Train Wreck Just Ahead?

This edition of Musings finds us freshly returned from what has probably become an annual pilgrimage to the mountains of Northern New Mexico and Southern Colorado. Being 9000+ feet above sea level, the water at one’s feet perhaps only hours removed from a snow bank, matching wits with salmonids that, while pea-brained, are quite exquisitely programmed for survival (at least if they are going to grow as large as the ones I tangled with) is a good thing. Sitting through an unrelenting succession of 1000 + days in what hopefully are the late innings of a bona fide contender for Drought of the Century, not so good. The 870 mile drive each way? A mixed bag, but definitely worth it. It makes for a couple of very long sits for what have become old bones, much of it through flat featureless country, but occasionally punctuated by very lovely scenery. This was also the year we learned that contrary to everything I had heard, speed limits will be enforced on the empty roads of West Texas. Specifically, 78 MPH will get you pulled over and warned on US 84 between I-20 and Snyder. (As the radar will see you up to a mile away on that flat, straight stretch, the officer will be rolling with lights flashing when you first see him.)

As much as I try to leave “the job” behind on trips like this (wireless Internet at the B&B not making that any easier), there was no getting away from the inner economist out on the sparsely peopled spaces traversed by US 84 between Lubbock, TX and Fort Sumner, NM. This is because on that stretch the highway follows the BNSF railroad. Inclined as I am to wonder about the actual state of the economy, the activity that is only symbolized by “indicators”, I could not help but notice the length and frequency of freight trains. Unless old-time games are being played with empty rail cars and containers (no doubt at least some of the eastbound containers were empty, but that is a trade balance issue), there is an awful lot of stuff moving from one side of the continent to the other this summer. Globalization and population density around port cities has made rail transport a decent business again after a generations-long decline (back to Henry Ford’s time, at least), unless of course the new owner of BNSF has lost his grip and succumbed to a childhood fantasy many of us had about playing with trains. In any case, highways were anything but devoid of trucks despite the massive numbers of containers that now go “most of the way” from port to destination by train. All this tells me that the global economy is not conking out.

Train traffic brings to mind that normally this far into the calendar quarter, we have seen a lot more earnings releases, including perennial early reporter CSX. Thus far we have seen Alcoa, Citigroup and Google, not much really in the way of a peek into how the economy is faring. This will change over the next few days, with IBM on Monday, CSX on Tuesday, and Intel on Wednesday, among many others that are going to make the next two weeks an unusually dense data dump indeed. I am especially looking forward to Intel, given the little throwdown that erupted a few weeks back when IDC cut its PC forecast. In a matter of just a few hours, and in a manner quite unlike anything I have seen them do in the years I have been watching, Intel came out with the statement that “Our Q2 results will speak for themselves.” This escalated a months-old tiff wherein Intel suggested that IDC does not quite have a handle on where PC demand is coming from in the still rapidly growing parts of the world. Considering how consistently and, quite often, grossly, the Street has underestimated the performance of Intel, one has to wonder who if anybody has a grip on just how well this company has responded that “crisis moment” a few years back (when AMD was supposedly on a rampage). We will see on Wednesday.

We should be surprised if this earnings release season does not depict an economy that is showing all the usual signs of recovery, however tepidly in the U.S., most of the EU and Japan, where effects of the earthquake dampen the already soggy prospects that go with such awful demographics. The global economy is recovering, and the earnings just ahead should spark a realization of this that manifests in another stair-step up in equity valuations. Unfortunately, there is this little distraction that is the budget impasse in Washington D.C., stinging the eyes of investors and otherwise making them uncomfortable, much like the smoke from that Las Conchas fire that threatened the Los Alamos National Labs. (Actually, while the smoke from that was pretty bad around Santa Fe, it was not evident up towards, Chama, NM, a stretch of highway as spectacular as I have seen in a very long time.) The politicians will probably (i.e., much more likely than not, if experience is any guide) manage some kind of compromise, probably one part chipping away at spending, ten parts kicking the can down the road. I cannot bring myself to bet otherwise, and uncertainty will abate, if only for a while. However, I cannot quite shake the uneasy feeling that this could end up being very ugly. It is not the substantive threat of technical default that should concern us. Owners of long term Treasuries should be delighted if perchance an interest payment were delayed by a matter of a few days or even weeks if the result was real progress towards assuring that principal will be returned on schedule and with dollars that have not been inflated into oblivion. What should concern us is the prospect of panic, that lethal admixture that bubbles up when craven demagoguery taps into seemingly programmed credulity. Like a bad accident no one saw coming.

How much of the bad stuff we see in history happened on purpose? Some of it, to be sure, like the fall of Constantinople, but probably not most of it. Did nineteen year old Gavrilo Princip have any idea he would spark WW1 when he shot that Archduke? Did Abraham Lincoln have any idea when the set out to preserve the Union that he would unleash a war that would rage for years and leave scars that would be generations in healing? And contrary to what some in the tinfoil hat set would have us believe, the Great Depression was an avoidable bad accident, too. 2011 finds us in a financial situation that while not yet precarious will become so if spending is not moderated and revenues are not increased (preferably by economic growth). An actual poll question I heard as I was taking a break from writing this (paraphrased): “Is the President incompetent or deliberately trying to make us more like Europe?” could easily and honestly be answered “Both”. The prospect of deliberate sabotage (making us more like Europe would be the same as sabotage, IMO) while not implausible given the atmosphere of the faculty lounges where his adult character hardened into shape, can be set aside and still leave us very nervous. This is because history has shown us that even truly competent leaders can cause the bad accidents that are history at its worst, and (at best) marginally competent leaders whose notions of their own competence have been inflated well beyond reality are especially dangerous in this respect.

My bottom line as Earnings Season Q2 2011 gets underway in earnest is that stocks are probably about to pop due to both confirmation of just how profitable many companies have become and at least an easing of the uncertainty attendant when the Inmates Running the Asylum have the power to cause bad accidents. Train wrecks, literal and figurative, only very rarely happen because someone wanted them to. Fortunately, they don’t happen all that often, and certainly not as often as the near misses that we never even think about unless we happen to have been there and paying attention. This should be a good week to be on board.