Yup, just take a look at the Fed's senior loan officer survey - you'll see the C&I loan demand lagging, even though standards are loosening. Not a good sign. Nor is the buildup of inventories - if demand is falling, then it's only another quarter before the IS ratio gets to the point where production cuts start. And when biz investment growth starts to cool, well, that will pretty much seal the deal on recession. I know someone out there is going to raise the commercial building saves the day argument, but trust me, that will end too. Vacancy rates are already high, and when job growth starts to dry up and layoffs start up, the vacancy rate forecast is going to be for an increase, and that means commercial construction will slow as well. There just isnt any good way out at this point.
The consensus view crowd is desperate at this point on just about anything that will allow a soft landing.
They are in the business to sell stocks and mutual funds. Go to any broker or Financial Planner- and they will try and sell you the same story. Recently I was looking into buying a fixed annunity- and was told by the Financial Planner aka as a salesmen that the economy was fine and stocks would be up strong this year.
Hmmm he was preaching to the wrong bird with me-
More of those on Wall Street like Ms. Sonders are facing the unpleasant reality that this 'housing mess' is much , much worse then any thought possible, and the ramifications for the economy are not at all good.
Mr. Roubini's esoteric views (and the sudden turnaround to bear status again of Stephen Roach) make the likely outcome of this carnage closer to their views then those of persons like Jim Cramer 'screaming soft landing!
Before jumping on the heads of forecasters about calls for a "soft landing" let us remember CR's own notion that recession forecasting is a mugs game. Think of Greenspan's "soft patch" and the 1994 experience. Forecasters learn over time that "the sky is falling" is a good way to get egg on your forecasting face. That doesn't mean recession is not on the way. It just means that we won't get a Blue Chip forecast of recesssion until recession is underway. Need to accept that idea and move on.
Jim A,
Yes, and...if we think about it in an opportunity cost sort of way, higher short end rates give businesses a lovely, fairly low-volatility alternative to investing in operations. What I find odd when Fed guys talk about the likelihood of a hand-off from housing to business investment is that Fed policy is aimed at making all kinds of investment in real assets less attractive. They are suggesting that their policy will lead not only to a cooling of growth, but to a rebalancing. We only have reason to believe in that rebalancing argument in the negative sense, that slower housing sector investment will leave a larger relative share to all other activities.
Good observations all. All the micro side however businesses - and I used to be part of this process - hardly ever look at the alt. investments and balance sheet impacts of capital decisions. They look at whether or not it makes sense and helps make a profit. Then they worry about financing it and the ROI. On a macro-scale that means they'll invest in capacity (or hire) depending on what current demand is like and how they see it growing. Over the last several years balance sheets have been building up huge cash balances because businesses didn't see any bood way to put that back into the business.
When you look at the numbers Investment is generally a lagging variable to GDP and Consumption (PCE)and turns down after they do. Right now we're in a holding pattern though in guessing where it's going we here know that the driving engine, housing, is going away. And you all's points provide anecdotal early indicators about the rest.
Agreed, regarding most firm's lack of attention to alternative forms of investment. But big firms seem to be a special breed. There have been press reports this year about the shift in corporate earnings toward a greater reliance on returns from financial assets. It may be inadvertant, it may not.
k harris - interesting. Would that necessarily be a contradiction though ? BtW - my business experience has largely been at these large companies and I was describing a process that I was intimately involved in. Both within and working with clients and customers. A good example is the major oil companies which have huge capital budgets but aren't investing all their cash flows in new exploration because they can't find secure sources. Mostly an analogy.
You might find the discussion on BigPicture on earnings and income, drawn from the WSJ germane: The Big Picture
That said alt. investments aren't capital investments or hiring. Which is what we'd need for business spending to take over from consumers. For Sonders at Schwab to issue a warning moves beyond 'canary in a coal mine'; as a client I've been ignoring their analysis for quite some time because it's ignored the Big Picture so much. May have to re-consider.
Dave L & k harris - great comments. I really appreciate your inputs as a follow ups to CR's initial postings. That's what makes this such an interesting board. Thanks.
I'm on the tiny side of micro - a corporation of 'one' - and agree that most smaller firms do NOT look at alternatives because they really can't. They are either making money via operations or closing up shop. If they have anything retained it doesn't stay in the kitty long.
This btw applies to companies worth a couple hundred million with a couple hundred employees as it does for my company of one. Once they get REALLY BIG... then they can look at alternatives.
But even then that might not hold all the time...
Consider we've come from a period of almost record earnings & profits (yes/no?)... Corps are awash in cash from what I read so they have the luxury to choose alternatives if they can't imagine 'normal' ways to produce earnings.
But what happens if we really do slip toward recession? It's possible sales slow, margins tighten and the cash cow dries up. Then they will have far fewer choices. Maybe then the choice is to feed the cow or watch it & the enterprise die.
I'm not saying investment will pick up... I'm just suggesting the 'alternatives' model is more a artifact of the unprecedented cash flows large multi-nationals have enjoyed recently rather than some sort of 'enlightenment' on their part. I'll be more likely to believe that if they navigate their way through this recession without ending up on the rocks.
Big companies bought back a record $116 billion worth of shares in the second quarter, up 43 percent from a year ago, according to a Standard & Poor's report released Thursday.
If the dollar drifts lower, exports could increase which could entail more business investment since the US is largely a capital goods producer. Declining domestic consumer demand would not affect this greatly. It still seems doubtful this would be sufficient to offset declines in housing though.
You can lock up 5.25% in cash (CD), or if you are convinced the dollar will fall you can buy ICPHX, or similar. Or if you think housing has further to tank, you can short the homebuilder index, XHB.
dryfly -we're both spending too much time on somebody else's blog but...think you're dead on. Post the bust enterprises have spent much effort in repairing badly damaged balance sheets, let's say from '01-'03 or so. Earnings per se as well as, from GDP stats, profit share of nat'l income have been historically high. Some of that is cyclic recovery (Hussman points out on his site that earnings recover to the mean and on average growth is 6%) but much of it strikes me as deep changes in decision-making.
IMHO what's been going on is that post '98/'99 business hasn't seen the opportunity for profitable re-investment and has restrained by capital spending and hiring. As they drastically reduced costs while constraining those outlays it showed up in cash and balance sheet repair which was then used for dividends (not much) and buybacks(which helps earnings a lot and bonuses). SP/BizzWk have done a good job of documenting the buyback phenomenon as has the WSJ. You don't do those things if productive investments are available.
Just as a case in point IBM's been throwing off $11B in free cash but investing less than half that and using the rest for buybacks. I know for a fact that they can't find new businesses to invest in that align with their capabilities. Yet the stock price has gone nowhere since '98.
Yup, just take a look at the Fed's senior loan officer survey - you'll see the C&I loan demand lagging, even though standards are loosening. Not a good sign. Nor is the buildup of inventories - if demand is falling, then it's only another quarter before the IS ratio gets to the point where production cuts start. And when biz investment growth starts to cool, well, that will pretty much seal the deal on recession. I know someone out there is going to raise the commercial building saves the day argument, but trust me, that will end too. Vacancy rates are already high, and when job growth starts to dry up and layoffs start up, the vacancy rate forecast is going to be for an increase, and that means commercial construction will slow as well. There just isnt any good way out at this point.
The consensus view crowd is desperate at this point on just about anything that will allow a soft landing.
They are in the business to sell stocks and mutual funds. Go to any broker or Financial Planner- and they will try and sell you the same story. Recently I was looking into buying a fixed annunity- and was told by the Financial Planner aka as a salesmen that the economy was fine and stocks would be up strong this year.
Hmmm he was preaching to the wrong bird with me-
More of those on Wall Street like Ms. Sonders are facing the unpleasant reality that this 'housing mess' is much , much worse then any thought possible, and the ramifications for the economy are not at all good.
Mr. Roubini's esoteric views (and the sudden turnaround to bear status again of Stephen Roach) make the likely outcome of this carnage closer to their views then those of persons like Jim Cramer 'screaming soft landing!
Not to mention the fact that with interest rates edging up, business investment costs more now than say, two years ago.
Before jumping on the heads of forecasters about calls for a "soft landing" let us remember CR's own notion that recession forecasting is a mugs game. Think of Greenspan's "soft patch" and the 1994 experience. Forecasters learn over time that "the sky is falling" is a good way to get egg on your forecasting face. That doesn't mean recession is not on the way. It just means that we won't get a Blue Chip forecast of recesssion until recession is underway. Need to accept that idea and move on.
Jim A,
Yes, and...if we think about it in an opportunity cost sort of way, higher short end rates give businesses a lovely, fairly low-volatility alternative to investing in operations. What I find odd when Fed guys talk about the likelihood of a hand-off from housing to business investment is that Fed policy is aimed at making all kinds of investment in real assets less attractive. They are suggesting that their policy will lead not only to a cooling of growth, but to a rebalancing. We only have reason to believe in that rebalancing argument in the negative sense, that slower housing sector investment will leave a larger relative share to all other activities.
Good observations all. All the micro side however businesses - and I used to be part of this process - hardly ever look at the alt. investments and balance sheet impacts of capital decisions. They look at whether or not it makes sense and helps make a profit. Then they worry about financing it and the ROI. On a macro-scale that means they'll invest in capacity (or hire) depending on what current demand is like and how they see it growing. Over the last several years balance sheets have been building up huge cash balances because businesses didn't see any bood way to put that back into the business.
When you look at the numbers Investment is generally a lagging variable to GDP and Consumption (PCE)and turns down after they do. Right now we're in a holding pattern though in guessing where it's going we here know that the driving engine, housing, is going away. And you all's points provide anecdotal early indicators about the rest.
DaveL,
Agreed, regarding most firm's lack of attention to alternative forms of investment. But big firms seem to be a special breed. There have been press reports this year about the shift in corporate earnings toward a greater reliance on returns from financial assets. It may be inadvertant, it may not.
k harris - interesting. Would that necessarily be a contradiction though ? BtW - my business experience has largely been at these large companies and I was describing a process that I was intimately involved in. Both within and working with clients and customers. A good example is the major oil companies which have huge capital budgets but aren't investing all their cash flows in new exploration because they can't find secure sources. Mostly an analogy.
You might find the discussion on BigPicture on earnings and income, drawn from the WSJ germane: The Big Picture
That said alt. investments aren't capital investments or hiring. Which is what we'd need for business spending to take over from consumers. For Sonders at Schwab to issue a warning moves beyond 'canary in a coal mine'; as a client I've been ignoring their analysis for quite some time because it's ignored the Big Picture so much. May have to re-consider.
Dave L & k harris - great comments. I really appreciate your inputs as a follow ups to CR's initial postings. That's what makes this such an interesting board. Thanks.
I'm on the tiny side of micro - a corporation of 'one' - and agree that most smaller firms do NOT look at alternatives because they really can't. They are either making money via operations or closing up shop. If they have anything retained it doesn't stay in the kitty long.
This btw applies to companies worth a couple hundred million with a couple hundred employees as it does for my company of one. Once they get REALLY BIG... then they can look at alternatives.
But even then that might not hold all the time...
Consider we've come from a period of almost record earnings & profits (yes/no?)... Corps are awash in cash from what I read so they have the luxury to choose alternatives if they can't imagine 'normal' ways to produce earnings.
But what happens if we really do slip toward recession? It's possible sales slow, margins tighten and the cash cow dries up. Then they will have far fewer choices. Maybe then the choice is to feed the cow or watch it & the enterprise die.
I'm not saying investment will pick up... I'm just suggesting the 'alternatives' model is more a artifact of the unprecedented cash flows large multi-nationals have enjoyed recently rather than some sort of 'enlightenment' on their part. I'll be more likely to believe that if they navigate their way through this recession without ending up on the rocks.
Comments?
If those big companies are looking for an alternative way to invest some of their excess cash, my company of one could use a new bucket truck...
Don't forget that companies seem to be keener on share buybacks than capex. Proof?
S&P Says 2Q Share Buybacks Set Record
Big companies bought back a record $116 billion worth of shares in the second quarter, up 43 percent from a year ago, according to a Standard & Poor's report released Thursday.
If the dollar drifts lower, exports could increase which could entail more business investment since the US is largely a capital goods producer. Declining domestic consumer demand would not affect this greatly. It still seems doubtful this would be sufficient to offset declines in housing though.
My question is, if one has been convinced by Roubini that the sky is falling, is there any good place to put your money?
You can lock up 5.25% in cash (CD), or if you are convinced the dollar will fall you can buy ICPHX, or similar. Or if you think housing has further to tank, you can short the homebuilder index, XHB.
dryfly -we're both spending too much time on somebody else's blog but...think you're dead on. Post the bust enterprises have spent much effort in repairing badly damaged balance sheets, let's say from '01-'03 or so. Earnings per se as well as, from GDP stats, profit share of nat'l income have been historically high. Some of that is cyclic recovery (Hussman points out on his site that earnings recover to the mean and on average growth is 6%) but much of it strikes me as deep changes in decision-making.
IMHO what's been going on is that post '98/'99 business hasn't seen the opportunity for profitable re-investment and has restrained by capital spending and hiring. As they drastically reduced costs while constraining those outlays it showed up in cash and balance sheet repair which was then used for dividends (not much) and buybacks(which helps earnings a lot and bonuses). SP/BizzWk have done a good job of documenting the buyback phenomenon as has the WSJ. You don't do those things if productive investments are available.
Just as a case in point IBM's been throwing off $11B in free cash but investing less than half that and using the rest for buybacks. I know for a fact that they can't find new businesses to invest in that align with their capabilities. Yet the stock price has gone nowhere since '98.