Animal Spirits Eating Green Shoots

Guest Post from David Merkel

http://alephblog.com/2009/09/01/animal-spririts-eating-green-shoots/

I have never liked Keynes concept of “animal spirits.” (I reread that piece, and though it is long, I think it is worth another read.  I try not to say that about my own stuff too often.)  Businessmen are generally rational, and take opportunities when they see them.  As for those that invest in the stock market, perhaps the opposite is true — panicking near bottoms, and buying near tops.

Most businessmen are risk-averse.  They do what they can to avoid insolvency.  But debt capital is cheap during the boom phase of an economic cycle, and businessmen load up on it then.  During the bear phase of the cycle, overly indebted businessmen pull in their horns and try to survive.  At bottoms, deals are too attractive for businessmen with spare cash to ignore — businessmen are rational, and seek deals that offer profitability with reasonable probability.

Unlike this article, I’m not convinced that the news does that much to affect behavior.  Movements in asset values are self-reinforcing not because of crowd opinion, but because of the accumulation and decumulation of debt and other financial claims.  As businessmen get closer to insolvency, they trim activity.  As their financial constraints get looser, they are willing to consider more investments with free cash.

As for the current situation, I am less confident of the “green shoots.”  Yes, inventory decumulation has slowed down.  So has the increase in unemployment, maybe.  Yes, financing rates have fallen.  We still face a situation where China is force feeding loans for non-economic reasons into its economy, and where the financial sector of the US is still weak due to commercial real estate loans, bank loans to corporations, and weak financial entities propped up by the US government.  Even residential real estate is not done, because of the number of properties that are inverted, and the increase in unemployment, which I think is likely to get worse.

Applications: I think it is more likely than not that there will be another crisis with the banks, and another round of monetary rescue from the government.  I also think that many speculative names like AIG have overshot, and the advantage now rests with the shorts for a little while.  Real money selling is overcoming day traders.

Be cautious in this environment.  After I put out my nine-year equity management track record, the next project is to dig deeper in the risks in my own portfolio, and make some changes.

Disclosure

This post is produced by David Merkel CFA, a registered representative of Finacorp Securities as an outside business activity. As such, Finacorp Securities does not review or approve materials presented herein. By viewing or participating in discussion on this blog, you understand that the opinions expressed within do not reflect the opinions or recommendations of Finacorp Securities, but are the opinions of the author and individual participants. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or other instrument. Before investing, consider your investment objectives, risks, charges and expenses. Any purchase or sale activity in any securities instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Finacorp Securities is a member FINRA and SIPC.

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