This note was originally published at 8am on August 23, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Are we human, or are we dancer?”
As many of you likely know, “Human” is a song by American Indie rock band The Killers. Keith referenced it in Hedgeye’s last company meeting to note the infallibility of us all. Sometimes we are right, sometimes we are wrong, but we are always human. As well, sometimes things just aren’t as complicated as humans like to make them.
While I am prone to typos, the typo, or rather grammatical error, is not my doing in this instance. The Killers actually wrote the song with dancer, and not dancers. In fact, the song was motivated by a derogatory comment by Hunter S. Thompson, when he stated that America was raising a “generation of dancers”. According to Wikipedia, in an interview in Rolling Stone, the lead singer of The Killers, Brandon Flowers, was asked about confusion over the lyric and responded:
“It’s supposed to be a dance song, the beat goes with the chorus . . . if you can’t put that together, you’re an idiot. I just don’t get why there’s confusion.”
Certainly, Brandon Flowers and his band mates are human, but grammatical error and all, their song, “Human”, was voted the top song of 2008 by Rolling Stone Magazine.
The investment business is perhaps one of the most humbling of all professions and reminds its participants every day that they are human. In the Chart of the Day, we show the SP500 versus 10-year Treasuries over the last six months. Certainly, there were very few investors on the right side of both trades six months ago.
This morning I went back to our Early Look strategy note from exactly six months ago and on February 23rd, Keith wrote:
“And this is really where I can look myself in the mirror and say, despite the fierce lobbying for me to chase US stock market fund “flows” into their mid-February crescendo, I stayed true to the best top-down risk management process I know – when Global Inflation Is Accelerating, and Global Growth Is Slowing, it’s time to build up a large asset allocation to Cash.”
At that point, the SP500 had been chugging upwards since the start of the year and was up roughly 4% year-to-date and on trajectory for a more than 25% annualized return. Back then, it was hard to be bearish, now it is pretty easy.
Akin to The Killers song, we aren’t bears, we aren’t bulls, we are only human. While Keith, myself, and our team are happy that our research process helped us alert our clients early to the confluence of global economic issues that has led to the dramatic decline in global equities year-to-date, the next challenge is to have the correct view of the next major move in global equity markets.
For us to turn more positive on U.S. economic growth we would likely need to see a positive change on the margin in three key areas: housing, employment, and debt. It is really that simple. The first two relate to the largest portion of the U.S. economy, which is consumer spending. Stable house prices provide consumers the confidence to spend, and fuller employment broadens U.S. consumption. The third factor, debt, relates to the U.S. government balance sheet. Just like any corporate or individual balance sheet, the federal balance sheet has become constrained by debt, which will impede future organic growth.
Underscoring all of this, as it relates to securities prices, is, of course, the perspective of expectations. That is, what is priced in? With the SP500 now down more than 10% in the year-to-date, there is certainly a reasonable amount of bad news priced in. Often, though, securities prices tend to be a leading indicator versus a lagging indicator and a key question to consider now is what the dramatic decline in equity prices we have seen in the last month means for confidence and economic growth over the coming quarters.
A couple of days ago, President Obama stated that he doesn’t expect a recession in the next twelve months. This was supported this morning by a survey from the Associated Press that indicated that a majority of economists believe that another recession is unlikely in the next twelve months. This is, of course, the same group of economists whose group GDP growth estimate for 2011 was +3.2% on February 23rd. . .
Flagging our competitors on their errors in groupthink only gets us so far, but looking at the consensus view does provide us some insight into what is priced into the market. That said, we certainly understand, as former Yale President and Commissioner of Major League Baseball Bartlett Giamatti famously said:
“No one man is superior to the game.”
Isn’t that the truth . . .
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research