Posts tagged ‘Jim Paulsen’
Rams Butting Heads: Rosenberg vs. Paulsen
Source: Photobucket
After a massive decline in financial markets during 2008, followed by a significant rebound in during 2009, should it be a surprise to anyone that economists hold directly opposing views? Financial markets are Darwinian in many respects, and Bloomberg was not bashful about stirring up a battle between David Rosenberg (Chief Economist & Strategist at Gluskin Sheff) and James Paulsen (Chief Investment Strategist at Wells Capital Management). The two economists, like the equivalent of two rams, lowered their horns and butted heads regarding their viewpoints on the economy. Rams butt heads (two words) together as a way to create a social order and hierarchy, so depending on your views, you can determine for yourself whom is the survival of the fittest. Regardless of your opinion, the exchange is an entertaining clash:
Paulsen’s Case (see also Unemployment Hypochondria): Paulsen makes the case that although the recovery has not been a gangbuster, nonetheless, the rebound has been the strongest in 25 years if you look at real GDP growth in the first year after a recession ends. He blames demographic atrophy in labor force growth (i.e., less job growth from Baby Boomers and fewer women joining the workforce relative to the mid-1980s) for the less than stellar absolute number.
Rosenberg’s Case: Rosenberg explains that the last two recoveries bear no resemblance to the recent recovery. The recent recession was one of the worst of all-time, therefore we should have experienced a sharper V-shaped recovery. All the major economic statistics are at dismal levels, and nowhere near the levels experienced in late 2007. He goes on to add that the stimulus, monetary policy, and bailouts have not produced the bang for our buck. Rosenberg says he will put on his bull hat once we enter a credit creation cycle that allows the economy to grow on an organic, sustained basis without artificial stimuli.
Like other pre-crisis bears who have floated to the top of the media mountain, Rosenberg has had difficulty adjusting his doom and gloom playbook as markets have rebounded approximately +80% from March 2009. Rosenberg maintained his pessimistic outlook as he transitioned from Merrill Lynch to Gluskin Sheff and has been wrong ever since. How wrong? Let’s take a look at Rosenberg’s first letter at his new employer, Gluskin Sheff (dated May 19th 2009):
Statement #1: “It stands to reason that this was just another counter-trend rally.” Reality: Dow Jones Industrial Average was at 8,475 then, and 11,114 today.
Statement #2: “It now looks as though the major averages are about to embark on the fabled retesting phase towards the March lows.” Reality: Dow never got close to 6,470 and stands at 11,114 today.
Statement #3: “It is unlikely that we have crossed the Rubicon into new bull market terrain and that the fundamental lows have been put in.” Reality: Dow just needs to fall -42% and Rosenberg will be right.
Statement #4: “[Unemployment] looks like we will likely get back to that old peak of 10.8% in coming quarters.” Reality: We peaked at 10.1% in October a year ago, and stand at 9.6% today.
Statement #5: “Deflation risks continue to trump inflation risks, at least over the near- and intermediate-term.” Reality: Commodity prices are dramatically escalating (CRB commodity index skyrocketing) across many categories, including the four-Cs (copper, corn, cotton, and crude oil).
I don’t pretend to be whistling past the graveyard, because we indeed have serious structural problems (deficits, debt, unsustainable entitlements, high unemployment, etc., etc., etc.), but when was there never something to worry about? See 1963 article? Like the endless “double dip” economists before him (see also Double-Dip Guesses). As the evidence shows, Rosenberg’s anything-but-rosy outlook is a tad extreme and has been dead wrong…at least for the last 1 and ½ years or almost 3,000 Dow Points. Just a few months ago, Rosenberg raised the odds of a double-dip recession from 45% to 67%.
Perhaps the sugar high stimulus will wear off, the steroid side-effects will kick in, and the Fed’s printing presses will break down and cause an economic fire? Until then, corporate profits continue to swell, cash is piling higher, valuations have been chopped in half from a decade ago (see Marathon Investing), and money stuffed under the mattress earning 0.5% will eventually leak back into the market.
I do however agree with Rosenberg in a few respects, and that revolves around his belief that banking industry will not be the leading group out of this cyclical recovery, and housing headwinds will remain in place for a extended period of time. Moreover, I agree with many of the bears when it comes to government involvement. Artificially propping up sectors like housing makes no sense. Why delay the inevitable by flushing taxpayer money down the toilet. Did you see the government running cash for clunker servers and storage in 2000 when the tech bubble burst? Does incentivizing capacity expansion with free money in an industry with boatloads of excess capacity already really make sense? Although media commentators and gloomy economists like Rosenberg paint everything as black and white, most reasonable people understand there are many shades of gray.
Gray that is…like the color of two rams butting heads.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Unemployment Hypochondria
Average investors feel ill from the 2008-2009 financial mess, and like hypochondriacs they can only find fleeting reassurances by reviewing endless amounts of unemployment data. Volatile monthly data is not sufficient, so even more erratic weekly jobless claims data are relied upon. Why just stop there? With this insatiable appetite for unemployment rate data right now, people can’t get enough, so I am not only petitioning for the release of a daily jobs report, but also an hourly one.
Jobs data are relatively straightforward and simple for most Americans to understand. However, most people have more difficulty connecting with economic acronyms and data points such as GDP, PPI, CPI, industrial production, Philly Fed, capacity utilization, Conference Board LEI, durable goods, factory orders, energy inventories, trade balance, unit labor costs, and other economic figures.
Normal Progression
What’s the big deal surrounding the infatuation with myopic unemployment data? We have these things called “recessions” about twice every decade, and of the last 11 post-WWII recessions we have had 11 recoveries – not a bad batting percentage. Obviously, unemployment is a big deal if you are one of the 15 million or so people with no job, but as Jim Paulsen, Chief Investment Strategist at Wells Capital Management points out in his August Economic and Market Perspective, this current recovery is progressing at the fastest pace of any recovery over the last 25 years, and yes, jobs are being added (albeit slower than hoped).
“The consensus perception that this recovery is the ‘worst ever’ and consequently extremely vulnerable to a potential double-dip recession is overblown…Even if this recovery is weak compared to older postwar norms, it is still stronger than any other recovery in the last 25 years,” states Mr. Paulsen.
As you can see from Paulsen’s table below, our current recovery is not as brisk as the recoveries in the pre-1983 era, but he chalks up this trend to subpar growth in the United States’ labor force.
Source: James Paulsen, Wells Capital Management
Paulsen identified this dampened worker growth since the mid-1980s. He doesn’t attribute moderate growth to the “New Normal,” as described by PIMCO pals Bill Gross and Mohamed El-Erian (see also New Normal is Old Normal), but rather ascribes the phenomenon to a continuing trend. Paulsen adds:
“Whatever is causing the ‘new-normal’ economy has been doing it for the last 25 years. The ‘new normal’ is actually kind of old—at least a quarter century old.”
If you think about it, what businesses carried out over the last two years is clearly consistent with a normal economic recovery:
1) Businesses fired employees swiftly amid great uncertainty.
2) Businesses cut expenses, especially discretionary ones, and now profits and cash are piling up.
3) Businesses are buying more capital equipment. Spending is up +12% (to ~$1.3 trillion) from early 2009 according to Joe Lavorgna, an economist at Deutsche Bank.
4) Business acquisitions are beginning to heat up. Witness BHP Billiton’s (BHP) bid for Potash Corp (POT), and HP’s (HPQ) bid for 3Par (PAR) as examples (read HP’s Winner’s Curse).
5) Businesses are paying larger dividends and buying back more of their own stock.
All these actions are very reasonable given the continued uncertain economic environment and rapidly building cash war chests. Buying back stock, doing acquisitions, and prudently spending on cost saving equipment are, generally speaking, accretive measures for a company’s profit and loss statement. On the other hand, hiring employees is usually a lagging indicator of economic expansion and acts as diluting profit forces – at least in the short-run until workers become more productive. Eventually cash and/or business confidence will rise enough to push human resource departments over the fence to begin hiring again.
The weekly unemployment claims chart shows how rapidly improvement has been achieved over the last few decades, even though the improvement has stalled at a lofty level.
Source: ScottGrannis.Blogspot.com (8/13/10).
Japan Case Study: Demographic Double Edged Sword
Be careful what you wish for. Low unemployment is not the end-all, be-all of the world we live in. Take Japan for example. From 1953 until 2010, Japan’s unemployment rate averaged about 2.6%. The last reported rate registered 5.2% in July, double Japan’s average, but almost half of the U.S.’s current 9.6% rate.
Why does Japan have lower unemployment? There are numerous reasons cited – everything from over-employment in the agriculture sector to uncounted married women and protective conglomerates to better disincentives in unemployment insurance program. Overshadowing these reasons is the unmistakable aging of the Japanese population. The National Institute of Population and Social Security Research predicts the Japanese population will fall 30% to 90 million by 2055. Low birthrates, limited immigration, and retirement all increase demand for employment, therefore Japan’s younger-age workforce becomes a scarcer resource and will be more likely to secure and maintain employment. Eventually, I will become old enough in retirement that I will need my underwear and bedpan changed, and create a job for someone in the process – a job that cannot be outsourced I may add. Of course there are very few countries that want a declining population, even if it may lead to an improved unemployment rate. A growing country with liberal immigration laws, healthy birthrates, abundant resources, and pro-business initiatives may have higher unemployment rates but also have more jobs available because of the growing workforce.
Source: UN via Financial Times. Declining Japanese population is putting a growing burden on fewer shoulders.
Eventually the 76 million Baby Boomers born between 1946-1964 are going to be exiting the workforce and will increase the burden on our younger workforce. Do we want to follow in the same path of Japan? Or do we want to adjust our legislative process to meet the draining demands of our aging society? My answers are “No,” and “Yes,” respectively.
The unemployment hypochondriacs can take a deep breath knowing the path we are experiencing is nothing new. Certainly I would like to see better policies implemented to accelerate the economic recovery, but regardless of what inept politicians bungle, our innovative companies, and restless voters are waking up to keep our representatives accountable. This is important because we are like a younger but stronger cousin of Japan, and we do not want to follow along the decaying path of an aging indebted country. In the short-run, we all want to see job growth for the millions of unemployed. In the long-run, retiring Boomers will be stretching the resources of our country even more. So although the unemployment hypochondriacs have little to fear in the near-term as the recovery continues, fiscal responsibility needs to be kept in check or hidden economic illnesses may become reality.
Read James Paulsen’s complete August Economic and Market Perspective
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in BHP, POT, HPQ, PAR, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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