Showing posts with label Recession. Show all posts
Showing posts with label Recession. Show all posts

Thursday, January 19, 2012

World Bank Issues The World A Rare Reality Check

The World Bank recently released it's "Global Economic Prospects" report for 2012. Organizations such as the World Bank tend to do their fair share of sugar-coating issues, however, their most recent report is about as blunt as you are likely to see from them in regards to the economic outlook.
"The world economy has entered a very difficult phase characterized by significant downside risks and fragility."
" a result forecasts have been significantly downgraded."
"However, even achieving these much weaker outturns is very uncertain."
"While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains. In particular, the willingness of markets to finance the deficits and maturing debt of high-income countries cannot be assured. Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out. The world could be thrown into a recession as large or even larger than that of 2008/09."
Oh and for all those who are still deluding themselves into believing the idea that Europe will avoid a recession in 2012. According to the World Bank "Europe appears to have entered recession" which they estimate to have begun in the 4th Quarter of last year. Again this should not be a surprise to anybody, but for some reason people deny it until organizations such as these put their official stamp of approval on it (and there will probably still be deniers all the way up until each individual country makes it official.....big delay).

Here is a chart of the World Bank's estimates for GDP growth using 3 different scenarios they presented

According to the world bank regarding the baseline forecast...
"The baseline projections.....assume that efforts to-date and those that follow prevent the sovereign-debt stress of the past months from deteriorating further, but fail to completely eradicate market concerns."
I think their baseline assumptions are pretty optimistic. And regarding the contained crisis scenario...
"it is assumed that one or two small Euro Area economies (equal to about 4 percent of Area GDP) face a serious credit squeeze.
"It is assumed in this scenario that although borrowing costs in other European economies rise and banks tighten lending conditions due to losses in the directly affected economies, adequate steps are taken in response to the crisis to ensure that banking-sector stress in Europe is contained and does not spread to the rest of the high income world."
And finally regarding the larger crisis scenario....
"the freezing up of credit is assumed to spread to two larger Euro Area economies (equal to around 30 percent of Euro Area GDP)."
"Repercussions to the Euro Area, global financial systems and precautionary savings are much larger because the shock is 6 times larger"
In their conclusion:
The global economy is at a very difficult juncture. The financial system of the largest economic bloc in the world is threatened by a fiscal and financial crisis that has so far eluded policymakers’ efforts to contain it. Outside of Europe, high-income country growth, though strengthening, remains weak in historical perspective. At the same time some of the largest and most dynamic developing countries have entered a slowing phase.
These are not auspicious circumstances, and despite the significant measures that have been taken, the possibility of a further escalation of the crisis in Europe cannot be ruled out. Should this happen, the ensuing global downturn is likely to be deeper and longer-lasting than the recession of 2008/2009 because countries do not have the fiscal and monetary space to stimulate the global economy or support the financial system to the same degree as they did in 2008/09. While developing countries are in better shape than high-income countries, they too have fewer resources available (especially if international capital is not available to support deficit spending). No country and no region will escape the consequences of a serious downturn.
I'll leave you with random charts I found interesting from the report

Yes that is China growing from using 5% of the world's metal consumption to about 41% how much of that consumption is productive vs wasted building ghost cities, is another question.

Thursday, January 12, 2012

When Should Wall Street 'Investment Strategists' Be Fired? Calling Out "Dr. Bob" Froehlich

In most professions if you are consistently wrong you lose your job. If for some reason you do not lose your job, you will at least lose your credibility. Oddly, that is rarely the case with Wall Street Investment Strategists. In fact, regardless of how their calls turn out, many show up day after day on the media circuit merry-go-round (and investment conference merry-go-round).

What brings this up is a recent meeting I attended where Dr. Bob Froehlich was the main speaker. You have probably seen him on CNBC, Fox News and the like. Somehow I seem to cross paths with "Dr. Bob" a couple times a year. He currently is the "Chief Investment Strategist" for The Hartford. He used to have essentially the same job for DWS Investments. In fact, I remember a rep from the firm bringing him by our office in mid-2008. And yes, he was in full permabull mode. According to him, The Fed was gonna keep lowering rates and you don't want to fight the fed! It was worth a good chuckle (after all, he still thought housing was only a "subprime" problem).

If you ever wanted a shining example of a "permabull" this is him. In his own words from his Jan 3rd commentary he says "As a strategist who always sees the glass half full......" However, honestly, I'm not sure he ever sees the glass as anything but completely full. Now there is nothing wrong with being optimistic....But blind optimism does justice to no investor.

Just to illustrate how consistently bullish this guy is...........BussinessWeek April 2000 - Branding a Bull, Kemper-Style (yes folks, this is about a week after the market peak, when the S&P was around 1500).
"Undoubtedly another reason Scudder Kemper is "branding" itself by featuring Froehlich is that he's an unabashed bull. He has produced a series of audio tapes called From Wall Street to Main Street that extols the great benefits of investing in stocks. He has penned a recent book, The Three Bears are Dead!, which makes the case that the "three bears" of investing--inflation, interest rates, and government spending--all died in 1997. And Froehlich is a big believer in "Boomernomics"--that is, that baby boomers are just starting to drive the economy and stock market and that their impact will be much greater than anyone thought, prolonging the bull market well into the 2010s. The Chicago Tribune wrote about Froehlich, "There are [those] who have the eyes to see the dust in the distance, ears to hear the hoofbeats of the thundering herd, and noses to smell the money to be made. One of those is Robert Froehlich."
Dr. Bob couldn't smell money to be made if someone shoved it up his nose. That is, unless we are talking about how he really makes his money (because we know it's not by investing). He knows he makes his money as an "investment strategist" by selling blind optimism.

Yes "Boomernomics" would prolong the bull market well into the 2010s.......and nearly 12 years later here we are........

Despite his continued bad calls, mutual fund companies continue to employ this guy. Why? Because apparently they believe optimism sells! When DWS Investments finally got rid of the guy in late 2008 (after another market crash he was completely blindsided by), Hartford was quick to swoop up the hype machine.

Dr. Bob puts out his 10 investment themes yearly and they tend to always be good for a laugh. For example, the below was Dr Bob's Top 10 Investment Themes for 2011.
Not Quite......

Well let's first look at how his sector bets turned out (I included commodities using the S&P GSCI). Dr. Bob's sector "overweights" are in red.

Gee, if he only would have picked financials he would have been picking all the WORST performing sectors. The story isn't really any different if we look at global sector performance either (except the negative numbers are much larger).

How about his country overweights? China and Germany were both down about 18%. That compares to the MSCI World index which was down just over 7%. Clearly not a good call. And it goes without saying that his call to overweight international stocks (with an emphasis on emerging markets) and underweighting the dollar were both bad calls.

Now anyone can get calls wrong, and everybody does. But the consistency with which he makes bad calls and the degree to which he misses every crisis is amazing.

So what are his themes for 2012?
10) STRATEGY: Overweight Large-Cap Stocks  
9) STRATEGY: Invest in Tax-Free Municipal Bonds 
8) STRATEGY: Overweight Dividend-Paying Stocks Over Non-Dividend-Paying Stocks.
7) STRATEGY: Invest in Japan
6) STRATEGY: Invest in International Bonds 
5) STRATEGY: Overweight the Energy Sector
4) STRATEGY: Overweight the Health Care Sector
3) STRATEGY: Invest in China
2) STRATEGY: Overweight the Media Industry
1) STRATEGY: Invest in Commodities 
It will be hard for him to do worse than 2011. Here are a few gems from the above letter. First in regards to China
"I believe the economy has a major reversal growing at 9.5% to 10% instead of the 7%-7.5% consensus the market is currently calling for in 2012."
He was also very adamant about the China story when I saw him speak. The funny thing is this part where he claims to be able to spot bubbles...
"Look, the one thing that I’ve learned in my 35-year career is what the chart looks like for an asset bubble. It looks just like gold where the chart simply goes higher, and higher, heading straight up with no end in sight"
So he has had a 35 year career but about 23 years or so into it he wasn't able to spot the tech bubble, and then he wasn't able to spot the real estate bubble. But NOW he has it down! Wait, what was that about China again? So he learned to spot bubbles but yet doesn't see one in Chinese Real Estate?

But the best is this one, and he repeated this many times also when he spoke.
"First of all, Europe won’t fall into a recession"
The above is a perfect reflection of how long Dr. Bob stays in denial. The reality is the Eurozone is already in recession!

Again, the purpose of this post was not to point out individual bad calls (although I did that). The purpose was to point out how ridiculous it is that the financial industry pays so much attention to (and regurgitates) opinions without any regard to the credibility or supporting facts behind those opinions.

Let me leave you with Dr. Bob's most ironic comment from his most recent letter. This is from his theme #9: Invest in Tax-Free Municipal Bonds (where he tries to call out Meredith Whitney for her call on Muni's)
"It never ceases to amaze me how the doom and gloomers tend to get all of the media headlines and hype. I guess it’s true that “bad news” sells"
News for you Dr. Bob. If bad news sells, why do you still have a job? Furthermore if accuracy matters, why do you have a job? And while he doesn't say it in his letter, when I heard him speak, he actually spoke about how upset he was that Meredith Whitney "was not held accountable" for her call! Really Bob? Really?

Friday, December 16, 2011

GDP Estimates 2012 Vs. 2008 and More Economic Consensus Groupthink

The Wall Street Journal recently released it's December Survey of Economists. This is where you generally get to hear about the current consensus groupthink. In the survey, 54 economists gave their projections for GDP in 2012 (among many other things). I decided to compare this years projections for the year ahead to what these great minds saw coming in December 2007 (the month the last recession started). Does anything about this strike anyone else as quite similar........

Now just maybe if they would have added a negative sign to their 2008 forecasts they would have been pretty spot on (considering GDP for the year finished down -2.5%). The December 2007 survey included 51 "economists"....yet not 1 came up with a negative GDP projection. Here we are now in 2011, with the European situation, the rest of the developed world including the US and Japan soaked in debt, and China trying to build ghost cities until someone rises from the dead, and not one of the 54 "economists" is willing to project anything lower then 1.3%? Interesting......

What else do they have to say?

With the unemployment rate right now at 8.6% (due to massive labor force shrinkage) the consensus is things will essentially stay as is. Funny, anyone know what the unemployment rate was in December of 2007? 5.0%. And what was the consensus for the end of 2008? 5.1%. In reality it tuned out to be 9.9% and yet not one of the economists predicted anything above 5.6%. Nice work guys.

Some more on unemployment....

Yikes, they can't predict one year ahead and now their being asked about the unemployment situation 3 years out? Anyone know how I can get in touch with James F. Smith from Parsec Financial Management who made that 5.0% projection? Because I would gladly pull a Mitt Romney on him and bet him $10,000 that's not gonna happen!

Alright, What about Treasury Rates?

Looks like they are calling for rates to rise from the current level of 1.85% to 2.75% (we can be sure this is due to their more optimistic view of the overall economy and not worries of the US ever expanding debt situation). In Dec of 2008 when it was 4.1% consensus said it would move up slightly to 4.28% (the yield ended 2008 down to 2.25%)

So what about their views on the probability of a recession in the US in the next 12 months?

23% and nobody puts the odds at higher then 40%? What about the Eurozone? Surely they must realize the Eurozone is already in a recession -- After all, the OECD already declared as much (and they are never the first to spot anything)

Really? You can't even get them to admit "yes" on a Eurozone recession which is clearly already happening? Well, what should we expect.......this is what they thought in July 2008 (7 months after the last US recession already started).

Ok so maybe we should interpret anything in the 50% range as their version of certainty LOL!

Will at least one member leave the Eurozone? 48%? Guess that should mean it's pretty near certain!

That may be about the biggest dispersion of views you will see on a subject from these groupthinkers.

Ah the joys of "economist" forecasts!