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The No. 1 Reason for Optimism TodayBy
Friday, August 27, 2010
Two friends sought me out yesterday...
These friends don't usually stop me in my tracks. And they don't usually ask immediately about my work. But they did yesterday.
I've never seen them so concerned about the economy... particularly our local economy on the Florida coast. They wanted my opinion – some whiff of reassurance. It's been a bad three years, and it doesn't look like things will ever get better.
These guys are successful local businessmen. They're levelheaded and smart. They consistently make good decisions, and I don't think they're overleveraged. They've served this community for a very long time. And I'm certain they will continue to succeed here.
But their concern about the economy was very real...
Time Magazine summed it up. This quote is long, but please read it closely...
The US economy remains almost comatose. The slump already ranks as the longest period of sustained weakness since the Depression. The economy is staggering under many "structural" burdens, as opposed to familiar "cyclical" problems. The structural faults represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought; the debt hangover; the banking collapse; the real estate depression; the health care cost explosion and the runaway federal deficit.
Does that sound about right? Did Time Magazine manage to cover all the bases? Or did it leave something out?
The thing is, this quote is from the September 1992 issue.
What happened next? The U.S. economy boomed for 16 years, without a single down year, until 2008.
If you ever wanted proof of the old saying "it's always darkest before the dawn," that quote from Time is it.
Of course, with 16 straight years of boom, people thought it could never end. Overconfidence and greed set in. Real estate investors, for example, started to believe real estate never went down.
Now people believe the opposite... that the bad times will never end. And that buying real estate is a terrible idea.
Meanwhile, the earth under your feet is agnostic. It doesn't care if you're optimistic or pessimistic. It has no opinion.
People were ridiculously optimistic when they should have been most scared. And right now they are scared. With history as our guide, it's probably a time to be optimistic.
We have plenty of reasons for economic optimism...
The cost to borrow money is lower than ever. Companies have been scared to spend, so they are now flush with cash. Many high-quality stocks are cheap. And so is a lot of real estate. Mortgage rates are the lowest in history.
But any reason for optimism is falling on deaf ears. All people see is what's in the rearview mirror: the worst economic contraction since the Great Depression.
I can't tell you the economic boom starts now... But I am certain people are always overly optimistic at the top and overly pessimistic at the bottom. And as an investor or businessman, you need to recognize these things and use them to your advantage as best you can.
I was a bit surprised my friends sought me out to talk. I thought they already knew this stuff. But it's one thing to know it intellectually. It's another thing to live it every day.
The fact that these guys are this concerned tells me pessimism is at a peak – it can hardly get any worse. That actually gives me optimism...
It makes me feel like we might be sitting at September 1992... at THAT moment, where it's darkest before the dawn.
Want to feel a bit better? Scroll up and read that quote from Time Magazine one more time... and then remind yourself that 16 straight years of economic growth followed that moment of extreme pessimism...
Remind yourself that people are ridiculously giddy at the peak and ridiculously despondent at the bottom, but the reality at those times is never as good (at the peak) or as bad (at the bottom) as people make it out to be.
Good investing,
Further Reading:
Earlier this month, Steve traveled to Destin, Florida and saw the pessimism firsthand. In this Gulf Coast beach town, he writes, "residential real estate prices are probably down 50%. And desperate local business owners might sell for even better deals than the homeowners." But just as the doldrums Time Magazine described in 1992 didn't last forever, the situation in Destin won't either. Read the whole story here: Florida's Panhandle: Supreme Buying Opportunity.
Market NotesA MAJOR NEW LOW FOR AMERICAN FINANCE Today's chart is an "early warning" alert. The XLF fund is drifting around a new 52-week low.
We monitor XLF because it's one of the largest and most diversified ways to take a position in American financial stocks. Major weightings in the fund include Wells Fargo, Bank of America, Goldman Sachs, and JPMorgan. These are the companies that rise and fall with America's ability to earn money, pay off debts, start new businesses, and just generally "get along."
XLF enjoyed a huge rebound off its March 2009 panic lows... soaring from $6 per share to $15 as investors flocked to positions that benefit from a stronger economy. But as you can see from today's chart, this rally stalled in October 2009... and has traded in a huge sideways pattern for about a year. Just this week, the fund closed at a new 52-week low of $13.51 per share.
If this new weakness leads the XLF into a downtrend toward $11 per share, call us darn skeptical about any positive economic claims you hear from the White House or CNBC. The market knows a thousand times more than they ever will... But if the XLF does manage to pick itself up off this floor and hit a new 52-week high, count us among the optimists.
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