Contrarian Chronicles
Stagflation, anyone? The slowdown has begun
All those bits of bad or mediocre economic and corporate news are not a coincidence. This isn't just a hitch in a recovery.
By Bill Fleckenstein
Stock bulls are sanguine and consumers are even more sanguine, at least if we are to believe last Tuesday's government-calculated consumer-confidence number. The feel-good mood is based on the belief that the economy is now firmly on the path of a self-sustaining recovery. My belief, however, is that we are starting a post-stimulus slowdown.
What might get folks to readjust their perception? Earnings weakness or economic data that buttress this point. Last week arguably saw the beginning of that trend:
Friday's June employment number was far weaker than expected; only 112,000 jobs were added compared with expectations of 250,000 jobs. (I'll have more to say about this next week.) In addition, results for April and May were revised downward by 35,000 jobs.
General Motors (GM, news, msgs) reported its June sales down about 15%, after Ford (F, news, msgs) stated that its numbers were down about 7%. (Those were the headline figures. When you get done slicing and dicing the numbers, they reported the declines about four different ways.) Suffice to say, those sales were worse than expected and, unequivocally, signs of weakness.
Wal-Mart (WMT, news, msgs) issued a sales-growth forecast that was dramatically lower, and in such a short space of time since its prior update. That tells me things must indeed have been quite weak in the last five to 10 days of the month. Musing on that interval may seem almost laughable, in the context of a $10-trillion economy. But given that Wal-Mart is basically a proxy for the U.S. consumer at large, I find it interesting that, after you factor in an inflation rate of about 4% (probably on the low side), its sales growth will potentially be zero or minus 2%.
Target (TGT, news, msgs) said that its June comps would be substantially below the 5% to 7% that had been forecast.
The Redbook Retail Sales index, according to a Bloomberg story on Tuesday, “fell sharply and now shows no gain at all for June, well below the targeted 0.6% gain for the month.”
The Chicago Purchasing Managers opinion poll results were released, and they were way below expectations. Last month's reading was 68. This month was supposed to be something on the order of 65, but it came in at 56.4.
Washington Mutual (WM, news, msgs) announced that its earnings would be substantially below what folks had thought, blaming the problems on improper hedges and expenses being too high.
Financial companies basically can report whatever they want because the accounting is so lax. They get to pick what assets to hold -- and not mark to market -- and mark to market the assets they expect to take profits on. Similarly, they have this flexibility with their derivatives, which enables them to report whatever they want. Therefore, when they are finally forced to say, ahem, we're going to miss the quarter, you should usually believe that the problems started a couple of quarters ago, and they used all the tricks they could just to get this far.
That's a representative sample . . . and that the best possible outcome is stagflation -- though there are permutations of events that could lead to far worse scenarios. At some point, people will ask: If everything is as wonderful as the Fed wants us to believe, how come it still has the Fed funds at the emergency rate of 1.25%, while inflation scoots along at 4% to 5%?"
Clueless Greenspan and currency debasement
Turning the calendar back to 1919, I would like to share some thoughts about inflation and currency debasement from the late John Maynard Keynes in his book “Essays in Persuasion.” (Thanks to a friend for forwarding this to me.) The following three excerpts are from the chapter titled "Inflation and Deflation":
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity (or fairness) of the existing distribution of wealth.
As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. (Sound like the last five years?)
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
It will come as no surprise that I think Keynes was exactly right, and I encourage everyone to read the above passage several times. I found it more illuminating on about the third pass.
Trickle-down trouble in tech and Intel
Back to present times, and technology in particular, I wanted to spend a minute on Intel (INTC, news, msgs), a company that has evolved to where it is basically in the marketing business. I have made no secret of my belief that Intel is in trouble, both in the near term and long term. (See my April 12 column, "Is Seagate's swoon bad news for Intel?")
My longer-term conclusion has been that if Advanced Micro Devices (AMD, news, msgs) is widely perceived to have swooped Intel on the high end, that perception will do a lot to undercut Intel's reputation as a technology leader. That will affect not only the company’s earnings but the price-to-earnings ratio and expectations of future profitability and growth.
Along that line, Intel's halo came in for a little tarnishing last Tuesday. According to work done by an analyst at Susquehanna Research (I'll give the guy the benefit of the doubt and not call him a dead fish, since I haven't seen his work before): "Channel checks indicate that Dell (DELL, news, msgs) is designing two dual-processor servers based on AMD's Opteron processors."
Intel bulls disagree that Dell will ever endorse AMD's products, but I believe it is only a matter of time. Dell is facing competitive pricing pressures from Hewlett-Packard (HPQ, news, msgs), and customers are beginning to demand the Opteron products. When Dell endorses the Athlon and the Opteron, it's essentially going to be game over for Intel's image. This will, as I said before, impact its earnings and multiple. I continue to believe that the time bomb is ticking away for Intel. |
