How much of our belief systems are a result of our personal situation?
Barron’s Alan Abelson channels David Rosenberg, Merrill Lynch’s North American economist in looking at that question, via the Bond market. Rosenberg has raised his odds of a recession in the U.S., in part based on his Wall Street core-inflation index:
"Right now [Rosenberg] puts the odds of a recession at 40% and rising. To his credit, he was early in spotting the beginning of the end of the housing boom. And he isn’t blinking the possible consequences of a bust in housing.
On this score, he noted recently that housing accounted for more than a third of overall job growth in the past three years, and that the consumer’s ability and willingness to cash in on his growing home equity made the difference between 2% average annual consumer spending growth and the 3.5% that actually occurred. All things considered, he reckons that the drop in housing will shave as much as two percentage points from normal GDP growth of 3.5% over the next four to six quarters.
And he comments: "Something tells us that sub-2% growth, let alone a recession, would come as quite a surprise to the consensus economic community, who still cling to near-3% forecasts for 2007, and the equity analysts who continue to see 11% EPS growth."
Interestingly, among his achievements is his discovery why all the bond portfolio managers he runs into are so darn bearish on the Treasury market. What provided this epiphany was a Wall Street core-inflation index he created, which concentrates on those precious items that Wall Street types can’t live without. He reports that, at last check, the Wall Street core-inflation index was running at a 4% annual clip, or double Main Street’s comparable inflation index.
That naturally prompted us to inspect with some care the constituent elements in the index. And they are, perhaps in order of importance (although David won’t come right out and say so): alcoholic beverages (consumed, he carefully notes, "away from home"); hotels; housekeeping and lawn-care service; jewelry; airfare; pet services; sporting goods; medical care; recreation (unspecified, we might observe); elementary, high-school and college tuition; personal-care, dry-cleaning, legal (even bond people get sued) and financial services.
What this states loud and clear is that the bearish bond-portfolio managers are talking to their checkbooks, and the more they have to fork over for martinis and the other necessities of life, the greater their sensitivity to inflation and the more intense their bearishness on Treasuries."
Bond portfolio managers are bearish — meaning they see lots of inflation, sending rates higher and bonds lower — because the items on their personal shopping list keep going up in price.
This is a fascinating idea, and very consistent with a concept I’ve had for a long time: I’ve long wondered how bearish someone can be if they were personally flush. Is the parade of perenially bullish, well-compensated fund managers (or strategists/economists) a projection of their own personal situations?
I’ve noticed an example of this phenomenon in automobile purchases. (This is a bit of a leap, but hear me out). Ask someone who is considering the purchase of a car about its virtues and vices before they buy it. they will easily tick off all of the upside as well as downsides to that particular vehicle. They likely spent time and effort researching it, and they enjoy showing off that newfound knowledge.
Ask them again a week after their purchase.
For the most part, they will tell you how terrific the car is and how happy they are with their purchase. Given that a week is hardly enough time to really find out what all the warts and design flaws are on an automobile, this is actually more of a self-esteem issue. By saying how much they like the car, they are affirming their purchase decision.
The same "coincidence" exists with stock purchases. Dick Arms is fond of noting that investors get bullish after they buy stocks — not before. That’s why an excess of sentiment in either direction can be a contrary indicator. It suggests that all of the buying (or selling) has already taken place.
Fascinating stuff . . .
The Missing Imperatives
UP AND DOWN WALL STREET
By ALAN ABELSON
Barron’s MONDAY, JULY 31, 2006