Wednesday, April 1, 2009

Not Getting Better All the Time

Things look as bad in the "advanced" economies today than they did in 1998 at the peak of the roiling economic/financial crisis in the emerging economies.  Please click on the link to the first graph that shows one measure of how much stress our financial system is under:  Econbrowser.

Beyond this, the "second derivative" of this economic contraction is much talked about elsewhere:

The Institute for Supply Management’s factory index rose to 36.3 last month from 35.8 in February. Readings less than 50 signal a contraction

“The pace of decline is slowing down, that’s important,” David Wyss, chief economist with Standard & Poor’s in New York, said in a Bloomberg Television interview. “It is too early to look for a turnaround, but maybe it is time to start saying that things are not getting as bad as quickly as they were earlier.”

This business that things are getting bad less rapidly, so don't worry-be happy is a little loony from EBR's standpoint.  Think of a dieter who gains rather than loses weight, but for a couple of weeks, he only gains one pound weekly rather than 2 pounds.  This is progress?

Dr. Wyss knows full well that he was at best exaggerating when he said "that's important" in the quote above.  It's not only not important what the second derivative of growth is for most people, but it is completely irrelevant from a stock investment standpoint, where the almost inevitable slowdown in deterioration in the speed of the recession is, mechanically, supposed to herald the up-phase of the "U"-shaped recession- the unsaid message being that you had better be in stocks or you will never ever get another chance to buy at such marvelous ridiculous bargain prices! . . .   He and his ilk are like late-night TV pitchmen.  As Graham and Dodd pointed out, individuals who need their capital should only buy stocks when there is a sufficient level of undervaluation to justify the risks, and in that case, the precise jigs and jags of the economy, and which phase of the recession we are in, would be of little importance.  But then we would not need economists to provide quotes for Bloomberg to aid the stock-trading community, would we?

The counter-example is that Japan has been alternating between getting better and getting worse for almost 20 years, and the stock market now contains a large number of truly undervalued equities.  The dinosaurs of growth in this country, GM and JPMorgan Chase, for example, have resorted to tricks to show growth for years, but their stock charts do not lie.
Legitimate secular growth stocks at fair valuations are still difficult to identify.

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