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Alan Abelson’s weekly column in Barron’s is one of my regular must reads. While many people complain he is a curmudgeonly perma-bear, I find him to be an astute observer of all things Wall Street.
If you think he is too negative, well then, just think of him as a thought provoking counter-balance to the still — post analyst settlement — excessively Bullish bias of the Street.
Further, if your leanings in either direction cannot stand up to some healthy criticism, than those beliefs are either weakly held or poorly formed — or both.
All that said, Abelson has 3 things going for him:
1) An extensive rolodex of Wall Street commentators, all of whom answer his calls, and freely share their perspectives;
2) A long institutional memory of who has a history of offering reliable advice — his column is as notable for those he didn’t quote during the 2000 run up as those he did; (My decade on the Street makes me a relative newbie; I hope to have him recognize my work by 2025).
3) A good eye for plucking some of the savvier and more relevant comments of the week and using them to further his arguments.
I believe it is a mistake to ignore him.
All that said, let’s look at what he offers this week:
"SPEAKING OF PICTURES that aren’t very pretty, as we just were, take a gander at the two charts that adorn these scribblings. They’re both lifted from Stephanie Pomboy’s latest MacroMavens commentary and, frankly, they’re more than a little ominous. For what they show is how dependent this quixotic economic recovery has been on IOUs.
The remorseless decline in wages as a percentage of personal income has reached an historic low of 62% (the chart to your left). Meanwhile, consumer spending as a percentage of wages continues to spiral upward (the chart to your right). In the past three years, Stephanie reckons, shop-happy consumers, cheerfully determined to live beyond their means, leaned a lot more heavily on borrowings ($675 billion of non-mortgage debt) than paychecks ($530 billion) to cover the $1.3 trillion increase in their spending.
Great while it lasts, but even the best of sprees — and it hurts to be the bearer of sad news — can’t go on forever. And this one looks like its time is almost up. Higher interest rates, obscene gasoline prices and the rising cost of just about everything are starting to sap consumers’ confidence, to say nothing of their capacity to consume. Retail sales this month, Stephanie takes somber note, have been the weakest since the last recession.
Over on the other side of the fence that separates presumed investment sophisticates from us poor civilians, risk-consciousness is suddenly the in thing. The spread in yields between junk and Treasury paper — a handy gauge of how venturesome or apprehensive the folks who speculate in bonds are — has begun to widen, and the flow of corporate bond issues is contracting sharply. Which Stephanie proclaims as clear proof of the dearth of liquidity in the corporate bond market.
Making things infinitely more disturbing is that the companies in the crosshairs, as she puts it, are the very creators of credit — the likes of GM, Ford, Fannie Mae — along with the facilitators (nice euphemism, Steph) of credit — AIG, Ambac, MBIA, to name only a few.
That the demon debt is finally exacting its due from consumer and corporate borrower leads her to the melancholy but unsurprising conclusion that "the great credit boom is now drawing to a close." And here we were so hoping Mr. Greenspan could take his leave smiling."
That dovetails nicely with our perspective of fading stimulus and slowing GDP. It also makes my concerns about 2006 all the more vivid.
Of course, this will end badly — every cycle does. (How is it that investors have yet to figure that out?) The questions are when, and by how much?
I still have til December to fret about 2006. For know, let’s watch and see how the March 29 Bear call plays out.
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UPDATE: May 2, 2005 7:47am
I am grateful to report that I will not be waiting til 2025 for AA to pluck me from relative obscurity. That happened this past weekend:
Demonizing Santa
Claus
http://online.barrons.com/article/SB111481127270021070.html
I am humbled . . .
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Source:
Will Wonders Never Cease?
Alan Abelson
Barron’s, Monday, April 25, 2005
Up and Down Wall Street
http://online.barrons.com/article/SB111421236708514915.html
Please let me know if you can see the graphics — they sometimes glitch out —
Two thoughts on why these charts might not be as bad as they seem at first blush:
1) I’m curious what percentage of non-wage personal income is LLC ownership, rather than more passive investment income? LLC owners don’t collect paychecks despite the fact that they often work significant hours in what would otherwise be a wage paying job.
2) What does the consumer spending as a percentage of wealth chart look like?
I was surprised Fed Gov Kohn comments (http://www.federalreserve.gov/boarddocs/speeches/2005/20050422/default.htm) didn’t get much attention. Didn’t he directly compare home prices (unusual asset price configuration) with the tech bubble? “But if current expectations are badly distorted, then the way forward may not be so smooth. Eventually, reality always asserts itself over wishful thinking, and such realignments are sometimes abrupt, as illustrated by the collapse of the high-tech bubble a few years ago. In such circumstances, asset prices can adjust sharply, and private spending may also respond quickly, making it difficult for monetary and fiscal policy actions to provide a timely enough counterweight to keep the economy continuously on track.” And for those thinking the fed will ‘blink’ due to risks of collapsing the real estate market, “we should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices…”. Yikes.
John, I totally agree. When I read his speech I winced.
Jeff, #1 seems a lot like the canard about all the supposedly self-employed skewing the employment numbers. As for #2, let’s see a chart breakdown of wealth. How large of a component is real estate? I would guess huge. If that’s the case a healthy portion may prove illusory.
American households are net creditors, but saving have been declining for far too long and interest rates are low, so notice the turn in the graphs from 1995 to 2000, and 2001 to 2005. We are living off wages, capital gains and debt.
By the way, this year for America will pay more income to international investors than we gain. This will add to balance of payments difficulties, and finally reverses a pattern we have experienced since World War II. We are finally international debtors in terms of income, as Warren Buffett complained.
John
And for those thinking the fed will ‘blink’ due to risks of collapsing the real estate market, “we should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices…”. Yikes.
I know, I know, I know. There is reason for lots of caution.
Barry,
This day the comments are fast. However so, I thank you :) Hello Andy.
Again, the turn in the graphs from 1995-2000 to 2001-2005 is what is most bothersome. Where is Robert Rubin or Lawrence Summers when we really really need such a presence?
These charts are illuminating in that they’re merely numerator-denominator twists on several undeniable trends: Since 2000, wages have been stagnant or shrinking, while consumer spending has been increasing. It’s unlikely that these numbers are distorted by entrepreneurship, since that phenomenon was by all accounts at an all-time high in the late ’90s. Unless wages increase, consumer spending must decline.
Bearish Yet?
Paul Volcker says the economy is in trouble. Warren Buffett can’t find anything worth investing in. Bearish yet? No? Barry Ritholz at The Big Picture has some disturbing charts for you. Economic growth has been fueled entirely by consumer spending, eve…
It looks as though the change in ratio of wages to income from ’00 to ’05 was roughly from 67 to 61%, and of consumption to wages from 141 to 157% — almost exactly symmetrical percentage changes in the ratios. So the change in ratio of consumption to income will have been much less than that of consumption to wages.
The 10% decline in the fraction of income coming from wages — over a mere five years — cries out for detailed analysis. It certainly doesn’t seem that dividend, interest and capital gains income have risen that much. Or that enough people could have switched to taking their income as LLC profits from taking it as wages. And the tax receipts monitored by TrimTabs seem to indicate that income subject to Federal withholding is rising nicely. What is going on?
Browsing the stats at economagic to see how the components of personal income have changed since Jan 2000, I notice the fascinating fact that, though most other forms of personal income are up on the order of 10%, and all the news tells us there’s been a boom in individual buying of rental properties, there has been essentially no increase in
“Rental income of persons with capital consumption adjustment”.
http://www.economagic.com/em-cgi…e/nipa/ T2t6l10m
I’m a big fan.I really enjoy the Barron’s interviews.Where can I go or subscribe to her regular oppinions?