Wealth: Slow is Good

Slow-recovery

By Mike Williams

If we think things are slowing a bit then remember it is now summer, and the markets are always susceptible to the summer haze.

The pathway runs from June, slows further in July (with a spike or two of interest if the headlines are strong enough), and ends in complete boredom during August.

Much like the windless doldrums we would often hit during offshore races when I was sailing as a kid, you could count on the wind picking up, even though a storm or two would often be thrown in to get your attention.

And rest assured, on a 50-footer in the middle of nowhere, 40-plus foot waves do tend to catch your interest!

Headline Comedy

A well-known magazine that comes out over the weekend reports: “US stocks fell sharply amid strife and lackluster economic reports.  The Dow sustained two straight days of triple-digit declines, ending the week down 0.88 percent at 16,775.74.”

Now that is a mouthful, though somehow the terms “sharply”, “0.88 percent” and “16,775.74” don’t seem to jive.  Attention grabbing indeed, but without any really big waves to back it up. Try this headline instead: “The markets acted normally, with rallies and setbacks within normal confines as a percentage of the average…ending down less than a percent on the week….another normal part of the primary uptrend we have seen for the last 300 years.”

That version just won’t sell as many ad spaces.

This Week’s Message?

Let’s see; weekly retail sales are doing fine, unemployment claims are doing fine, technology is building higher profit margins in most businesses and leading to the perception of lower job demand.

The charts below from our friend Scott Grannis show that industrial production is doing just fine as well…

In the end, the summer is ripe for reasons to expect a little smouldering setback or two.  We hope it unfolds as the strength under the surface continues to be misunderstood.  Yes, the recovery has been “slow”, but slow is good.  It produces more solid platforms for steadier and longer-lasting growth, with fewer high-speed surprises.

The perceived “lousy recovery pace” has also led to a very lengthy reduction of exposure to equities.

There are simply not as many mountains of cash in equities anymore to drive a typical rush to the exits that so many folks tend to fear.  And that confounds the market bears.

And now we want a summer swoon.

We stand by our long-term thesis:  The crossroads at which we are standing is far more like 1982-1983 than 2007-2008 as many bears would like us to believe.

Industrial Production Updates

“The U.S. economy continues to benefit from solid and continuing growth in industrial production.

“This adds still more weight to the already-impressive body of evidence that shows the economy continues to improve and that a recession or even a slowdown is not in the cards. How much more of this do we need to see before the Fed realizes that it needs to start shrinking its balance sheet and raising short-term interest rates?”

SummerHaze_fig1

“U.S. industrial production in May increased more than expected, and there were upward revisions to prior months.

“Production is up at a 4.6% annualized rate in the six months ending May, and it hasn’t been much stronger in the current recovery. The level of industrial production is now well into new, all-time high territory.

“The Eurozone is still struggling but making progress nonetheless. Given the very low level of inflation in the Eurozone it’s understandable that the ECB feels the need to increase its monetary policy accommodation, but it’s arguable whether still-lower interest rates are going to boost economic growth significantly.

“Both the Eurozone and the U.S. economy would benefit more from growth-friendly fiscal policies than from zero interest rates.”

SummerHaze_fig2

Manufacturing production rose at a 3.9% annualized pace over the past six months, and is up 3.5% in the past year.

You could complain that manufacturing production has yet to reach a new high, but it is undeniably the case that there has been a significant and ongoing recovery.

From the market’s perspective it’s all about changes on the margin, not the level of production.

SummerHaze_fig3

With the economy continuing to grow but short-term interest rates still priced at recession level or worse, it seems inevitable that the prices of risk assets will continue to rise since their yields are significantly higher than the yield on cash.

The story of this recovery has been the same for the past five years: although the recovery has been disappointingly slow it has nevertheless recovered, and it has consistently performed better than the market’s rather pessimistic expectations.

Mike Williams, President, Genesis Asset Management, Chicago & New York

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