I really like this quote, but with a caveat:

“The economy remains on government-assisted life support, and the government has been very successful in creating the illusion of economic prosperity. It is doing this to buy time and help preserve social stability as the adjustment towards housing deflation, consumer deleveraging, and chronic unemployment takes its toll on the growth rate in organic final demand.”

-David Rosenberg

Its a reminder of just how broad the disconnect between fundamentals and the market can become.

Any portfolio manager who is overly reliant on macro economics and fundamental analysis will run into a timing issue.

That is why I find it so important to use additional metrics, including technical (breadth, volume) sentiment and liquidity. Otherwise, you can wait a very long time for the market to start reflecting the fundamental realities.

Category: Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “QOTD: On the Real Economy”

  1. foosion says:

    >>Any portfolio manager who is overly reliant on macro economics and fundamental analysis will run into a timing issue.>>

    If stocks are worth the present value of future cash flows, then the vast bulk of value is based on future fundamentals, especially at low interest rates. Focusing purely on today’s results is not good macro or fundamental analysis.

  2. JasRas says:

    “..Any portfolio manager who is overly reliant on macro economics and fundamental analysis will run into a timing issue….”

    I really enjoy Rosie for his economic analysis. But as a strategist, he is lacking. To say, “I was right!” to his bearish outlook in 2003 that didn’t come to fruition until 2007 is plain silly. Yet in the last few weeks of missives, he has the audacity to do just that. Missing *4 years* of very good markets, be it secular or cyclical, is—-wrong. Leaning wrongly for 4 years gets me fired a few quarters into that walk in the desert…

    His economic analysis is enjoyable to read. He cuts through the bull that most just “go along with”. Yet, as an economist, surely he knows many of the equations have government variables in them, so what he deems “life support” is simply working the existing formulas. Good, bad, or otherwise–the equations still work, the results are as expected, and if one wants to make money, one has to go with the expected output.

  3. IvoZ says:

    >>Any portfolio manager who is overly reliant on macro economics and fundamental analysis will run into a timing issue<<

    A very good point. I think there are some reasons why "fundamentals" are (even) less important these days:

    - a lot of OPM used for leveraged speculation
    - financialization of the economy (most profits there; Fed's favorite tool is to blow equity market bubbles)
    - concentration of wealth in a few hands (collective decisions of cartel members determine the non-free market)
    - unprecedented government meddling in markets (well these are a part of "fundamentals" to an extent)

    Result: resort more and more to trend-following.

  4. Petey Wheatstraw says:

    The middle class hasn’t, even yet, begun to absorb and pay for the criminality of the corporatists. Social instability is the inevitable consequence that the government is trying to avoid, via their ongoing con game, as it prepares to be besieged. In the meantime, they’re getting while the getting is good.

    We will be left with debt, denominated and settled in close-to-worthless dollars, while tangible assets and commodities will be sequestered from the current economy, to be capitalized on by the New Princes, once the new global monetary system is in place.

    The real economy is invisible. The economy we see is a magician’s trick.

  5. dougc says:

    kicking the can down the road is too mild of an analogy, it is more like we are living on the top floor of the Empire state building and a fire has destroyed fverything but the top 2 strories and our solution is to build another story. When the price for this crisis is paid, I hope you all have parachutes.

  6. MayorQuimby says:

    Fund managers are the ‘dumb’ money (no offense BR)….the smart money knows where things are headed. The dumb money follows and is hopefully nimble enough to eek out a profit over the long haul.

    The REALLY dumb money is in 401Ks and with individual investors. They are largely clueless and risk money they can’t afford to lose (unless you have a few mil you can’t afford to lose any money).

  7. JaundicedEye says:

    BR you are absolutely right there. I remember your posts in the spring of 2009.

    I think fund managers are nervous these days because the market is shooting up, but even if there is a significant correction, don’t you just buy it? Can’t we count on the asset inflation trade this year?

  8. jjay says:

    “Government-assisted life support”
    That sums up our economy and society.
    “New Princes”
    That sums up the Corporations that have taken over the government and the country.
    The Chinese are beginning to fill their role in the world.
    The old bully on the block, (that’s us) is now a toothless old alcoholic, still acting tough, but staggering down the block, mumbling nonsense to all he passes.

  9. dead hobo says:

    BR observed:

    Its a reminder of just how broad the disconnect between fundamentals and the market can become.

    reply:
    ————
    True, but most people don’t really understand the concept of ‘fundamentals’ or properly identify them. This is the real disconnect.

    The traditional fundamentals include wages, prices, GDP, inflation, employment and all of the common, ordinary ideas associated with them. While they are and will always remain essential ideas to comprehend, they do not comprise the universe of fundamentals.

    You have to go even more fundamental to grasp the traditional concepts.

    The fundamentals react to flows of money. Money comes from somewhere and goes somewhere. Constantly. Think of it as a circulatory system. Too little flow and the system collapses in shock. Enough flow and the economy functions. Wages, prices, GDP, and the rest of the fundamentals are all a function of the flow of money.

    Next comes the more intangible ingredients. The most important one is psychological. It is the feeling of security. If people don’t feel safe and secure in the belief that the world won’t end soon, then the economy will freeze and the fundamentals will choke. Likewise, when people think all investments end up with Wall street crooks as bonus, then this chokes investment and markets. This is why you can have massive stock market rises and few participants. If it looks like the crooks are running the show, then keep out if you value your retirement savings.

    Finally, you have the invisible hand.

    Today, you have massive fund flows and massive funds in reserve in bonds waiting to flow back into equities. You have markets that look safe, with respect to far fewer crooks in control. This knits into the fundamentals that are commonly referred to as traditional and are now fueling the markets. The invisible hand is doing the rest.

    And, thus, the concept of fundamentals is a little more fundamental than most believe.

  10. Robespierre says:

    “Its a reminder of just how broad the disconnect between fundamentals and the market can become.”

    Barry is not just a “disconnect” issue just like it was not a “liquidity” issue. The problem I see in this market is the dishonesty of the government and just about anyone in the industry including the press when dealing with what is going on with the real economy. take for instance the following remark by a writer in Bloomberg :

    “Financial companies have recorded losses and writedowns of $1.82 trillion stemming from the U.S. housing crisis and the highest U.S. jobless rate in 26 years, according to Bloomberg data. The pace of new problem loans eased over the last two quarters as the U.S. economy recovered, even after the federal government withdrew support from financial markets. ”

    This was a write up about citi’s “earnings”. Can you spot the subtle lies in that paragraph? Now I can deal with a “disconnect” any day but how do you deal with a complete government fabricated “recovery” where just about everything that gets publish is mostly Goebbels style propaganda?

  11. forwhomthebelltolls says:

    Although I don’t entirely disagree with much of anything that Mr. Rosenberg says, one cannot help but wonder if he, after having left the “blundering turd”, is feeling a tad lonely up in the great white north.

    His comments seem to be exceedingly dire and vitriolic since having gone to Gluskin and he seems to be quite careful to get himself quoted on an almost daily basis these days.

    Oh well.

  12. JasRas says:

    Look, life is all about disconnect from fundamentals… How many people really do something about their health until something bad happens? They(we/I) keep shoving crap down our throats and not exercising until an even happens. And then, it’s a long road back to “better” if at all. As humans, our first reaction is avoidance of reality and that means fundamental are disconnected from, well, most of the time. That is the human reality. We’d rather buy cheap stuff at Wal-Mart that doesn’t last as long, is built in places with no regard to the environment, labor safety or rights,… The ultimate cost? Jobs are shipped overseas b/c everyone is competing with Wal-Mart. So one can only laugh as the UAW member buys stuff at Wal-Mart while chastising others for not “buying American”… The labor crisis is one that isn’t just derived from the housing bubble, it is a massive social movement that just happened to have a tipping point simultaneously with the 2008 debacle.

    Change happens very slow, and when it happens, seems to happen “all of a sudden”… That, too, is the human reaction to it.

  13. Mannwich says:

    I think you nailed it, JasRas.

    Ditto Petey. The strip mining continues.

  14. cognos says:

    Disagree.

    Good fundamentals ALONE caught the best shorts in 2008 (Bear, Lehman, Fannie, Freddie, Casinos, over leveraged buyout plays like the Directories businesses).

    Good fundamentals ALONE caught many great longs in 2009 (Apple, Bank America, Ford, tech and consumer stocks at cash).

    Whats the problem again? (Rosenberg is JUST bad analysis. Its just BAD. Its a broken clock.).

    ~~~

    BR: The fundamentals underlying those shorts had been in place for many years prior

  15. Long term says:

    “The fundamentals react to flows of money. Money comes from somewhere and goes somewhere. Constantly. Think of it as a circulatory system. Too little flow and the system collapses in shock. Enough flow and the economy functions. Wages, prices, GDP, and the rest of the fundamentals are all a function of the flow of money.” (dead hobo)

    nicely worded and visualized, dead hobo. i like it.

    in terms of rosenberg’s statement…it SOUNDS great. but in my humble opinion, it is not within the US government’s capacity to do sound long term planning except in the military sense. what he is saying would require vast bipartisan agreement as well as a long-term concern (5, 10 years out) to be true. the politicians “buying the time” are only doing so for their own election chances; not long-term american economic interests.

  16. ezrasfund says:

    “The market can stay irrational longer than you can stay solvent.” I guess it’s good to be reminded of this every once in a while. And when market finally and inevitably re-aligns with fundamentals it often seems sudden.

  17. TripleSigma says:

    People say buy and hold is dead, I say “MACROECONOMICS” is Dead. This is nothing but Ponzi at this point. Outright manipulation. How is it that Citi Bondholders did not take a haircut on their bonds at all, through this whole debacle? Because this is no longer capitalism, it facism.

    Barry does a good job of using technical and sentiment to help get him gains. This is what you need to do. The #s are dismal, the world is in for default, but the market trudges higher. So ride the wave with stops. Dont even ever look at a balance sheet again, just use stops.

    I think we are going to collapse, but have been long and will stay long until trailing stops are hit. It goes against everything I beleive but I have to play the rigged game in a rigged way if I want to make any money.

    Analyst are a waste of time these days. Just look at Banana Ben and analyze his twitching beard. That all you have to do. He will pump and pump, until you guys wonder what happened to your currency.

  18. TripleSigma,

    Good Point..

    like, this:

    ECB Allows Irish Central Bank to Counterfeit 51 Billion Euros

    Ireland central bank counterfeited 51 billion Euros out of thin air. The amount is not backed by government bonds. Nor was it a loan from the ECB or anyone else. The money is counterfeit in every sense of the word.

    Please consider the facts as depicted in Central Bank steps up its cash support to Irish banks financed by institution printing own money.

    The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money.

    The figures also provide the latest evidence that responsibility for funding Ireland’s broken banks is being pushed increasingly back on to Irish taxpayers. The loans are recorded by the Irish Central Bank under the heading “other assets”.

    A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.

    Other Assets? What Other Assets?……”

    http://globaleconomicanalysis.blogspot.com/2011/01/ecb-allows-irish-central-bank-to.html

    as a ‘Case, in Point’..

  19. jz says:

    I don’t know what your point is Barry. Rosie has been big on bonds and gold, and these have hardly been duds. I myself have been a hard core double dip deflationist and have been heavy into bonds and have made a killing. There has been no penalty for me for staying away from stocks.

  20. Sunny129 says:

    @Triplesigma

    ‘…I have to play the rigged game in a rigged way if I want to make any money.’

    Well said!

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