Tuesday, November 13, 2012
Our last post saw this as part of an anonymous comment -
"I am commenting for the first time to just point out that it feels like the global business cycle has finally turned, and bulls and bears alike are mistakenly attributing the risk-off nature of the past 2 months to the usual macro suspects of the past few years. Companies are making less money, plain and simple, and I see little to change that trend in 2013".
Being a pretty complex subject we thought that rather than bang out a quick comment, it is worth opening this up as a separate topic and turn our opinion on it into a post.
It is obvious that companies have made less money because Asia and Europe slowed.
China is turning back positive.
Europe is scaring the bejeezus out of many and whilst we will accept that the jury is out, we do think that it has passed the worst. PMIs that we believe have overstated weakness for a while, have stabilised and the current focus of German slowdown can be explained by them being "tail-end-Charlie" in the demand chain, so the full shock of weakness has only just hit them properly.
In the US we feel that with the election behind us there has been a reduction in uncertainty and the barrier to investment has been lifted. With that there is good reason to believe that Capex will ramp up into the spring and the employment situation with it. Put that together with the housing rebound and suddenly it looks like the demand side is lifting off again and with it, eventually, company earnings will recognise that interpretation of the situation. We would argue strongly that the evidence from 2004/5 would support that when Capex fell ahead of what was perceived a close election (as did consumption) there was a strong rebound in growth in Q1 2005 after the election.
The fact that consumer confidence and Capex intentions have parted ways so dramatically can be squared by viewing the world through this lens and given the consumer now has the ability to spend, corporates will have to catch up to meet that demand.
We understand that many want to view it like the 1990s stop-start cycle of Japan and it is certainly a valid position to take, but as Credit Suisse's Wilmot has pointed out, so far the recovery in IP from the recessionary depths has been largely in line with similar deep recession/recovery cycles. Historically, the next 6 months would be when it begins to accelerate. TMM are quite happy to bet that, as Wilmot argues, "This time is not different".
We understand that many want to view it like the 1990s stop-start cycle of Japan and it is certainly a valid position to take, which may well turn out to true. However, as Credit Suisse's Wilmot has pointed out, so far the recovery in IP from the recessionary depths has been largely in line with similar deep recession/recovery cycles. Historically, the next 6months would be when it begins to accelerate. TMM are quite happy to bet that, as Wilmot argues, indeed "This time is not different".
But TMM certainly are not afraid of humiliation. If they are wrong (we have been wrong many times before) and activity hasn't taken off by the summer, then it will be time to reassess. But to argue that we only face the Japanese outcome despite a great many differences, when the evidence so far suggests we are following normal deep cycles, seems to be somewhat tunnel-visioned. After all, the Japanese outcome is unique in this respect (so-far)