By Rich Karlgaard
Monday’s sharp pullback in stocks was attributed to weaker-than-really-reported bank earnings. Andrew Sorkin of The New York Times scorches four big banks for their tricky accounting:
But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.
Then again, maybe Monday’s pullback was just the inevitable technical correction. So predicted Doug Kass on Monday morning, presciently once more, just before the market’s open. Kass looks like a wizard these days. He was bearish from late 2007 to March 9, 2009, when he pronounced the market had reached a “generational low.” Kass has been spot-on.
A third explanation for Monday’s pullback: Investors sense that the economy is at a crossroads. A political crossroads.
Here is what I mean. The U.S. economy has turned the corner. Not dramatically, but enough to notice that things are better than they were six weeks ago. Where do we go from here? If the president and Congress and regulators would just leave matters alone–go on a long vacation, say–the economy would show positive growth by the second half of this year. Call me nuts, but I think a second-quarter positive surprise would be possible.
The Fed has done it’s job. (Maybe too well, but that’s another story for another day.) Consumer sentiment and spending has ticked up. The headwinds that remain have less to do with bank stress tests, and more to do with CEO sentiment. The Business Roundtable reports “record low” CEO confidence as of early April:
* Most see declines in capital spending.
* CEO Economic Outlook Index negative for first time.
Let me say this again. The yield curve predicts growth. Check. Consumer sentiment is ticking up. Check. But CEO confidence is lousy, and CEOs are (not) spending accordingly. Whoops. This begs the question: Why are CEOs in such a low mood?
Answer: If you are a CEO in financial services, manufacturing, energy production and health care, you are going to be more regulated. Period, end of story. Your response to forthcoming regulation of yet-to-be-determined complexity will be to hunker down. Keep your name out of the news, improve the balance sheet and hold tight.
This is why the U.S. economy, which wants to turn the corner, is still stuck in the intersection as it decides which way to go.
In her book The Forgotten Man, Amity Shlaes (now a Forbes columnist) wrote that the 1937-38 “depression within a depression” occurred when “capital went on strike.” President Roosevelt’s willingness to “try anything”–including retroactive taxation, laws against discount pricing and an attempted Supreme Court packing–had businesses and their backers so confused about Roosevelt’s rules that they simply withdrew.
This is the risk of Obama’s willingness to “do what it takes.” The words sound positive and action-oriented. But in practice, “do what it takes” really means “anything can happen.” Tearing up of legal contracts … that can happen. Limits to salary and travel … that can happen. Bullying by the Environmental Protection Agency … that can happen. Nationalization of General Motors and Citigroup … that can happen. Nobody knows for sure. Government is sorting it out, day by day.
The yield curve predicts good news. Consumers are bored with the recession and are ready to come back. But CEOs are nervous about deploying capital, and for good reason.
Thus the U.S. economy is not sharply turning the corner toward recovery, as it should be doing at this point in the cycle. It is turning, but very tentatively. That’s why the recovery will be modest, lumpy and disappointing.
Ok, all well and good.
But CEO’s don’t lay people off for nothing.
I’d love to buy a car. I tried to buy a car. My bank won’t lend me any money even though I have stellar credit and a 6-figure job.
So, I tried to pay cash for the car. The dealer refused to sell it to me unless I took their overpriced credit offer (7%).
So, I’m just driving my old car until all these idiots go out of business.
“Perversely, the rights of captured Islamic jihadists generate greater concern in Washington [than the rights of executives].” This quote is from an article by Peter Schwartz at the Ayn Rand Institute. (See here: http://www.aynrand.org/site/News2?page=NewsArticle&id=22995&news_iv_ctrl=1021.) Schwartz’s piece reinforces your theme, and shows that CEOs (and the rest of us) have rational reasons to be scared, given that the rule of the mob is replacing the rule of law in this country.
So, I tried to pay cash for the car. The dealer refused to sell it to me unless I took their overpriced credit offer (7%).
I find this hard to believe. Besides, one dealer offers you a crap deal? Did it occur to you to go to another?
I’m calling BS on that — a car dealer will not sell you a car for cash when nobody is buying cars? Come on now. I don’t believe you can’t get an auto loan, either, sorry. Unless you’re leaving out the part where you’re a convicted felon who did six years for writing bad checks.
CEOs *do* lay people off “for nothing”, it’s a way to keep expenses down.
Furthermore, it’s not as though an energized, competent and credible opposition is forcing the governing party to get its act together.
I thought that Obama’s message of “change” without clearly articulating what the change was going to be greatly worsened this economic downturn. Business is not going to spend money on major expansion until it knows what the rules are going to be. All this talk of “change” caused business to “hunker down” as you put it but still not clearly articulating what the plans are is causing them to remain so. While it sounds good to some voters, nebulous “change” is poison to a CFO. You can’t plan your route if you don’t even have a map.
Boomers will pull cash rather than deposit it on retirement. Those of us in the generations that follow may have to cash out as well just to keep our overvalued houses until either we have enough equity to get out gracefully or our employment situations cause us to foreclose. That cocktail can’t be good for capital, either.
Yup, quite true. Anyone with good sense is either angling for a government job or building up his own security against the government.
Welcome to the Sovietization of America, Phase I. One might hope Americans would read up on their history and turn the steering wheel before the ol’ ship of state hits the reef and sinks, but history doesn’t give much hope. People don’t ordinarily wake up from the crack-addict dream that the right Strong Leader can solve everything from bad luck to psoriasis until the polity is in shambles.
>The Fed has done it’s job.
It is job? And that is not what “begging the question” means.
I agree with mishu, I call BS on readerer’s statement. I bought my car with cash and the Honda dealer didn’t refuse me.
“Furthermore, it’s not as though an energized, competent and credible opposition is forcing the governing party to get its act together.”
Any opposition to the Obama administration is automatically racist, and therefore not credible, no matter how many protests they manage to peacefully organize.
I really, REALLY, REALLY , don’t see how an economy that was fueled almost exclusively for decades by financial slight of hand and problematic (read CRIMINALLY STUPID)investment vehicles , can be said to ‘have turned the corner’ and is now on the path to recovery.
Recovery to What? Are we supposed to be satisfied with a mere re-inflating of the non-sustainable bubbles ? Is that the game plan here ? Just keep kicking the bomb down the road in the hope that when it finally goes off, AGAIN, someone else(anyone else to be candid) will be there to ‘take one for the team’?
Printing money as if it were just paper and bailing out incompetent corporations because they are ‘too big to fail’, and the ‘recovery’ we will likely get is more of the same financial cluster*****, until the other shoe finally drops sometime down the road.
What a joke. Anyone still laughing ?
Ditto on the BS call. I don’t make six figures, and the local Pontiac dealer nonetheless cheerfully set my wife and I up with 0% interest for 60 months on a new G3, not to mention the “we’ll eat three months’ payments if you’re laid off” provision and so forth.
I can believe “wouldn’t sell it to you *at *the *same *price*”–if they can’t make money on the loan they have to make it on the car. But I’m not going to believe they won’t sell it at all. And if you were talking to a compleat idiot, well, there’s another dealer down the road.
No car dealer these days is turning down a cash-in-hand buyer.
Offtopic- Can’t read the web site using Gogogle Chrome. The ads overlay the text.
– … the U.S. economy is not sharply turning the corner toward recovery, as it should be doing at this point in the cycle.
Uhm… which cycle? More importantly, which part of which cycle? This isn’t just a question of BHO’s willingness to “do what it takes” (as if that statement has any more inherent meaning than the word “Change”).
When viewed over the appropriate time scale, the current state of the economy is really old news. It’s a story that goes back – this time – to early 2007. No one remembers, for instance that federal tax-receipts-vs.-spending trends up to that point had the fedgov on track for a balanced budget by late 2008. The reason we don’t recognize the longer cycle any more is because of the camouflage created by last year’s events. No one seems capable of seeing beyond those, further into the past.
After the 2006 midterms, CEOs – and, more importantly, anyone running one of the tens of thousands of small businesses that employ most Americans – knew that they were in for trouble. Higher energy costs, higher taxes, minimum wage increase, statutory health care entitlements (like in MA), trade wars and all the other items on the Democrat Congress’ wish list now had to be factored into business planning.
That had consequences.
Why? Well, unlike the rest of the media-duped electorate, CEOs and other managers know that Democrat economic policy is inherently anti-business. So they started to cut back, knowing what was likely coming down the sewer pipe from the Pelosi-Reid Congress. As a result, the economy slowed from its consistent growth of the preceding 5 years and tax revenues dropped off (but of course fedgov spending didn’t). This slowdown not only stalled the economy, but also accelerated the deflation of the housing bubble – popped it, in point of fact – by tanking the RE market that had been artificially inflated by low interest rates and social engineering programs (e.g., CRA and ACORN lawsuits).
Looking back from where we are now, however, it’s difficult to remember any of that. Today we only see as far back as the result of the fedgov’s mismanagement of FM & FM, which pushed the first domino leading to the credit crisis that we saw last year. That fiasco amplified and accelerated the slowdown that started in early 2007, ultimately resulting in a bona fide recession.
Now that the credit-crisis-induced recession is easing off, we’re effectively back to where we were when all that started. Back to early 2007. Back to when the economy was beginning to stall. Only now we’re in even worse shape from a business standpoint. America is now stuck with a marxist bozo running the fedgov who will rubber stamp any anti-business policy the Pelosi-Reid Congress pushes.
Given all that – and since economic recovery is obviously not a goal of the current administration or the current Congress – if we have any real recovery at all it’ll be a miracle.
Slow-or-no recovery won’t be just because of the uncertainty engendered by one arrogant ideologue. Business has been dealing with uncertainty – punctuated by several months of sheer terror – for over two years now.
Tax cheat incompetent Treasury Secretary Turbo Tax Timothy Geithner & equally incompetent President Obama are making certain to hamper the return with their War on Capitalism in their need to grow government further.
If the fed suddenly became the majority stockholder of my company, I would be running scared too. As for the banking sector, what is with this deal that they were forced to borrow billions of tax payer dollars and not allowed to pay them back? That is certainly an odd twist on the old Chicago protection racket. (WSJ lead editorial 4-21-09)
Wow … what a bunch of ostriches.
I am not making up my car-buying experience. I tried to buy a car, and the dealership wouldn’t sell me one for cash money after I’d negotiated the price. This is a common car-buying phenomenon when times are good, but extremely uncommon when it’s a buyer’s market.
GM announced today that it will close its plants for the summer – an act unprecedented in American automobile history. It’s a true story that people are unable to buy cars because banks and other lenders refuse to provide credit; and it is also true that dealers are unwilling to sell cars due to some perverse incentives in the credit markets.
Here is a link for the non-believers (unless you think that maybe I’m in cahoots with Yahoo and the Associated Press in making all this up).
http://finance.yahoo.com/news/AP-SourcesGM-to-shut-many-US-apf-15004037.html?.v=2
Geez. How many dealers have you shopped?
Dougf has it nailed.
In this recovery – who’s going to create sustained (and sustainable) demand?
Not the US consumers who have belatedly figured out that they are broke.
Not the surplus countries (China, Germany) who believe capitalism is simply a zero sum game – economic warfare.
The Federal Government will create demand until the bond market and the dollar collapse.
Things could look swell for a while until that happens. But the problem is excessive debt and expansion of the Fed and Treasury balance sheets to make up for the contraction of the consumer and corporate balance sheet will only delay the reckoning.
I went into the chevy dealer to buy two trucks for the company I work for, I told them to write them up give me a total and I would have corporate pay them in a couple of hours. the fleet sales manager said they wouldn’t do it, he said “what if someone comes in and offers me more?” I told him to sell them, I then asked that the quote be honored until close of buisness that day, he still wouldn’t do it. I drove a block and paid for two toyotas within four hours. American dealers should at least act like they want to sell cars.
Even if what you say is true, all you had to do was accept the dealer’s 7% deal, then pay it off with your cash before you acrued any interest. They have to accept full payment, you got a good deal, and your dealer fulfilled his financing deal with them. What’s the BFD?
readerererer-er
There’s nothing in the article you linked to support your B.S. claim that a dealer won’t accept cash for a car. Which makes your ‘stellar credit’ and ’6-figure job’ claims equally suspect.
Every car I’ve purchased over the last 40 years, I’ve paid cash. No dealer has ever so much as raised an eyebrow.
Same with me.
My last new car, ordered at the dealer, was an 86 IROC paid for in cash. I paid when I picked it up. Since then, I have bought used vehicles with good remaining life (for cash). Cost per mile goes way down that way. Our last is a 2006 Town and Country van with power everything, fantastic 8 speaker system with CD, DVD and remote. With $1000 trade in, $9000 cash.
New it was $26,000 sticker. $9k I can afford.
“Scared CEOs Hamper Economic Recovery”
I think the headline should read:
Stupid Interference By Occupant of White House Cripple Economic Recovery
I’ve been shopping for a car (cash-in-hand) and have had similar results.
An Infiniti dealer wouldn’t talk to me about a cash offer for a car, instead wanting to talk about leasing, etc. He kept saying it was for “my” benefit. Time value of money etc. As if someone that had the cash for a car of that value needs a lesson in return rates and risk levels.
I thanked him for his time, and walked out the door.
I think he would have sold me the car if I had insisted. I think he was just using this as a negotiating tactic. And obviously the dealer negotiates from a better position if he’s throwing in financing issues. If he can lose money on the car, but make money on the 7%, and then you don’t want to take the financing he might walk away from the deal.
I don’t know about credit issues, but I have read and heard of capital issues in financing car deals. I’m reasonably sure credit in auto deals is not as easy as it once was, but it can’t be impossible.
I don’t think that localized dealer experiences can be used as a barometer of the car industry as a whole or the economy.
Ignore the car troll. BS
I see companies circling the wagons and looking for good opprotunities overseas. Absolutely NO capital spending here in the forseeable future.
“No car dealer these days is turning down a cash-in-hand buyer.”
It all depends on the car and the length of time it has been on the lot. If the car has been on the lot for over 3 months and is sold for cash, the dealer has lost money. If it has been on the lot for 1 week, the dealer makes money.
Re. the yield curve and the markets – it’s probably not a good idea to read too much of anything into the tea leaves at the moment. Usually the yield curve and the market averages are useful barometers; but in the current state one has to remember that both are being actively manipulated. The yield curve by the Fed via QE, and the makets by the major players like GS (see, for example, http://zerohedge.blogspot.com/2009/04/goldman-sachs-principal-transactions_23.html ). It’s a bit like someone setting the barometers to “fair weather coming” and hoping no one will notice the heavy line of black clouds outside….
Those clouds include things like the basic demographic change occurring in the States ( as predicted in “Boomernomics” over a decade ago), the fact that the option-arm and commercial real-estate shoes are just beginning to drop, the huge liability w/r to defined benefit pensions (particularly from gov’t employees) and Social Security, the collapse of federal tax receipts (down 27% yoy in March) combined with the boom in outlays. Add to that the growing political rift between fly-over country (the real wealth generator of the States), and the Great Urban Dependencies; the promised rise in power costs (try keeping folks anywhere that gets hot in the summer when electricity prices go to European levels and the a/c becomes unaffordable – the South and Southwest were relatively unpopulated for a reason prior to the 1970′s).
Even worse, of course, is the abandonment of the primary pillars of American success – reason, the Constitution, and the uniquely American traditions of self-reliance and self-respect. Once those are discarded in favour of “whatever it takes” there’s really little left other than a primitive self-indulgent fear.
On my worst days I think of the current situation like the pull-back before a tsunami hits; on my better ones I remember that the devastation from a tsunami is primarily confined to the haphazard constructions along the coast line, and that once the detritus is cleared those who applied the principles mentioned above can rebuild. At this point there isn’t much one can do other than move to higher ground, and protect the assets one has until it’s all over, and watch while Obama and his acolytes run around shaman-like on the beach, reading the chicken entrails, sacrificing whomever they can lay their hands on, cursing and pleading to the fates.
Apologies in advance for the rant; it beats aspirin as a cure for the Saturday morning after a Friday night
BTW, this is defintely one of the better articles I’ve read on what investors are thinking (long term) these days (not that I agree completely, but it is, as usual, well argued):
http://www.global-view.com/forex-trading-tools/research/index.html?nid=15881