March 2009 - Contrary Investor - The Most Important Messages From The 4Q GDP Report

[slipslidingaway]

The Most Important Messages From The 4Q GDP Report

http://www.contraryinvestor.com/mo.htm

"Although quarterly GDP reports are usually not at the top of our list in terms of intensive review given the fact that by the time this news is actually reported it is stale at best, we believe there were some VERY important messages to be garnered from looking at the totality of 4Q 2008 GDP report, above and beyond the more than noticeable headline number decline. The character change witnessed when reviewing the components of the report is some of the most striking we have seen in a very good while. We believe realizing what is happening and “seeing” this character change will be very important to individual US equity sector outcomes ahead as well as macro investment decision making. Although we sure as heck hope not to bore you with economic stat details, which can easily happen in a heartbeat, we saw little to no coverage anywhere in the mainstream financial media of the issues we’re going to cover in this discussion.

We come away with what we believe are two very important bottom line takeaways from the report. First, behavioral change in the US consumer may be approaching the definition of secular if indeed current trends continue throughout 2009 and beyond. We know that sounds melodramatic, but keep an open mind while you look at the historical and current character relationships we’ll cover in this discussion. Secondly, the total character of the GDP report is suggesting to us that current stimulus plans being proffered by the incoming Administration will be inadequate at best if indeed consumer behavior is very importantly shifting, as the numbers in the GDP report show us is occurring. Add in the proposal of meaningful tax increases and the storm clouds only darken. Let’s get to it..."



Just for the heck of it, here is the March 2008 article which dealt mainly with the CDS issue.

http://www.contraryinvestor.com/2008archives/momar08.htm

"...What is obviously apparent, we believe very meaningful, and perhaps little understood in the greater investment community, is the growth in magnitude over the 2004 to present period in the CDS market. From about $1 trillion in notional value outstanding at year-end 2003, we're looking at just shy of $14 trillion in notional exposure as of September 2007 for the US banking system singularly. A near fourteen-fold increase in three and one half years. We ask you, do you see this fact being discussed or at least being mentioned on the "front page", if you will? Do you even see this mentioned in discussions or articles regarding what led up to the current mortgage credit debacle? Do you see Senators and other assorted politicians grandstanding in their demands for investigations about how this could have come to pass? We need to at least think through potential investment consequences if indeed credit default swaps become the next credit market shoe to hit the floor in some manner. Why? Because at the periphery it’s already starting to happen.

Very quickly, who are the major players among the US banking system elite? The usual suspects, who else? Here's how it shakes out at present:.."

[PM Martin]

1. Credit Derivatives are the core of the problem.

[slipslidingaway]

2. Yes and they have been talking about them for quite some time...

but they have also been discussing the ability of consumers to spend at rates seen in the past, now we are hearing about it in the corporate media, at least to some degree.


http://www.contraryinvestor.com/2007archives/moaug07.htm

"...For now the change is minor in the current period in that this measure has stopped expanding ever further into negative territory, but what we believe is important is that this is the first trend break we’ve seen after sixteen years of literally consistent deterioration in this relationship. Again, for now the trend change is minor, but we need to watch in the periods ahead for corroboration of potential long-term trend change. And why is this important? A change in trend as we are now seeing suggests one of two things, or both – households are borrowing less and/or saving more. And if indeed that’s the case, we have to believe there is less household liquidity then available for consumption moving forward..."


http://www.contraryinvestor.com/2007archives/mofeb07.htm

"...But what we don’t know is how households/consumers will react ahead as, very much unlike the financial markets, they are not swimming in liquidity. Not by a long shot. At least not relative to the context of history. It’s probably been a year and a half or more since we’ve touched on this subject. Given our fixation on the residential real estate cycle being an asset class capable of behavior modification when it comes to the US consumer, we need to fully recognize that US household excess liquidity availability has largely been driven by the monetization of asset inflation in both equities late last decade and residential real estate in the current, to say nothing of additional leverage assumption. In literally point blank terms, the following chart documents just how important stock and real estate asset inflation has been to growth in household net worth by the decade over the last half century-plus. As is clear, real estate and equities have never been more meaningful to aggregate household net worth expansion than is the case in the current decade. Hence, incredibly meaningful to consumer behavior...

...Boom, Boom, Out Go The Lights?...So why is all of this discussion about household liquidity important? What does it mean to our investing activities ahead and the broad economy in general? Although this is somewhat of a generic comment, we believe the significance of these trends find their meaning in demographics. In very simple terms, we know that the baby boom generation is moving full speed ahead into retirement years. Point blank, assuming the boomers in aggregate actually do retire, their need for real liquidity will be meaningful. Very meaningful. Remember, we're referring to a baby boom generation who has "learned" to become relatively dependent on asset inflation for a good many years now to generate household "liquidity". Asset inflation that has truly acted to underpin consumption. Unless we can bank on asset inflation continuing, implying that asset inflation will "fund" boomer retirements as it has clearly funded their lifestyles for at least a good decade now, just where will retirement funds/liquidity come from? This is the issue, and it's clearly of longer term importance as opposed to being something influencing the open of trading tomorrow morning. Can the Fed fund boomer retirements by simply printing money and inciting ever greater household asset inflation? Can the boomers "borrow" their retirement lifestyles as they have done up to this point by taking on ever greater household leverage? ..."

[ixion]

3. consumers couldn't afford to spend as fast as they were

in the first place. Now deeply in debt, they can't afford to spend much of anything.

[slipslidingaway]

4. And yet the talk is to have banks lend money so people can

spend again, for years there was talk of people using the equity in their homes as a cash machine.

Long term loans for short term expenses has been a recipe for disaster in some cases.