Four bullish tales in search of dupes
James Saft is a Reuters columnist. The opinions expressed are his own.
HUNTSVILLE, Ala. — With a U.S. debt deal hopefully past, we can look forward to the ritual trotting out of explanations for why investors should be bullish despite a broken political system and a AAA rating on the edge.
We got a hint of this Monday morning, as shares in the U.S. rallied on news of an expected compromise deal to raise the debt ceiling, but sadly the fun lasted all of 30 minutes before data showing manufacturing was sputtering towards contraction sent shares lower.
Never fear, though, there is no situation bleak enough to make the sellers of hope take flight, so, for the perplexed, here is a handy guide to the four bullish arguments that you should simply ignore in the coming days.
1 — “Corporations are in great shape”
This one, a perennial favorite, posits that even if the U.S. faces a little local difficulty with its debt, don’t worry, its corporations are global now, able to exploit opportunities in a borderless world. After all, look at earnings — they are at lifetime highs despite faltering growth. What’s more, corporate balance sheets are lean, not weighed down by all of that nasty debt that is plaguing the countries and consumers they serve.
First, this argument assumes that corporations can somehow continue to make profits despite faltering spending among their clients. This simply isn’t true, and contraction in government and among households will bring earnings down with a bump, though with a lag.
Secondly, globalization is a powerful force, but corporations will not be able to slip the coming round of taxation. Athens’ woes may not be Apple’s woes, but Washington’s woes definitely will be.
2 — “Money is easy”
Look how low interest rates are, this tale goes, this is highly stimulative. And, if you are lucky enough to still be credit-worthy, there is tons of money out there for the asking. This is going to be very sweet for people with good ideas for investment, and when the economy accelerates it will do it in a burst. Furthermore, all of those fears of inflation are proving wrong; that means rates can stay low longer.
This argument again tries to lift the individual company or investor from the macro backdrop, and won’t work. Rates are low in absolute terms, but relative to growth and capacity utilization they should be substantially lower. They can’t drop below zero, of course, and the Federal Reserve’s willingness to engage in another round of quantitative easing will be very low, given the mixed success of the first two and the political capital such a move would consume.
Falling bond yields can’t be read as a green light to growth, but rather as a reflection of the risks of a double dip, and quite possibly more Japan-style deflation fears to come.
3 — “Emerging markets will save us”
Sure, the U.S. is stumbling and Europe is in crisis, this particular bullish take goes, but emerging markets are still growing strongly and will drive demand for raw materials, food and consumer goods. Just invest in companies which make, mine or grow the things emerging markets want and you will clean up.
Well, Chinese manufacturing is actually contracting, according to the latest HSBC purchasing managers index survey, while India’s manufacturing sector is showing the weakest growth in 20 months.
Emerging markets can no more escape the gravity of global growth than can corporations, and the big picture is very weak. Look at Britain, where manufacturing is also going into recession, hurt by lousy domestic demand courtesy of the policy of austerity the U.S. apparently wants to now follow. Look at Italy, which is looking fragile and may soon add its considerable weight to the deflationary force flowing out of Europe.
4 — “Someone is always making money somewhere”
This one, beloved of brokers everywhere, is the original sin of the investment industry. It posits that there are no bad markets, only bad investors unable to capitalize on the opportunities that the twists and turns of the market provides. It is a deeply seductive idea, as it plays on our narcissism, our false feelings that we are uncommonly provided with common sense and, of course, our desire to becoming satisfyingly rich.
The implication here is that no matter how bad the backdrop, you as an investor should be able to game it, to aggressively time the market. The truth is you can’t time the market; very likely neither can your broker, your mutual fund manager or your pension fund manager. Someone out there probably can, but we will either never find them or won’t realize it if we do.
Here is the bottom line: global growth is slowing alarmingly, austerity is in fashion and the U.S. looks politically and economically weak. The stage looks set for years of subpar growth.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)