Saturday, January 22, 2011
Safe Cheap and Skeptical
I wrote a variation of this article on RealMoney recently but of course I am somewhat more constrained and correct in those pages than I am here. The upshot of it all is that I am done apologizing for my economic and market outlooks. I have often found myself apologetic for taking a stance that is contrary to folks that have Ivy League degrees, white shoe firm pedigrees and a shitload of initials behind their name. I have none of those. Far from having fancy degree I was actually a high school dropout. To be fair kick out is a far more accurate term. I was not a well behaved youth and had spent a fair amount of time behind bars lng before I was old enough to be in bars.
I do not apologize for that either. I eventually graduated at the age of 17 by going to night school while washing dishes, busing tables and cooking at a dive in downtown Baltimore. For a while there I cooked at the drug and alcohol rehab where my father was a counselor while polishing off my diploma. While it was not a perfect path, nor one I would recommend or allow my kids to follow, I have to say it was an education in and of itself. I know that at some point I should have gone back and gotten a degree but the truth is that there is just been too much life to live, too many adventures to have and far too mnay other interesting things to do than sit in a classroom.
I learned what I know through books. Of course I have read all the graham Books, Klarman’s book, Marty Whitman’s and every other significant piece of literature related to value oriented investing. I have read all the important technical books growth bools and just about everything I could get my hands on about markets over the years. In addition I found time to work in Adam Smith, Milton Freedman, Hayek, Keynes, Marx and Mises. I didn’t learn it all in a classroom but I think I have a pretty good handle on the subject.
I often find myself defending my current position. There is no doubt that forcing money into the market is good for stocks and fanfuckingtastic for Wall Street. With rates at zero there is no other place to put money. Of course that’s going to push stock prices higher. I do not think the market is particularly cheap as earnings achieved through cost cutting, inventory management and accounting measures are not growth. There is very little top line growth going on in the US right now. Let’s say the idiot, I mean analysts are right and we will indeed achieve Nirvana this year and hit $96 in earnings on the S&P 500. In real terms the growth rate of our economy is roughly zero. A zero growth rate according to everything I have ever learned deserves a multiple of 8.5. That gives us a fair value of about 816, a far cry from yesterday’s close of 1283. There will be some who tell me I am wrong about the zero growth rate and cite government stats and other horse crap about why we have this great recovery. To which I reply if we were growing we would be seeing JOBS created. We are not nor do we appear likely to do so. Repositioning is not growth.
I also take a little flack for my long term structural view of the economy and markets. While easing measures have bailed out bond traders and stock jockeys we have not done much to repair the country. In fact I think we have harmed it deeply. I fail to see how we grow enough to deal with the deficits we continue to pile up. These measures are not creating jobs; all the cash thrown in the markets have not healed the real estate markets. We have allowed those that created the problem to prosper at the expense of those who suffered. I am not talking about the idiots that borrowed too much money for too much house or used their house as an ATM. They are as much to blame as anyone. What about the poor ass that paid his bills, lived within his means and was unfortunate enough to buy the stocks as the best long term choice mantra and invested his kids college fund and his 401K accordingly. That poor bastard got hosed. Now he is going to be stuck with a higher tax bill to pay for this mess.
They told us that all kinds of bad things would happen if they did not bail out the banks.so what? Is my reply. Sometimes the piper has to get paid and this was one of them. Yes it would have been a mess and some of the big guys would have failed. Again, so what? I think banks like BB&T, M&T and even Wells that did not have the mess the giants had would have filled the void. There’s a good chance that JP Morgan would have made it through. is the world really a better place because we saved Goldman, B of A and Citi? I do not necessarily think so.
Here is where are now. State and municipal fiancés are mess and probably going to get worse. Real estate, income and sale taxes are the lion’s share of most state revenues. With real estate down, a 20% real unemployment rate of 20% and justifiably scared consumer I question how quickly these recover. The federal budget deficit is out of control and the debt is rising at an alarming rate. The stock market is higher but the bulk of the volume is form algorithmic traders and there is very little long term investing going on right now. ETFs and indexes are distorting valuations and the retail investor has left in disgust. Our capital markets look like casinos without the benefit of showgirl and free cocktails. This is a party that has to end at some point and there will be a hangover.
The upshot of all this is that I am even more cautious than usual. The emperor not only has no clothes he has a tiny wee-wee. When this becomes apparent I think the market will price a lot lower. It might not be in 2011 as the free lunch provided by liquidity and forced asset allocation holds sway. But it is going to happen and I do not want to be the guy paying the bill when the party ends. You cannot borrow your way to prosperity. Smart phones cannot be the basis of an economy as you cannot text your way to prosperity either.
Two things have given me a greater deal of confidence in my views of the markets and economy. First as I mentioned in my Real Money article I am finding that an awful lot of smart people with degrees and letter have almost exactly the same viewpoint I do. I am not some lone voice in the desert preaching doom and gloom. I am actually in well-educated experienced company in my views. The other factor is that historical record of my ramblings. I have been cautious about the markets and limited my buying to only the cheapest names for several years now. There are warnings on the foolishness in real estate as far back as 2006. Throughout I have remained cautious and openly skeptical of government involvement in the markets. It has worked and I have to my surprise been right far more than I have been wrong about the outcomes.
I shall openly and proudly confess that my biggest missed call was 2009. I badly underestimated the markets ability to recover. The impact of the printing presses surpassed anything I could have imagined. I failed to see how powerful the Fed could be in influencing the direction of the stock market. I will also say that following the discipline of buying what was too cheap also worked far better than I could have ever imagined.
I am not always right. Nor am I always wrong. I am however done apologizing for being cautious. The first question I always ask is what can go wrong with this? Right now I see a lot of things that can wrong with our fiscal policies. Unlike 2008 and 2009 I do not see a lot of cheap assets that I should buy no matter what I think the economy is going to do. That sends up a huge red flag for me. I think we have fiscal and structural issues that could be problematic for us and I think stock prices are too high given what’s going on in the rest of the world outside the beltway and the rivers.
Right now I am content to drift along buying the occasional super cheap stock and waiting for things to adjust to my perceptions. I think they will. Then there will be sufficient cheap assets to get more heavily invested. I’ ll continue to track and buy thrift conversions as that is one area of the market that I think has extraordinary potential If you have a mutual thrift in your town go now and deposit a few bucks to get at the head of the IPO line. I do not feel the need to chase the market or attempt to out trade the black boxes and ETF traders that currently control the landscape.
I am at heart an optimist about this country. I always have been and always will be. I have no idea what the catalyst will be to correct the current fiscal missteps I see. At some point we will figure it out of that I am sure the 70s lead to Reaganomics, Mike Milken and a sustained 25 year burst of prosperity. It won’t be the same path to a brighter fiscal future but a path will open and the right person will hopefully emerge to take us there. I have a suspicion that this time the path is a combination of reduced assistance to Wall Street and infrastructure spending that creates real jobs and expands payrolls and the tax base but the jury is still out on that. I would like to think it was a return to hands off economics that lead us out of the wilderness but we may have passed the point where that would work. But if we are going to spend money let’s spend it on rebuilding the nations electric and water systems as well as transportation infrastructure in a way that creates job and leaves open a return to Austrian methodologies down the road.
When it comes to governments and markets I will never again apologize for being cautious, critical and suspicious. It has served me well for a long time now and probably will for years to come. Safe chaep and skeptical shall remain my mantra.