Last One in the Pool is a Rotten Egg

I’ve been on the optimistic side of the economic downturn for awhile. I predicted it in October 2007 and said it would end by the start of the third quarter of 2009. I also forecasted a sharp V shape to the unemployment figures (not the unemployment rate, but the monthly job stats). I wasn’t quite right on that one. It wasn’t a U shape, but it isn’t a V either. Either way, the positive news stories are coming out in the media now about the market looking favorable. There are still reports about Main Street not being back yet and the chances of a double dip recession, but those are somewhat the “don’t forget about me” stories that get a good amount of people’s eyes. 

Today I read on a story by Becky Quick called Who Says the Economy is Rebounding? She’s a CNBC Squawk Box host (picture below).

Her take on the situation is to listen to three prominent businessmen: Warren Buffett, Jamie Dimon, and Jack Welch. She gives a mix of anecdotal evidence and statistics to show the economy has turned the corner. I pulled out a few aspects of her writing and added my thoughts.

The first statement she writes that gets me is:

But don’t take my word for it. Take Warren Buffett’s. And Jamie Dimon’s. And Jack Welch’s. All three tell me that in the past four to eight weeks, they’ve seen a real change in their businesses, and that indicates better news for the nation’s economy.

The part that gets me about this statement is the specificity of it – four to eight weeks ago isn’t enough time to get a good feel. My guess is they’ve seen the thaw since at least November of last year and have made their bets. What might be meant by the four to eight weeks comment is that the positive parts of the economy have accelerated. I agree with this.

Next she writes about Warren Buffett buying Burlington Northern at a time when rail traffic was it’s lowest. Now Buffett is using rail traffic as a litmus test about the economy – the more rail cars being used the more goods are being purchased. Here’s what she says and an illustration to support it:

At the start of the recession three years ago, Burlington Northern felt the pain early when retailers stopped ordering goods, automakers stopped shipping cars, and home builders stopped needing so much lumber.The railroad started storing thousands of idle rail cars; now those cars are being called back into service. And that’s an incredibly important sign.

It isn’t a new idea to use certain industries sales as an indicator. I did it with my Peanut Butter and Pasta observation in October of 2007. Another that Quick mentions is Buffett’s Iscar company. They make cutting tools which are used in heavy manufacturing. When their goods are purchased, it usually means the old stuff is worn out.

She writes that Jamie Dimon is seeing credit card write offs return to the more normal rate of 5% to 6% rather than the 9.3% it was not too long ago. Credit cards, being unsecured lending, are a good signal about consumer income. Even when down and out, people will pay their credit card near the top of their bills. Why? Because it’s a revolving loan, so they can keep living another day.

But Quick describes Dimon holding court with his acquaintances:

But his most important indicator may be the anecdotal evidence that a hiring boom is on the horizon. Dimon travels the country constantly for lunches or dinners with business leaders, meeting with groups of 20 to 250 people at a time. They may be people who run small or large  businesses, they may be venture capital investors, they may be clients of the firm’s massive private banking group. But everywhere lately, the reaction is the same. When he asks how many of them are going to be hiring in the next 12 months, a third of the hands in the room go up. That’s from virtually none a year ago. “The strength and resilience of the American economy may surprise people,” Dimon says. “The odds of a potential upturn are stronger than people think.”

In March Manpower Inc released a survey saying about 16% of employers are going to hire. This observation is about double that. However, the March Jobs Report showed 60% of industries hired. That is more aligned to the aggressive number that Dimon is stating.
Another aspect to this is the Fed rate being so low. This means funding of new projects is very cheap to do. For a long time businessmen ignored the opportunity, but now that it’s more apparent that the positive dominoes are falling, people are starting to jump on the cheap capital. A year or two from now, your interest payments will be much higher for the same project.
And one more point on this. I was reading Surowieki over to the New Yorker recently and he was recently talking about the economy and elections. He wrote in Timing the Recovery that elections aren’t won or lost if the numbers are high or low, but rather what direction are they headed. He contends that the economy will have high unemployment even as November rolls around, but the number will be coming down and pay will be improving. It may have been a bad two plus years, but if things are looking up, then those in office tend to stay in office. And finally, the massive stimulus package from 2009 was backloaded into the second quarter and third quarter of 2010. This means the economy should continue to see improvements from federal government investment.

I somewhat agree with another story she shared:

He told Squawk Box recently that customers across the board are flooding back. “People who have jobs are now feeling more secure about keeping them and are therefore spending,” Welch says. “And people who don’t have jobs are becoming more hopeful as they see glimmers of hiring.”

I don’t give that much credit to the hiring situation as much as I do that people feel their personal balance sheets are back in order, or at least as much as they’re going to be. Those with jobs just spent a year paying down debt. They bought TVs, nice furniture, and other items that don’t add value in the long run (hello roomba) and they finally paid the bill for them. Now it’s time to have some fun again. In the long run this is going to leave the US with more leverage than in the past. However, taxes will go up so maybe that won’t be true.

But I love how she closed her writing:

“When fireworks go off now, people are expecting that it’s a nuclear bomb,” Buffett says. It’s a natural reaction, but a dangerous one. That mentality exacted a painful cost for investors who followed their gut and got out of stocks as the Dow fell below 9000, then 8000, then 7000. Since then stocks have rebounded 65% off their lows. And if you were waiting on the sidelines until things looked more stable, then you missed the party.

I like the idea that you can’t wait for the all clear to jump back in, because by then the good part is over. You have to accept some risk to get reward. The Dow being in the 7000s was unreasonably low. Not all business models vanished in 2008. It was a great time to buy and just hang out.

At some point we all think “This is our decision, to live fast and die young.”


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