Paul points to this fascinating assessment of the state of the Economy from Larry Haverty, Portfolio manager, Gabelli Global Multimedia Trust via Barron’s.
This is the market that just won’t quit. Or is it?
Haverty: It is like a mystery play. In Act I of the play, it is very clear the U.S. consumer is in what I would call a 21st-century recession, and that’s a recession without the negative economic statistics that you would normally get in a ’60s or ’70s style recession.
How then do you know there is a recession?
Haverty: We have weak end demand virtually everywhere — in restaurants, autos, durables and at the low end of the consumer area, with pricing pressure on everything from oil to milk. We are not getting a classic recession, probably due to the fact that inventory management has been so much better than it was 30 years ago, largely due to computers. There aren’t the massive cancellations of orders that existed in the classic recessions in the ’60s and ’70s. I can’t tell you the last time I have seen a retailer with seriously excessive inventory. The message from this part of the play is that while the consumer is weak, it has basically put the Fed on hold for the last year and for the foreseeable future, because if the Fed raises interest rates it is going to make the sectors that are weak much weaker, and that is not going to accomplish anything.
The question on my mind is how will just-in-time inventory be impacted by the ongoing housing slowdown? Sure, there’s no inventory build and less layoffs necessary — but that only helps the corporate side more efficiently manage a slowdown — not avoid one alltogether.
Regardless, I find Haverty’s comment’s insightful, and like the best observations, obvious in hindsight — one those "Why didi’nt I think of that?".
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Source:
Interview With Larry Haverty, Portfolio manager,
Gabelli Global Multimedia Trust
SANDRA WARD
Barron’s, JULY 23, 2007
http://online.barrons.com/article/SB118472768144069974.html
I think the EM’s hold the key. How long can they drive growth in the absence of the US consumer? History would say not very long unless its different this time!
There are other considerations there as well. During the 60s and 70s no single entity was responsible for over 30% of P&G’s revenues. The mass retailers today often don’t even own the goods they sell. They can return things at will for lack of sales. On many items you’ll notice in large print “Please Call Us!” in hopes you don’t return the item to the retailer. Computers have had an impact, yes, but the bigger impact is the centralization of the retail space such that manufacturers haven’t unloaded a good until is the hand of the end-consumer. Inventory management is real simple when returning the item to the manufacturer at or near cost is an option.
Prior to our last short recession the same inventory controls were in place but it didn’t stop poor business decisions and bubble dynamics. This time though we have the ameliorating effect of more illegal workers and a larger underground economy. At the same time there is the Gavkal platform dynamic at play, liquidity coming at us, the housing bubble, and black box credit instruments- a virtual reality. Alot of cross currents. Still food and energy know what time it is.
(1) In the 60’s and 70’s if you had the money supply growing in double digits
(US & WORLDWIDE)
you could stop a recession, but then again people would be crying about high prices!
(2)The main “inventory management” being used right now might be mid to low paid workers.
Interesting, but an old observation
http://www.deloitte.com/dtt/article/0,1002,sid%253D15288%2526cid%253D148556,00.html
I think the consumer was crying about high prices back then…….it’s very different to have the reality (real numbers) be in such complete contrast to what is reported (commerce department). As to say it will not exist if you do not look for it.
I fell out of my chair last week when Ber”Hank”e said that the fed needed more data to make sure inflation was contained. More data??? So that it can not be included in the overall CPI/PPI and PCE deflator releases?
“If you do not look…..it does not exist…”
Hank Paulsen, Ben Bernancke 2007
seems to be the continuing motto over there.
Ciao
MS
SO IN WHICH COUNTRIES CAN WE FIND A STRONG AND EXPANDING MIDDLE CLASS? ONE THAT HAS AN APPETITE FOR OUR GOODS.
RUSSIA
ALSO THIS LOOKS BAD FOR THE DOLLAR WHICH DOUBLY SCREWS THE AMERICAN MIDDLE CLASS SINCE IMPORTED GOODS LIKE OIL WILL GET MORE EXPENSIVE AND THAT WILL LIKLEY HAVE ADDITIONAL RAMIFICATIONS ON THEIR AFFECTS ON OUR ECONOMY.
WHEN COMPANIES AND COUNTRIES START DEMANDING PAYMENTS IN CURRENCIES THAT ARE INCREASING VALUE (OR THEY BARTER FOR BASIC MATERIALS THEN WE KNOW WE ARE IN A LOT OF TROUBLE.
THIS MAKES HIGHLY LEVERAGED GOLD COMPANIES OF INTEREST OR LESS LEVERAGE IF YOU ARE MORE RISK ADVERSE.
WE WILL LIKELY SEE A REDUCTION IN THE PRICE OF OIL. I THINK IT WILL NOT LAST MORE THAN 4 MONTHS OR SO. THIS WOULD PROVE TO BE A BUYING OPPORTUNITY. OPEC WILL BE TORN BETWEEN THE NEED FOR CURRENCY (WHICH WILL MORE AND MORE BE A NON DOLLAR EXCHANGE0 AND THE UNDERSTANDING THAT THERE ARE VERY INTELIGENT OBSESSIVE GEEK/NERDS (GN’S ) WHO WILL COME UP WITH DIFFERENT APPROACHES. THEN THE INVESTORS WITH EURO SIGNS IN THEIR EYES WILL EASE THEMSELVES IN. THIS WILL START IMPACTING THE US MARKET AS MORE CARS WEAR OUT OR MEANS TO ADAPT THIS TECHNOLGY BECOME INCREASINGLY PREVALNET. THEN WE CAN BUY DOLLARS.
Nah….it’s not different this time.
We overshot on inventory *again*, only the product is housing this time. People are “returning it” (via cancellations, forclosures, bankruptcy due to IO/PO deARMing), and there is “Call us!” type mortgage workout going on in an effort to stem returns.
History doesn’t repeat, but it rhymes.
KnotRP,
Spot On!
History doen’t repeat but it stutters, sometimes the message is new but we pay attention more to the delivery than the content.
Housing is not the same thing when it comes to inventory. Unless you like glacial economics. Simply put the movement in all things housing is usually slow. So although markets seem to move quickly the amount of time it takes to create new inventory and sell it is slow. When we see excess inventory lets say for cars we have how many half built cars? But with real estate the whole thing just stops.
knot, I think you are correct but a realestate problem just takes a long time to correct and this one with the foreclosures is rather ugly.
comparing a 60s/70s recession to one today, wouldn’t the growth of revolving credit (stlouisfed.org) be more important than “just-in-time” delivery?
MarkTX,
I agree that in a largely services based economy, workers become “inventory”. I’m not so sure that applies only to the lower end of the income scale though.
One interesting element of the worker inventory is that, unlike a widget, the utility of the worker is a function of time. Excess corporeal inventory retains at least some value into the future, and liquidation will provide future working cashflows. Underutilized worker time inventory is largely a deadweight cost with little opportunity to store value to generate cash through lean times.
Interesting point(s) Estragon,
it seems highly possible that workers(Inventory) in the US service/asset economy may be in recession,
but the “overall economy” is doing fine.
JIT inventory is therefore working (sorta).
“Different this time (from the 60’s/70’s)?”
Do you think there’s a wee bit more productivity these days?
PC’s (and everything DIGITAL!)
Internet
Cell Phones
Fax machines (lol)
Nanotechnology
CAD
CRM
I’d say it’s vastly different.
Does China, India, Brazil, or Mexico vaguely resemble what they were back then?
Fred,
One of the defining characteristics of the 1960’s and 70’s was an expansion of the labor force. In part, this was a result of the entry of the baby boom generation into the workforce, but also a result of a higher participation rate as women joined the workforce.
Today there’s a similar expansion of the labor force, but this time the expansion is outside the US. I think that, combined with the service intensity of the US economy is what makes this time different.
Technology is different today, but I could argue that technology played just as big a role back then. Think TV’s, transistors, plastics, interstate highways, commercial air travel, etc.
Interesting point. Inventory maladjustment was one of the classic arguments for why free market economies inherently generated a business cycle.
One factor somewhat increasing the chance of inventory maladjustment instead of reducing it is the length of supply lines going all the way to China. In 2000-2001, some of the tech companies were caught with inventory in the long pipeline that wound up being massively excessive.
The inventory is in China. Ain’t nuttin changed just the locale. Alter production in China? “whaddya mean they ain’t buying our debt no more!”
Barry,
I don’t know if I agree with this argument.
Some of my best shorts have been companies with too much inventory. And those ideas simply came from reading the balance sheet.
I gather Fred does’nt travel much as Brazil and Mexico actually look worse now than they did at that time period. When the National Flower of Mexico is the plastic bag……
well you know..
Ciao
MS
MarkTX,
I’m not suggesting we’re in a worker inventory recession (yet). I was thinking more about how such a recession would play out given the nature of the “inventory”.
In days past, the latter part of an expansion often saw hording of raw materials as price increases accelerated and shortages developed. At the end of the cycle, production fell off as stocks were liquidated throughout the supply chain.
Today, it may be that workers are being horded as the cycle matures.
Estra…fair points.
Yet don’t forget that global tax rates have plumeted…while global growth is BOOMING.
The differences are vast, imho.
“The Global Race for Lower Corporate Tax Rates
by Daniel J. Mitchell
Daniel J. Mitchell is a senior fellow at the Cato Institute.
Thanks to globalization, it is now increasingly easy for capital to cross national borders. Investors naturally prefer lower–tax jurisdictions, so there is a shift of jobs and investment out of high–tax nations. This is having a big impact on tax policy. Simply stated, tax competition is compelling governments to dramatically lower their tax rates. This has important implications for China, the United States, and other every nation seeking to play a role in the world economy.
As recently as 1980, the average top statutory corporate tax rate in industrialized nations was nearly 50 percent. Top personal income tax rates were even more punitive, averaging close to 70 percent. But beginning with the Thatcher and Reagan tax rate reductions, there has been a remarkable shift in the direction of lower tax rates. Maximum tax rates on personal income have dropped by an average of 25 percentage points, and top corporate tax rates have fallen by 20 percentage points.
Tax competition also has helped trigger other pro–growth reforms. Learning from Hong Kong’s success, there are now 17 flat tax jurisdictions, and three other nations are about to implement simple and fair low–rate flat tax systems. Other nations have chosen an incremental approach, usually focusing on reducing or eliminating the tax bias against saving and investment. Several countries, for instance, have lowered tax rates on dividends, interest, and capital gains. Others have abolished wealth taxes and death taxes.
These reforms have boosted the global economy. Worldwide economic performance is much more robust than it was in the 1960s and 1970s, when nations were raising tax rates and increasing the burden of government.”
Full article:
http://www.cato.org/pub_display.php?pub_id=8382
Isn’t this just a new version of “the business cycle has been tamed”?
Fred,
Though I agree that taxes played a role, I have trouble with simplistic views like “Worldwide economic performance is much more robust than it was in the 1960s and 1970s, when nations were raising tax rates and increasing the burden of government”. It’s a complex subject. For example, most of the key technologies you mentioned earlier were commercializations of military technologies.
Anyway, tax debates here seem to degenerate rapidly into ideology and dogma, so maybe it’s best if we just leave that one alone ;-)
Another huge factor in the 60’s and 70’s was the Viet Nam war. The creation of dollars to finance the war, plus the oil shocks, strikes, etc. contributed a great deal to the mix back then. Inflation was rampant and we all know where it stopped, and what interest rates were needed to do so.
I go along with the thesis that there is inflation in the things we need, tuition, food, energy, and deflation in the things we want, electronic gadgets.
Our workers have been suffering a gradual decline in their earnings and standards of living for many years, and that will continue until we are on a par with the rest of the world.
No need to lay the workers off that you never hired in the first place.
You’re a wise man, Estra.
Thanks, and agree.
The US has had recessions in the early part of the decades since 1960. Expansions lasting 7.5-10 years since the 60’s as well. The only exception was the 1970’s. Why? Oil baby. The gradually price of Oil we pay today is nothing like the shocks were. If the shocks hadn’t happened, the 70’s have a long expansion as well IMO.
RE has become “different” from the economic cycle. 2001 showed that. So will 2008. So what is RE’s most dangerous part to the economy as a whole? Capitulation and giving up on RE equity blowing prime loans and builders into the sea forcing a sea change. Because RE has changed, we don’t know the end result. Which is annoying.
Too bad that isn’t true of housing. It looks like we have a huge inventory (and getting worse.)
barnaby33,
It is a huge inventory, and that means that we also have a huge inventory of construction equipment, concrete, wood and manufactured wood products, fiberglass, gypsum board, copper, glass, vinyl… of everything which is now borrowed against future demand. Commercial construction will disguise those inventories this summer, but will grind to a halt – overbuilt just as housing is overbuilt – and then all the above-named industries will wait a few years for demand to rebuild.
2Q GDP figures report on Friday , and they will be above 3% ….. that number will be due in large part to inventory build … BUT … the 3Q won’t see that lift and the ensuing GDP will fall below 3%
It seems to me that when the most mature free market capitalist society starts to see its citizens in decline in a world where fledgling free markets are actually raising the standard of living of their new participants, that the end game of the Debt-Based Monetary system comes into focus. Sell the Dream, Create the Dream, Export the Dream to new market, Steal the Dream from old market, lather, rinse repeat.
stormrunner very incisive spot on post !
And 6.5 yrs ( soon to be 8 ) of Bush admin. has accelerated the end game of Debt-Based Monetary system in USA perhaps by 2 decades.
The pain of Joe and Jane Middle class American is just starting…
Fred posted:
“As recently as 1980, the average top statutory corporate tax rate in industrialized nations was nearly 50 percent. Top personal income tax rates were even more punitive, averaging close to 70 percent.”
Funny that RightWingers consider the wealthy being asked to pay their fair share of the tax burden as “punitive“.
“Learning from Hong Kong’s success”
Only the top 1.5% of income earners are subject to the single-rate “flat tax” in Hong Kong. The other 98.5% of taxpayers in Hong Kong pay a graduated income tax which consists of four separate tax brackets and allows for sizable personal and dependent deductions.
Further evidence favoring a progressive income tax.
“Worldwide economic performance is much more robust than it was in the 1960s and 1970s, when nations were raising tax rates…”
To the contrary, the American national economy had it’s two greatest periods of prosperity in the 20th Century when tax rates were either at their highest on the Rich & Corporate or when the tax rates were raised on the Rich & Corporate.
“Daniel J. Mitchell is a senior fellow at the Cato Institute”
Mitchell is a hack and Cato nothing more than a fake RightWing front group.
.
VJ…try some valium, and stay away from the crack pipe.
Uhhh, nice substantive response, jules. (Like this one?)
Saw somewhere that the last time global growth ran this fast was 1970-73. Not particularly auspcious.
Barry, I don’t know why you write:
‘Regardless, I find Haverty’s comment’s insightful, and like the best observations, obvious in hindsight — one those “Why didi’nt I think of that?”.’
I could swear this is one of your themes: newer statistics are hiding mild stagflation and recession in plain sight.
Now, I googled “site:bigpicture.typepad.com inventory recession” and didn’t find much directly in your posts (but more often in readers’ posts — though that’s to be expected since we technically post far more than you). But, for instance, on this page:
http://bigpicture.typepad.com/comments/2003/09/shell_shocked_c.html
I did find you posting this link:
“Inventory controls prove to be recession busters”
http://www.boston.com/business/globe/articles/2003/09/07/inventory_controls_prove_to_be_recession_busters?mode=PF
So, I think you knew this idea and knew it was relevant…maybe just forgot.
>> and didn’t find much directly in your posts
Oops.. I meant:
“…didn’t find much directly in your posts *regarding Haverty’s second point about inventory control*”
Obviously, you’ve written at length about how the statistics are tortured. I *do* believe it’s possible the average American can live less and less well while the stock market — thanks to greater numbers of us and thanks to inflation’s contribution to EPS — can keep rising.
Deja Vu.
It was a scant 8 years ago (1999) when the Media and the Maestro (Greenspan) argued that the Business Cycle had been conquered thanks to advances in technology and JIT inventory management (and hence much higher equity valuations were warranted). It was not until 2002 that we discovered the sad truth (massive inventory buildup in every sector of technology, including cisco systems, which should have been better than most at inventory management. cisco took a massive inventory writedown in 2002).
No Thanks. I’d rather wait until 2012 or better yet 2015 before accepting the view that “It is different this time” with respect to inventory management.
Interesting and great insight. Very different perspective than what I have seen.
Actually excess inventory in technology is worse for the company but better for those who make the technology (who get paid). I believe this might be due to the hardware loosing value against tech. advances. At least with a car some aspect of value, even at a loss, is likely to be retained, but tech value drops so fast it is a slap in the face with a circuit board. And lets not forget the hardware to make the tech. On the other had just in time tech with flexibility and no contracts might work well.
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