Like Watching Paint Dry

Earnings release season for Q2 10 has pretty much run its course, and wary optimism has certainly paid off since our last Musings. The Market seems to want to go higher, more in synch with a steadily recovering (from the Panic of 2008 and the nano-panic wrought by the imminently dissolving Euro) global economy than with the like-watching-paint-dry recovery as indicated by U.S. economic data. Its reactions as companies opened up their kimonos and revealed what in the aggregate was a rather fine fettle seemed more indicative of Price Reality dysfunction (i.e., a surfeit of speculative interest running so roughshod as to demoralize all but the hardiest of investors) than anything else. The Q2 results clearly confirmed that “back from the brink” as defining trend remains intact. Yes, there was a pause in there, a prudent tap on the brakes by business decision makers that rippled back up the supply chains, but it was just a tap. The volcanic ash quickly settled, the oil dissolved into vapors and rock, Europe remembered that slow decay is normal course of things in most of its principalities, and that hit to household wealth that is Market correction spent the last, for the time being, of its fury. Then it was all down the memory hole in no time at all.

The wall of worry continues, and the Market continues to climb it. There is always a mix of good news and bad news; it’s just that at any given time one kind tends to get a lot more attention than the other. Europe has for longer than any of us have been around been a bad accident waiting to happen. It took a regime change in one of its creakier entities, along with the wholesale re-set of pension asset values inflicted by 2008, to remind us of this fact, but we soon learned that the powers that be are well practiced in art of kicking it down the road. This has caused the congenitally worried crowd to shift their focus to whatever uncertainty lingers about the U.S. economy. We have been treated to an almost daily litany as to how slowly, fitfully, unevenly the economy is recovering. Earnings were for the most part gangbusters, but what about revenues?, the naysayers lament. Home sales took a post-subsidy dip, but who didn’t expect that? (We are also supposed to be dismayed about lack of progress in reducing the number of homes for sale, as if would be sellers who were prudent enough to take their homes off the market during the Panic would not try again once they saw signs of recovery in their particular markets.) But nowhere are the howls of dismay more plaintive than on the matter of jobs, or the lack thereof.

All this blather about a “jobless recovery” strikes me as simply the most convenient way to keep things “interesting” on behalf of those interests who benefit from a high level of day-to-day volatility. That weak jobs growth is being posited as an indication of a sputtering economic recovery strikes me as farfetched in the way the things go when someone seems to be trying get you to zig when its time to zag. The purportedly weak growth is just about as one should expect, given the hand we have dealt ourselves. In every downturn since about the time “data processing” became IT (who knows, maybe even before then, but none of us were around to take note) some jobs just go away and don’t come back. (Think steel making, c. 1982). Such is the discontinuous nature of creative destruction. This tendency became even more pronounced once that 25 or so year golden era that was the result of WW2 (i.e., what we now call global competition having had time to rebuild from the rubble and start to give us a run for our money) had run its course. Global competition of the sort that has defined the past twenty years imposes a certain discipline that creates at least some drag when improving prospects prompt a need to consider adding more employees. Add to this secular shift a heightened level of uncertainty with respect to taxation, regulation and mandated expenses, and we should not be surprised that companies are not hiring as fast as the politicians and the marginally employable would like.

It also matters that so many of the “talking heads” of the investment world live and work in parts of the country that have the most serious impediments to recovery. Money centers like NYC, Boston and LA have systemic issues generations in the making. They boomed harder and then busted harder. They enacted policies and face topographic constraints which exert upward pressure on how much it costs to live there, which steadily eats away at their erstwhile advantages. While some parts of the country didn’t boom or bust quite so hard, if at all, these place are facing serious, persistent hurt. So while much of the rest of the country is getting on with it, it still feels like acute recession where most of said talking heads live, work and occasionally breed. They draw their oxygen from precisely those places that have fallen the furthest and as of yet have the least sanguine prospects of recovery. Being surrounded by lingering despair, with so many intractable obstacles (though if Governor Christie could balance NJ’s budget without raising taxes, who is to say what is intractable?) cannot help but bleed over into one’s assessment of the world’s future. I would submit that there is a whole lot more country out here that is finding its way forward, not as quickly as some would like, but quickly enough.

The July jobs report did not indicate that the economy was shrinking or even slowing down, though slower y/y growth is certainly what we should expect as the near death experience of 2009 gets anniversaried and then some. Private sector jobs were created, it just wasn’t as many as a consensus of economists had guessed it would be. What I see in the aggregate number, though, was little remarked upon. Yes, a big part of the decline was all those census workers being sent back to their respective couches. Everyone expected as much, and if they were in the estimate business they had no problem cranking that into the equation. What is being missed I would like to call the Chris Christie Effect. Employment is heading south when it should be growing because state and local governments, most remarkably the Garden State, of all places, are owning up to past profligacies and bringing their budgets back closer to earthbound reality. This means cutting expenses, which means hiring freezes and maybe even letting a few “workers” go. It no doubt also means cutting back on some contracts, which in terms of jobs bleeds over into that which is classified as private sector. It is the long overdue actions by the likes of Gov. Christie that is weighing on that statistical indicator of economic recovery we call jobs creation. And this is but one of many reasons that recovery, lived a day at a time by those of us who have money on the line or find ourselves at the margins, employment-wise, find it so much like the proverbial drying paint.

One other item from this slow news week we seem to have been in of late, a “you heard it here first” regarding the 2012 election: The question of who will run on the Democratic ticket is getting more interesting than who the Republicans will run. This latest installment of the White House’s Permanent party/vacation strikes me as bizarre. What can they be thinking, spending the hard pressed taxpayers money on a junket for “forty close friends” at a luxury resort in Europe? This, on top of how many other high dollar excursions? One gets the sense that they get the sense that the “good life” presently available is not going to last much longer, so get it while you can. The trip to Spain, when so many of the rest of us are settling for a downsized vacation or none at all, was so over the top as to make me wonder if she is not, in the lexicon of therapy, “acting out”. If so, we should not be surprised if in the months ahead we get something quite a bit more dramatic, something that will be remembered a generation from now. We should also not be surprised if someone within the Administration not the President moves to the head of the ticket in 2012. We can be sure that she and her husband would like nothing more than to regain that good life that they experienced when they resided at 1600 Pennsylvania, and that they have been laboring assiduously to bring that to pass. Their friends and allies will continue the slow, as yet too subtle to notice, poisoning of the incumbent and everything he touches, ahead of the day when she, festooned with cartoon accomplishments, will step forward and into the breach. (Now wouldn't a fight between her and the grizzly mom be a treat to watch?)

That is an early heads up of potential drama well down the road. For the moment, it's all about global economic recovery. My take on Earnings Season, Q2 10, was that tepid jobs growth notwithstanding, the global goods producing economy is on the mend. Despite this, traditional equity owners are so disheartened by a decade of unacceptable returns, and so frazzled by what has become the 200 pound tail that is Speculation wagging what has withered into a neutered shih tzu of the rest of the Market, that valuations languish as if its never going to get better. With such valuations, the economy does not have to get up and run for investors to do well. A slow, dull as watching paint dry, even halting, recovery, as households and corporations continue to fortify their balance sheets, will be all that is needed for patient, gutsy investors to reap an ample reward over the next couple of years.