Hello Mark, <<Some interesting counter points on the view that debt overhang is strangling the US economy from ML>>
And so we must examine the counter points by countering them, see how we do, assess the risks of being wrong, and place our wager.
<<the stock market is braking the economy>> Yup, certainly doing that, and continuing to do more of same.
<<But underlying fundamentals are fine and we don’t see any deep-seated imbalances>> Maybe, perhaps, until they do, given that their record of seeing ahead has proven to be less than harmless.
<<If there were any capital spending excesses during the 1990s they have been resolved>> If? What is with the still in denial ‘if’. They are unrepentant and must be judged as such.
<<The tech capital stock is growing at the slowest ace in 60 years>> and so all is well again?!
<<Corporate balance sheets are less strained than in earlier cycles>> Yup, and the off-balance sheet ugliness have never been worse, to the core, and the tip of the very top.
<<Interest expense as a share of cash flow peaked far below the level of prior cycles>> Horridly bad news, as the Japan script is playing out as expected, and the economy not behaving as hoped.
<<Households have already raised the savings rate sharply in reaction to equity-market declines>> Sharply, from zero, after many years of gambling and speculation, all for naught and resulting in some SUVs.
<<Further increases are likely to be more modest>> could be true, because of falling real income and declining employment count, plus rising taxes and old-folks obligations.
<<We don’t see any deep-seated structural imbalances>> No, just the need to raise savings, hike taxes, fight a perpetual war, destroy obligations, keep deflation at bay, reign in service inflation, and find a useful way to make use of some previously highly valued talent. Nothing structural, for nothing is ever structural, even in Japan.
<<we don’t believe the equity market is currently reflecting economic fundamentals>> Equity markets rarely do reflect anything other than greed and fear, and both camps are getting pulverized.
<<Beyond that hopefully temporary set of problems, U.S. economic fundamentals are fine>> Some people cannot even be imaginative with their hedging sentence, and blatantly defer to hope.
<<Tech spending has already started rising ... earnings are rebounding and profit margins are widening>> from negative counts, for the good news, by way of cutting cost, and creating jobless folks, for the bad.
<<Lack of pricing means that revenue gains are lackluster>> i.e. revenue cannot be manipulated, shucks, and so we better say something.
<<But that forces companies to redouble their drive for increased efficiency>> ultimately resulting, in the extreme, one guy working to produce for everyone else. For the umpteenth time, productivity is a double-edged sword.
<<That kind of productivity performance guarantees that profit margins will continue to widen and the earnings recovery remains on track>> Why? This is not how it all happened before!
<<As for households, the huge equity meltdown has seriously impaired their net worth. Even so, the ratio of net worth to income still equals the average of the past 50 years>> What do snap shot of numbers mean, independent of the trend line? Anything any one wants it to mean, and nothing at all.
<<A strong case can be made that households will want to start saving more out of current income. But they already are. The savings rate has risen from a cycle low of 0.8% to 4%. We think it's headed for 5%. We don’t see the need for an abrupt upward adjustment to savings nor do consumers seem to be acting that way>>
This misses the point of ‘what is the savings rate that ensures average J6P a shimmering and happy sunset dream.
<<Worries about consumer indebtedness are overdone. Consumer delinquency rates are actually lower now than in the last stages of the expansion, inconsistent with the idea that consumers are overly leveraged>> because interest cost is low, still, unnaturally.
As before and always, I will wager against the happy Merrill folks, once again, until they chirp no longer, and then, it may be time to buy, without fear, in full gallop. Until then, cash of all flavors, gold in different phases, and income earning real estate in chosen locations.
Chugs, Jay |
