Stockton, Cyprus and the Tendency to Overreact to Natural Market Cycles
When the first one falls, invariably so do the rest. And quickly.
We as a species (humans) seem to have a tendency to panic when we catch wind of that “first domino falling.” Once we read a news story or hear a friend talking about the apocalypse around the corner, we can’t seem to focus on the possible solutions – the problem is just too darn enticing. I think it’s the same emotion that drives our appetite for horror films. Maybe we secretly like to feel scared?
I’ve got bad news for the bears, though: Life is not a horror film. There are more of us who want to see the plane land safely than see us end up at the bottom of the Atlantic.
When Stockton, California gets approval to officially enter bankruptcy, all of the sudden we imagine the remaining 477 cities and towns in the nation’s largest state (by GDP) must also be teetering on the brink. Trust me, it’s not so. There is more construction going on in Los Angeles today than at any other point in my ten years here – the commutes (and economic contributions) of a couple hundred thousand people depend on those bills getting paid. A relevant point that isn’t getting enough attention is the positive impact our healing real estate market has on our state’s finances. Property taxes, a huge source of revenue for state and local governments, are based on property values. When property values go up by 10%, so do property tax revenues. Remember when the entire state of California – then the seventh largest economy in the world on its own – was going bankrupt back in 2008? Did that happen? I forget….
Two weeks ago when the tiny island nation of Cyprus changed its Facebook status to “In need of 10 Billion Euros” we assumed that all progress we thought had been made in Europe was for naught. 2011 must have been merely a training exercise and this time it’s for real – Europe is finally going to drag us back into recession, or depression. Yes, Europe is still a work in progress, and their currency will almost certainly weaken as a result of the crisis in Cyprus. But why must we continually torture ourselves with worst case scenarios? Is it possible that Cypriot contagion catches on and things get worse across the entire continent? That Spain’s 30% unemployment doubles to 60% and then doubles again to 120%? That bet sounds like a loser to me.
After hiring accelerated in February we saw jobless numbers announced today which indicate a weakening in job growth. In fact, the number of Americans filing claims for unemployment benefits is at its highest point in four months as of today’s report. I guess this must mean we are headed back down, right? That strong, steady trend we saw for the past two years has finally broken. It’s over. Or, could it be that the impact from January’s payroll tax increases and the recent onset of sequester is finally being felt? A speedbump.
What about the fact that our nation's debt has eclipsed our GDP in real terms? That sounds pretty bad, doesn't it? Japan has attempted to recover from the bursting of their 1980s asset bubble to no avail. They have maintained artificially low interest rates and soaring government deficits (currently 245% of their GDP) but the result has been two "lost decades" with no wage or asset growth. Wait- isn’t that exactly what we’re doing?? No. It’s not. That would be like cheating off the kid in class who has been held back twice. There are major differences between our economy and Japan’s — we are less sensitive to the impact a strong currency has on our exports; we do not have the same demographic issues (aging population) that they do; our Fed has acted swiftly and forcefully to induce inflation, keeping us out of harm's (deflation's) way. This article does an excellent job explaining these differences, the fact that it is from 2011 is irrelevant for the purposes of this argument.
So what’s the lesson? The stock market operates in cycles, and each time we reach a bottom — whether after a correction or a crash — we can’t imagine ourselves ever seeing a top again. What if you could envision each of the stock market’s historical catastrophes as just a series of buying opportunities, one after another? The best in recent history was in March of 2009, but there have been several others since and there will be several more to come. It’s easy to anticipate a correction in today’s market. The harder thing has been not acting on those instincts. Were you anticipating a correction when the Dow crossed 12,000 in December of 2011? We haven’t seen 12,000 since. How about when it crossed 13,000 just five months ago? Dow 13,000 sounds like ages ago, doesn’t it? We are at 14,600 as of this writing. Letting up on their equity exposure over the past few years has cost a lot of investors dearly.
There have been small, intermittent opportunities to bet against the stock market and global economy over time, and in many cases this strategy netted folks with small fortunes. But over the long term it has been patience, diligence, fortitude, and faith that have created real wealth. On which side are you betting your family’s future?
Have a great week!
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067