The Psychology of the Economy
It is interesting how much technical data is available to both big and little investors and yet when you look at when disaster strikes, it is rarely for pure technical reasons. Most sharp downturns in the economy are triggered by market perceptions. It always starts with a few big players getting the jitters and start dumping and then the lemming effect kicks in and all run off the cliff and a few actually take the real dive out of their Fifth Avenue apartments.
So I thought I would research a bit into what is the current perceptions by both the big boys and the man on the street. What I found was that a second big dip appears to be a reality. It is not a matter of if it will happen, but only a question of when. I personally have felt for some time a second dip, to say the Dow at 6500 by spring, could be a strong possibility. However, now I think it might be the only reality.
You be the judge. First how do we collectively feel about the future of the economy. Consider the following from USNewswire.
NEW YORK, Sept. 9 /PRNewswire-USNewswire/ — Almost two in three Americans (65%) say a double-dip recession — defined as a recession followed by a short-lived recovery, followed by another recession — is now likely to happen. Among those who expect a double-dip recession, nearly half (44%) fear it will be worse than the first one, with 21% worried it will be “much more severe.” Just 24% think the second recession will be less severe. These findings come from a recently conducted survey of 1,043 Americans by the polling firm StrategyOne, a Daniel J. Edelman company.
As they are bracing for a second downturn, Americans are certainly not holding their breath for a full recovery coming anytime soon. Just 5% think there will be a full economic recovery by the end of this year, and only another 21% see recovery taking place by the end of 2011. Half of all Americans polled (50%) see a recovery not coming until sometime after the end of 2011, and about a quarter (23%) doubt our economy will ever fully recover.
But beyond feelings about where the economy is today and where it is heading next, fundamental doubts and concerns are being raised about America. The country is split on whether America’s best days lie ahead of us or behind. A slim majority, 52%, say they are ahead of us, while 48% say they are behind us. There is however consensus around another point – 71% agree that America is fundamentally broken and not working.
OK, so the collective consciousness of the common man seems to have already concluded that a second dip is coming and probably will be worse than the first dip. But, the common man doesn’t control the markets and certainly the PTB and the billionaires see it differently, right? Well, consider this article that recently appeared over at CNBC
For 25 years, legendary Wall Street strategist Byron Wien, now with The Blackstone Group, has held summer meetings with high net worth individuals to get their outlook on the global economy and investing. This year’s group, totaling fifty individuals and including more than 10 billionaires, was decidedly pessimistic on the U.S. economy, investment opportunities and the Obama administration.
“They saw the United States in a long-term slow growth environment with the near-term risk of recession quite real,” said Wien, in a commentary to Blackstone clients. “The Obama administration was viewed as hostile to business and that discouraged both hiring and investment. Companies and entrepreneurs were reluctant to add workers because they didn’t know what their healthcare costs or taxes were going to be.”
The strategist, (whose “Ten Surprises” predictions for the New Year became required reading on Wall Street when he was at Morgan Stanley), declined to name the participants in this year two so-called benchmark lunches. However, the gatherings, which typically takes place out on the eastern end of Long Island, have included in the past such investing legends as George Soros, Julian Roberson, and James Chanos, according to an account of one such lunch in 2007 by The Financial Times.
Stocks are off their August lows this month and many traders, including Jim Iuorio, attribute some of those gains to this changing political tide. Still, President Obama re-emphasized in a press conference today that extending the Bush-era tax cuts for the wealthy was not in his stimulus plans.
“A massive reduction in the consumer debt load, a workforce without the right skills for the jobs of tomorrow, and too high labor costs relative to other countries “are not problems that are likely to be solved any time soon,” wrote Wien of the attitude of the people at the lunches, which took place in two groups on successive Fridays last month. “Only a few investors thought the Standard & Poor’s could reach 1200 next year.”
So what are the billionaires buying if this environment continues? Wien said “vacant office building,” “farmland” and “Africa” were some of the ideas thrown out. Not too many things for the regular investor.
“Billionaires have little in common with the retail investor in terms of investment options,” said Stephen Weiss of Short Hills Capital. “They don’t rely on mutual funds or stock/bond picking for return unless it is very concentrated. Their investments are generally more strategic and negotiated in businesses or other assets such as commercial real estate.”
To be sure, the folks at Wien’s lunches certainly have the most money at stake, but that hasn’t meant they were always correct. As The Financial Times chronicled in August 2007, only George Soros and one other big investor believed the economy was headed into a recession or a bear market. Now, we know those two men, not the consensus, were correct.
The scary part this time is that it seems from reading Wien’s commentary that there were not many dissenters. “The lunches were over about three-fifteen,” wrote Wien to end the piece. “I didn’t get the feeling anyone there was rushing out to place an order before the close based on what was said.”
Based on the current psychology of the economy, it looks as if a second dip is all but a done deal and has the potential to be more severe than the first dip down. Not good news for sure. My suggestions remain the same. Reduce your personal debt as much as possible. Reduce your expenses as much as possible. Try to develop a second or even third source of income, don’t rely on the fact you have a job right now. Finally, there are others out there who see this release(second dip) occurring in the late October or early November timeframe. Looks like it is “Hunker Down” time.