'It's Easier to Get Into These Things, Than it is to Get Out of Them 12/05/2008

In a recent interview with PBS’s Charlie Rose, Citigroup CEO, Vikram Pandit, offered revealing commentary on the state of the domestic financial markets, and Citigroup’s plans to restore fiscal health, responsibility, and shareholder value to their ailing company. He also offered the following regarding the nation’s current economic woes: ‘It’s easier to get into these things, than it is to get out of them’. And with that, Pandit provided a statement replete with irony and sarcasm, though neither appeared to be his intent.

That it was easy for policy makers, business leaders, and consumers to lead our economy down the road we’re currently traveling has become apparent. The question is ‘why?’ In the face of onerous regulations and near constant scrutiny, how could the tentacles of the credit markets become poisonous and so deeply entrenched for our nation’s economic leadership to have become so blind to them? Thankfully, few will ever really understand the entirety of the situation, well enough the enormity of it. Likewise, those in positions of authority and responsibility will likely commit the remainder of their careers in seeing to it that we don’t find ourselves in this position again. Sadly, the day will come that we’ll have forgotten the pain of falling equities markets, increasing unemployment, and unstable commodities prices, and we will repeat the mistakes of the past in the name of greater understanding about the future. Such is the human condition.

A battle between fear and confidence

The US equities markets closed the day last Friday with a 260+ point gain on the DOW in the face of disturbing employment and manufacturing data. Earlier in the week, traders were wringing their hands over November’s slumping retail and auto sales figures --none of which should have come as a surprise. Extending the emotion-driven trading patterns established earlier in the year, the post-election markets have been beset by swings, sometime intraday, representing a battle between fear and confidence. It appears as though the markets will have posted meaningful gains again today, Monday – at the moment the DOW is op another 200+ points with just over two hours to go in the trading session. If the markets can post back-to-back gains in the face of difficult economic data, it may be a sign that the worst behind us.

Non-farm payroll data reflected a decrease of over 553,000 jobs for November and unemployment rose to 6.7% nationally, up from 6.5% in October. Though decried as the worst jobs number since 1974, the figure is far from the worst we’ve seen in the post-war era. Since 1945, there have been 41 jobs reports worse than that reported for November, and it’s altogether likely that December will offer a worse figure still. Important to note is that the average unemployment rate since the end of WWII has been 6%. For those who are out of work, this is a huge number and their families are feeling the pain. For the economy as a whole, these numbers are worlds away from the 25%+ employment figures of the early 1930’s.

New orders for manufactured goods in October decreased for the third consecutive month by $21.9 billion or 5.1 percent to $407.4 billion, the U.S. Census Bureau reported Thursday. This followed a 3.1 percent September decrease. Excluding transportation, new orders decreased 4.2 percent. Shipments, also down three consecutive months, decreased $13.8 billion or 3.2 percent to $417.7 billion. This followed a 3.1 percent September decrease. These figures are the byproduct of tighter credit markets and foretell lower jobs figures in coming months.

Declining auto sales have been forecast for months, and with the US House of Representatives forcing auto makers to state and restate their financial woes to the nation, it is a wonder that there have been any domestic auto sales to report. The beating the ‘Big Three’ executives have taken in the press has been unrelenting, and this in the face of these CEO’s having taken the helms of these companies well after the labor contracts that are at the heart of their problems were negotiated. The fact is that the US auto manufacturers have produced and sold more cars, trucks, and SUV’s than they ought to have been expected to in the face of lower-cost foreign competitors. Add to this the recent tightening in the credit markets, and one can draw the conclusion that the main reason Ford, GM, and Chrysler dealerships are still able to move even small inventories is a result of brand loyalties and consumer enthusiasm for models such as Corvette, Mustang, and Charger.

November retail sales, always bolstered by post-Thanksgiving buying, had virtually no chance of being anything but lower than expected. Not only did November 2008 have the fewest post-Thanksgiving shopping days of any November on record, but consumers have been beaten with the constant reports of how bad things were going to be, with the entire self-fulfilling prophecy routine then being played out in department stores across the country. Expectations were too heavily drawn from historical data, representing months with more available shopping days and pushed by a certain degree of desperation on the part of some retailers. According to the International Council of Shopping Centers and the LA Times, November retail sales were off by 2.7% over the prior year. Given that November 2008 had only three shopping days following Thanksgiving compared to eight days for 2007 and an average of six days for each of the last five years, a drop of only 2.7% is more reflective of a highly successful ‘Black Friday’ sales campaign than is being reported. Early media reports of ‘Black Friday’ sales were bleak; but when the numbers were tallied, 2008 ‘Black Friday’ sales actually exceeded 2007 by 7%.

The market dynamics played out through much of 2008 have reflected emotional swings indicative of a battle between fear and confidence. On any given day, the markets respond vigorously to positive reports, often beginning as rumors, and then just as vigorously retrace themselves out of fear and uncertainty. These swings, often representing several hundred points or more for the DOW, though not unprecedented, are counterproductive at best. They indicate a lack of confidence in the financial system and will only be replaced by calm and positive trend lines once the credit markets return to a level of normalcy, housing prices stabilize, and job creation outpaces layoffs.

Obama’s economic stimulus package is intended to offer much needed relief but will only have a chance if our legislative bodies stop parading the follies of business leaders in front of us every week, and the national media outlets back away from the ‘doom and gloom’ reporting that has become their ‘stock in trade’. Certainly, there are problems to be reported, and the American public deserves to be informed; but to constantly overstate the difficulties and under-report successes, only fosters greater volatility and may add sufficient negativity to actually create the very problem that is being fretted over.

Our society is great at coming together to mourn, we’re able to rapidly raise the national awareness of both scientific and cultural issues, and collectively we will move ‘heaven and earth’ in support of a worthwhile cause. What we need is a national day of confidence - a holiday from negativity - with the reassuring words of our national leadership, offered as a united front to allow confidence to win out over fear just long enough to provide rational thought an even playing field with that of emotion and fear.

$40 Per Barrel Oil?

In mid-July, we suggested that energy costs would trend downward well before the end of the year and that the price of a barrel of oil would fall below $80 or $90. Privately, we projected per barrel costs as low as $60, but had no expectation of price reductions $40 per barrel. Though we may have correctly calculated the vigor with which the US dollar would strengthen and the US and foreign economies’ ability to reduce consumption, we clearly underestimated the overall economic slowdown that would further weaken demand.

The run up in oil and other commodities was fueled by a weakened US dollar, increasing global demand, and some level of speculative manipulation. While speculation has been curtailed by greater enforcement of various regulations, the demand destruction we’ve seen now raises new concerns over a deflationary cycle. The swelling federal deficits, though never considered welcoming, will have an inflationary effect once enough jobs are created and personal incomes begin to rise. If this can be done quickly enough to avoid a sustained deflationary trend, remains to be seen; but it is likely. It is also, just as certainly, part of the Obama economic recovery plan. Likewise, the incoming administration has a planned cure for the likely inflation cycle--increased taxes. Inflation can only be sustained as both the number of jobs and personal incomes rise. Given that we will one day be forced to pay for the trillions of dollars of bailouts being offered, it only makes sense that the Treasury and Federal Reserve should seek an opportune time to exact payment and calm the growth that excess deficits consistently produce.

Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management