Friday, July 19, 2013

Things ARE getting better...

Shortly after the close of yesterday's session, the news came out that the city of Detroit had indeed filed for Chapter 9 bankruptcy. Many professionals in the industry have stated that this was always just a matter of when, not if. Regardless this is the biggest municipal bankruptcy in US history, there is just no easy way around it.

However, I for the most part, happen to be a contrarian and an optimist. So I thought this would be a good time to point out some positive developments as well. I am not an economist, I am a technical analyst that has been very bullish on the macro picture in terms of equity prices. With increased central bank intervention I believe the ride could be a volatile one, but it is a ride that I believe will take equities much, much higher over the coming years and decades. About a month ago I came up with a post entitled "Are you ready for Dow 150K?!". In case you missed it, click on the link to check it out. The only thing I may have some regret about in writing that post, was the title. I think the title got people to either write it off completely or end up focusing on the 150k Dow target and not the meat of the message. I don't regret writing the post at all, it's the way I feel whether we hit that target or not. And it offered a perspective unfamiliar to these investing times.

Basically the message comes down to the facts that are #1) major averages are coming off historically oversold levels after declines not seen since the great depression. #2) the two major sectors of the US economy (tech and financials) have both seen 80% drops as a sector on separate occasions in the last decade. #3) We have been in a period of historically low sentiment regarding the US financial system as a whole. So much so that after making new all time highs in every major average, most people are still, 5 years after the financial crisis, looking for a major stock market crash right around the corner. Call me crazy, but as a contrarian play alone, this market has seemed like a screaming buy for me the last few years.

But maybe I am crazy. As I said I am a technical analyst that looks at charts at patterns. I am not an economist, I would be well out of my league to even attempt to make off like I was. That is why I want to reference a couple guys in this industry I really like and admire a lot. There are only a handful of guys that I follow and these two happen to be on top of that list.

Scott Grannis a chief economist at Western Asset Management from 1979-2007, has a tremendous blog I follow very closely for my macroeconomic data. In his post Budget outlook improves dramatically he has laid out a very informative look at the federal budget deficit. I highly recommend you follow the link and read the entire post for yourself. The above two charts are his main charts that portray this message.

He goes on to say and I quote:

"Over the past four years, and especially in the last 12 months, there has been a dramatic improvement in the federal budget outlook. Revenues have grown at double-digit rates of late, while spending has slumped. As a result, the budget deficit has plunged, both in nominal terms and relative to GDP. Almost two-thirds of the decline in the burden of the deficit since 2009 has come from the spending side, and that is good news since it leaves more room for the private sector—the source of most productivity gains—to expand."

He concludes:

"From a supply-side perspective, it's refreshing to see how much can be accomplished by the private sector in the face of serious fiscal headwinds (e.g., big increases in regulatory burdens and rising marginal tax rates): even just 2% GDP growth per year can solve lots of problems if the government gets out of the way.

This is all very encouraging because the huge decline in the deficit—which is now back to levels that are quite manageable—all but eliminates the need for still-higher tax rates. Indeed, it even opens up the possibility of lower tax rates in the future. The bi-partisan tax reform effort now underway, led by Sen. Max Baucus and Rep. Dave Camp, could produce dramatic pro-growth results if done correctly. That would be the best news I could hope for, outside of a permanent delay to Obamacare, which would almost certainly boost federal spending with little or no benefit to the economy."

Next there is Cullen Roche from Pragmatic Capitalism. Cullen is another good guy in the business, he is always very helpful with visitors and followers. And I find him to be very objective and genuine, really looking to help people get good information as opposed to pushing an agenda.

He also had a fascinating post today on how as of now, the fear trade has been demolished. I would highly encourage you to follow the link and visit his site as well. One of the main points he makes I could not agree with more, and unfortunately I find this prevalent in today's investing world.

He says and I quote:

"If you’ve been paying attention over the last few years, you probably remember how many people predicted hyperinflation, surging bond yields, soaring gold prices, a cratering US Dollar and a collapsing stock market.  This was the fear trade.  You overweight gold, short US government bonds, short the USD, short equities and laugh all the way to the bank.  Parts of that trade have worked out OKAY (like the gold portion over the years), but on the whole that trade has been a big disaster.  In other words, fear lost out – again.  And I think a lot of people who bought into the fear mongering nonsense are angry.  They’re angry because they backed their political beliefs with their wallet.  They’re angry because they listened to so-called “experts” peddling their political beliefs as an understanding of the monetary system.  They’re angry because they read scary websites that claim to have predicted the crisis, but have gotten almost everything wrong since 2008.  They’re angry because they let their emotions get in the way of sound analysis.

Look, there’s plenty to be upset about.  I am not here to claim that all is well in the economy and in the USA.  In a lot of ways this country feels as disjointed as ever.  But I see a lot of people who seem to be upset for reasons that can be pinpointed to little more than their ideological beliefs.  If I am right then these people have no one to be upset at but themselves for constantly buying into this fear mongering nonsense.  You have to be very careful approaching the monetary system and the economy with an ideological or political bent.  It will lead you astray at times.  I know it has certainly led a lot of people astray in the last 5 years…."

Very strong words indeed, and he concludes with some very helpful lessons we all can benefit from, not just in terms of investing. He states...

"The good news is it’s never to late to learn from mistakes.  I’ve made plenty of mistakes over the last 5 years.  But I always try to learn from mistakes.  So the question is, will people actually try to approach the monetary system and the economy objectively, rationally and apolitically?  Or will they continue to expose themselves to the same biases and ideological pitfalls that have led so many people to fall for the fear trade?"

So there you have it. Some good food for thought to counteract all the noise that will inevitably continue after developments in Detroit, Fed tapering, take your pick. Hope you enjoyed.