Brian Pretti CFA's Contributions

Over the course of the current cycle I’ve pointed to one glaring dichotomy based on historical precedent again and again – the lack of a small business fundamental recovery. While the large multi-national blue chips have basked in the sun of global central bank sponsored stimulus, small businesses have struggled under increased regulation and a domestic economic recovery that has been one of the most shallow on record.

Not a quarter goes by that I do not check in on the Duke University/Fuqua School of Business CFO Optimism Survey. As I’ve suggested in these pages many a time over the years, “the CFO always knows”. Infallible? No, but one heck of a lot better than listening to the hot air spewed by the Street in virtual non-stop fashion.

If there is one lesson to be learned from the Japanese experience with deleveraging over the past few decades it’s that deleveraging cycles have their own special rhythm of reflationary and deflationary interludes.

To suggest that this is a rather pivotal week for the global financial markets and economy is an understatement. We all know that the Eurocrats have in the perception of the markets dragged their feet for far too long in terms of attempting to both resolve short term financial market pressures as well as restore confidence in the system.

No one indicator can be called the Holy Grail. But, with regards to long term trends, these two serve as very important guideposts for market direction, both of which are currently bearish.

What’s the single most important issue for so many in the professional money management community? Getting the macro right? Being an incredible bottom up stock picker, even in an environment where asset class correlations are near historic highs?

We are all quite aware of the fact that heightened volatility has become a short term norm in the financial markets as of late. Not surprisingly, we’re seeing the same thing in a number of recent economic surveys.

Are you wearing a neck brace yet? With all the volatility in the financial markets as of late, I just had to ask the question. It seems recently that not a week goes by where equities are not either screaming higher or lower, or often both in the same week. If I’m not incorrect, last week was a 10% bottom to top week in the S&P futures alone.

You may remember that this was indeed the title of the last novel published by John Steinbeck. Maybe a bit apropos to our current circumstances as the big themes in the book revolve around the ubiquitous human condition issues of honesty, integrity, morality, societal corruption, and greed.

Although it’s just my own personal shorter term outlook, I’m currently making decisions under the macro assumption of a recessionary environment to come on the fundamental side of the equation and a bear market in equities as per financial market outcomes.

Without trying to reach for melodrama, this is the first time a multi-decade credit cycle has collided with the short-term business cycle since the late 1920’s/early 1930’s. Most decision makers and Street seers of the moment have absolutely no experience with this type of a generational collision.

Last week was fun, was it not? Nothing like a little volatility to get the blood pumping. My bigger picture view of life at the moment is that the macro generational balance sheet deleveraging cycle is far from over, having only been interrupted by Fed and Government stimulus efforts of the last few years, which really are not repeatable in magnitude anytime soon.

If you would have told me a decade ago that we’d be facing the macro and micro circumstances we’re all facing today both domestically and globally, I’d have suggested you were simply out of your ever loving mind. What we’re seeing at the moment would clearly have been on the fringe of at least my thinking or scenario planning.

Until domestic job and wage growth returns, domestic aggregate demand will remain very weak relative to historical precedent. Given that increased fiscal policy is going to be near impossible politically, that only leaves one entity to fill the gap in all of this - the Fed. You think you've heard the last of them in terms of monetary action? The numbers tell us you better think again.

Declaring higher commodity prices and higher inflationary pressures a transitory or temporary phenomenon based solely on lack of meaningful US wage growth is shortsighted at best and perhaps very dangerous in investment decision making.

Look, it was no secret that the May employment number would not be good. C'mon, employment has been the standout "what's different this time" characterization of the current cycle, hasn't it? I've been talking about the whole economic slowing theme for well over a few months now and all the anecdotal economic stats point to continued slowing. For now.

We all know that the “target” of Mr. Bernanke’s second quantitative easing experiment has been equities. But to be honest, there's been an academic method to the madness here. Certainly what Bernanke and friends wanted to create was macro portfolio rebalancing, to be charitable in characterization.

You are probably sick and tired of pontifications about just what will occur when QE2 "officially" breathes its last. Well, I promise not to as absolutely no one really has any certainty of what's to come. But what I would like to do is simply a little compare and contrast relative to circumstances we witnessed when QE1 breathed its last. Personally, I fully expect QE3 at some point, but not quite yet. Very much like the wait and see conclusion of QE1.

Clearly one of the more dramatic contrasts of the current cycle is that corporate profit margins rest near all time highs and consumer confidence currently sits at what have been prior economic cycle lows. Very different than what we’ve seen in prior cycles. Just what does this set of circumstances portend for forward corporate profit margin outcomes? This mismatch between record profit margins and historically low consumer confidence says the bulk of corporate profit margin expansion in the current cycle has been accomplished by cost cutting.

In recent discussions I’ve highlighted the fact that for the average US consumer, the cost of living is clearly rising. Without question, we know the Fed has been hell bent on “reflating” the US economy. In the globalized financial markets of today, Federal Reserve actions no longer primarily influence the US alone, but rather have consequences across worldwide asset markets.