Byron Wien, vice chairman of Blackstone Advisory Partners, and I were on Larry Kudlow’s show on Monday night, and Byron was bullish.
He said that he felt that the economy was doing better than the data showed. While he said that this was mostly a feeling, he thought that strong corporate earnings were a compelling positive. Byron is a very smart and experienced guy, and while such finger-in-the-wind opining could be easily dismissed from others, Byron has earned greater consideration.
How do you feel about the economy? It is a critically important question and so is your answer. Your feelings about things economic will guide your behavior as a consumer and investor. You can see how mass sentiment can be self-fulfilling.
I took the more cautious stance against Byron. The data show a good deal of weakness and that weakness will likely continue for some time. I don’t believe that maintaining a bullish or bearish stance at all times is completely necessary, but I do think it is critical to have an honest, realistic assessment. Mine is, and has been, that there is no V-shaped, bounce-back recovery from this economic contraction and that emerging from it (as we most certainly will) will take time. During that time global economic growth will continue (albeit at a more tepid pace), and money will be made. Investors with exposure to international growth across different economies and conducted in different currencies should benefit. Stocks in companies with strong balance sheets, outstanding management teams, and dividend yields that compare favorably to Treasuries should outperform the overall market. This is not a “swing for the fences” stock market. This is a market in which longer-term returns of 7-8% should be gladly accepted and appreciated in light of the alternatives.
The minutes from the last Federal Open Market Committee meeting were just released and do not show a great deal of optimism. The Fed has pledged to leave short-term rates near zero until mid-2013. This was a novel and shocking statement. It seems that the Governors want markets to have a greater sense of certainty about monetary policy so that participants will have greater confidence to invest and spend. The statement wasn’t received too positively, at least at first, because it was taken as a sign of more profound concern on the part of the Fed than investors had thought. In our view, the market’s concerns are justified, and the Fed simply cannot come to the market’s rescue ad infinitum.
The recent release also disclosed that some members supported “a more substantial move.” This language sparked a market rally in anticipation of additional Fed support (more money) for volatile share prices. Mr. Bernanke’s comments last Friday from Jackson Holewere brilliantly non-committal. He suggested fuller consideration of additional monetary options at the next FOMC meeting. It sort of sounds like the European Central Bank when they talk about Greece and promise more details of their plan in a month or so.
If Byron was trying to say that there are opportunities for long-term investors to profit, then I agree. If his sense was for a return to a more dramatic phase of economic expansion, then I do not agree.
The debt crisis in Europe remains highly volatile and combustible. While our elected officials have kicked the debt ceiling and budget-cut debate down the road, it too remains vibrant and critical. Folks who don’t have jobs may consider these discussions well beyond their sphere of consideration, but they’re wrong. All things economic are linked. All deficits get funded sooner or later, and as ours continues to grow at an impressive pace, the funding becomes tougher and of much greater consequence.
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.