I know Carl through a mutual friend "” he's in Washington State, and had been very successfully running several 100 million dollars, primarily in small cap companies. I've found his views to be informative and refreshing.
We last heard from Carl when he penned Its Dues Paying Time: American Myths Being Destroyed "” And What May Happen Next.
Here's his latest missive
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So What Could Really Turn the Economy Around? by Carl Haefling
Could it be something as simple as a huge rally in the stock market? Think about it! The stock market is a reflection of what people are feeling at one point in time. One day their feeling good, another day their feeling bad. Stocks go up and stocks go down.
Since the end of 2008 the average investor has had the @@@@ scared out of them as they have confronted one negative headline after another. The real estate market collapsed, pension plans are in trouble, city and state governments are watching their tax revenues slip, slide away and our federal budget is out of control. Corporations have reduced expenses as much as possible and are socking away cash every moment of the day. They are afraid to hire–so instead they are buying businesses, and then firing even more people as they eliminate duplication of jobs. There is little confidence anywhere that tomorrow the financial system will survive, or that our jobs (your job if your working, I’m retired), will be there when you show up for work.
The federal reserve in their response to fear has lowered interest rates about as low as they can go. They have saved the day—they prevented 30% unemployment or worse instead of 10%. But what we see is the best of we may achieve, UNLESS confidence is established somewhere in our economy. The easiest place for that to happen is in the stock market.
Stocks are trading at 20 year valuation lows. You can buy blue chips yielding 5% with Treasury yields below 1%. I see stocks trading at 3 to 8 times earnings everywhere I turn. Companies are now run as tightly as possible. Employees work day and night because they fear loosing their jobs. Stock prices reflect zero confidence and many seem to be betting that the economy will not only have a second dip into a deeper recession (most people think we never escaped the first one), but it will officially called a depression. Economic fear is rampant.
There is most likely more cash sitting on the sidelines then any time in the modern history of financial choice making. If the market begins to rally and confidence builds, stocks will skyrocket—nothing else currently offers any competition. Government bonds are yielding little, CD’s yield little, and corporate bonds yield little.
The price of gold keeps climbing–a reaction to fear. Speculators are now bidding up grains and other food items—fear about supply. Fear is everywhere. Five years ago if I had attempted to discuss anything to do with the economy in a conversation people did not want to engage. Now it is the first topic of engagement. Over the last 2 years people have sat up and taken notice about how the economy works, what makes the stock market go up and down, and the relationship of the economy to politics.
The world of politics is predictably a reflection of fear. If people are fearful all politicians who are in power should be fearful. As long as the economy is suffering it will be the political party flavor of the year. Whoever is in power, will be at risk of loosing power. Two years ago the Republicans were blamed for everything that was wrong, rightfully so in my estimation, and this year the Democrats are being blamed. Since they have done a horrendous job of educating people about the problems now faced, they deserve to be blamed. If we are fearful of not being able to pay our bills you can be certain that political parties will point that out in their advertising campaigns. I now sit with my finger on the mute button when political commercials dash across my TV screen. The fear mongering must be near an all time record.
The stock market is a very emotional critter. If it starts to climb people will jump to the conclusion that things are getting better. If confidence builds the economy will get better. If stock prices go higher business people will be less interested in buying a business and more interested in building a business—and that means job creation.
I have been investing since I was 14 years old. I’m now 62. I have rarely seen stocks as cheap as they are. All that needs to happen is for the economy to improve at a 1 to 2% rate next year and stocks will become even cheaper relative to their buy out values, unless stock prices climb. Business men with excess cash are and will be buying every business in sight that is trading at a discount to future earnings. Why shouldn’t we? You could not come close to duplicating the business of many companies trading at current market capitalizations.
So if you want the economy to improve—invest in the stock market. If you want to get beyond the political wackiness now running rampant in American politics where your vote is determined by what you fear, not what is best for the country, hope for a higher stock market. I know it sounds greedy and even irrational. But having played this game for almost 40 years, I have learned that it is fear that drives stock prices higher—fear of not participating in a rally.
Its a simple formula. Higher stock prices, leads to confidence, confidence leads to investing in jobs.
Now before you think I worship at the alter of the free market, I don’t. I have my own theories about human behavior that have helped me through this life. I do not believe that humanity will for the most part make the right choice when it comes to financial self interest. I strongly believe that an unregulated market is a precursor to economic disaster and allows the worse of what it means to be human to emerge. Stock market optimism is not the free market run wild. It is a statement of belief in the future of a regulated economic system that allows us all entry into the market place. The stock market is one of the few places that one can take paper route money and turn it into a significant amount of money. I know.
When things seem bad, it is very counter-intuitive to buy stocks. I’m a buyer.
Carl Haefling
Sorry. I just can’t get past all the grammatical errors. (their, loosing, your, etc.)
“Its a simple formula. Higher stock prices, leads to confidence, confidence leads to investing in jobs.”
Oh really? We just had a 70% rally in stocks & there was no improvement in either confidence or jobs.
It makes some intuitive sense. I also very much believe a large part of Bernanke’s plan is to restore confidence by whatever means necessary. He is a con man, after all.
But confidence is only half the story. Jobs are important, but jobs and confidence don’t eliminate global debt issues overnight. Confidence doesn’t eliminate negative home equity. Confidence doesn’t solve global economic imbalances in trade (see China and the US). These are large, structural issues that have been decades in the making (yes decades, so your 40 years really loses relevance along the way), and will likely take a similar amount of time to resolve. These are issues that can’t be ignored – especially given the prevailing bullishness around Emerging Markets (equity sales in developing nations this quarter exceeded the previous high of $72 billion in the last three months of 2007, greater than developed nations).
So as a corrolary to your point, while confidence is good for S/T market moves, you can not ignore OVER-confidence either. We are adjusting to back to back asset bubble bursts – housing, then commodities. While there is no shortage of bearish sentiment out there, bullish sentiment in risky stocks is now back to peak levels since the August-September rally began. And there is a prevailing assumption that QE provides us with a nice, handy, “risk-free” equity market. I believe confidence is important, but it appears to be as cyclical as anything else. And for all the bullish commentary and outlooks from companies on earnings calls, it doesn’t appear to me that they are lacking in this department. Perhaps they are playing the con game along with Berspanky.
If stocks are so cheap and its time to buy then it must be time to buy a house also. Look, these cheap stocks are where there were 13 years ago. They have a negative return this decade, so I should buy again why? The “cheap” market is so stacked against us little guys.
I think the last 40 years were an anomaly based on America’s position in the world. Currently the Achilles heal to your argument is the banking system, which has never been in jeopardy like it is now. The second weakness is that the debt to productivity ratio is skyrocketing. It takes so much production to safely support a certain level of debt. This relationship is destroyed and will result in a large decrease in the standard of living to rectify it.
Cannibalistic Fat Cats
There is no hope. All the fat cats used to sucking 25% of the value out of everything bought and sold in this country have fallen upon hard times. Now they been trying to subsist for two years on a dramatically reduced economy and still get their 25% worth, which in this economy amounts to 50% of everything bought and sold. They have eaten their grandparents, their parents, their children and are now turning to their spouses with a hungry look. Normally they would be exiled from their families and communities, but in a global society, that doesn’t matter the problem just gets shifted. So get used to it. We live in a world of dross, where everything of value goes to sustain the rich upon the top of society, while the rest toil day and night to support the topheavy load.
Carl, please elaborate on the metrics you use to define equities as currently being “cheap.” If, by definition stocks are “cheap” then public sentiment is not a necessary condition for them to rise to their fair value, as professional money managers would arbitrage this spread away.
Wow … that’s a perspective from another generation.
Carl, I’m 29. To me, your optimism is hilarious. My parents had a similar viewpoint based on their experiences. Work part time to pay for college, graduate, marry, buy a house, move up the corporate ladder, all on a single income. Let’s just say that NOT A SINGLE ONE OF MY FRIENDS HAVE BEEN ABLE TO DUPLICATE THIS SUCCESS.
This doesn’t directly relate to the stock market, but I don’t have a blind belief that what worked well for your generation is going to work for mine. You simply have lived in another economic reality.
@Pure-Water: Bingo.
[...] What could turn the economy around? Hint, the stock market. (Big Picture) [...]
The title should really read “So What Could Really Turn the Economy Around-with the least amount of pain to the top 10% of Americans”
As of 2007, the top 10% of Americans own 88% of all investment assets (including 92% of all stocks).
Barry, check out G. William Dumhoff’s paper titled, Wealth, Income & Power. He’s a Sociology Professor here in Surf City USA (Santa Cruz). He’s “lefty” but the numbers can’t lie much…
http://sociology.ucsc.edu/whorulesamerica/power/wealth.html
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"You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete." -Buckminster Fuller
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