A Wall Street economist was in our office the other day to update us on his forecast. He said he had been on the road a lot lately talking to a wide range of institutional investors, and that “nine-and-a-half out of ten are bearish.” As anyone who reads our blog can tell, we count ourselves in that group.
Rather than take comfort in the fact that we are not alone in our view, the contrarian in us is restless. If the vast majority of professionals are expecting continued weakness, we have to consider the probability of the opposite outcome. After all, the market will always find a way to inflict maximum pain on the maximum number of investors. So we check our assumptions and challenge our conclusions.
This exercise brought to mind economist Herbert Stein’s maxim,
If something cannot go on forever, it will stop.
Usually we apply this rule to asset bubbles, like tech stocks in 1998-99 or home prices in 2004-07, as a way to justify our belief that periods of great overvaluation tend to be followed by periods of mean-reversion. So when we see the record drops in housing starts, home prices and business inventories, or the huge jumps in productivity and the savings rate, we have to remember that reversion to the mean works both ways.
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All of the dislocation and contraction that is going on in the economy is painful, and it will last for a while, but it is a prerequisite to the turn in the cycle. While there is clear evidence that progress is being made in correcting the pre-2008 above-the-mean conditions, we are not convinced that the current below-the-mean correction has begun.
We are sticking with our view of the world for now-credit performance in residential and commercial mortgages, overleveraged household balance sheets, oversupply in the housing market and structural deficits in municipal and federal finances are still in the process of correcting the bubble’s excess. The turn will come at some point, and we have to be mindful of that fact.
On a related note, how to read Friday’s jobs numbers? The headline numbers were surprising to the upside, NFP down just 11 thousand, UER falling to 10%. We refer to our blog post of November 13, 2009, in which we suggest that perhaps a more granular view of the employment picture is in order. For that, we cite the following data in today’s report: The average duration of unemployment jumped from 26.9 weeks to 28.5 weeks from October to November.
The graph below shows more new highs being set in the persistence of joblessness. It is the percentage of people unemployed who have been out of work for more than 15 weeks and for more than 27 weeks. Perhaps the takeaway from the non-farm payrolls report is that there are fewer people to fire (which is good), but that people who were unemployed in October were still unemployed in November (which is not good).
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