When is something so widespread and all-encompassing that it acquires the status of truth and accuracy? When can we be sure of a forecast because we have put together a total mosaic of multiple inputs. When does something travel the distance from anecdotal to empirical?
That debate right now is at the heart of the matter of this market and its direction. It is why everyone is talking about but so few people have a crystal ball and the one that the Fed is using, I believe is very clouded, clouded by a belief that full employment is causing real inflationary problems in the system.
I find myself in the middle of this debate and I can tell you that it's not a comfortable place to be for me because I am inherent optimist, something that happens if you bought your first stock at Dow 1,000 or thereabouts and we are at Dow 25,000, and my forecast is not as optimistic as what the Fed sees or what the White House says, even as I come out where the latter vociferously suggests. In fact, President Trump has done everything he can, calling the Fed crazy, loco, that you think he would have a sound button that says "They Know Nothing" which is how I excoriated a blind Fed that took off us off a cliff with rate hikes that ended in the Great Recession.
But let me get back to the first point because I want to show you where reasonable people can disagree. This morning we interviewed my old partner Larry Kudlow, the president's chief economic advisor, and he told a glorious story of a booming economy, a smashing success boosted by the tax cuts and deregulation.
It was what we call a top-down view and his top-down view it extremely rosy.
I, on the other hand, much as I did when he was my partner on CNBC's Kudlow & Cramer, approach the issue from the bottom up, making my calls speaking to executives, to workers, to directors, to pretty much anybody I can glom on to for information so I can be better at my job of forecasting, particularly on a three-to-six-month horizon.
My view? What Larry said was true, but I fear it is no longer true and will only get worse, which is why I agree with the president even though he has made things much harder for his cause of not having lockstep rate increases because the Fed likes its independence and Jay Powell is not going to knuckle under and say he has to be more data dependent and isn't going to stay on rate autopilot Armageddon.
Which brings me back to this empirical-versus-anecdotal conundrum. As an old debater I know that perhaps the most negative way to damn an argument is to say it's anecdotal. What's anecdotal? Okay, we sell a lot of Corona at Bar San Miguel, my joint in Brooklyn, so therefore I have to presume Corona's a huge seller for Constellation Brands (STZ) . If I said that to any rational thinking person, he would ask me "have you checked with any other bars? Have you checked with distributors? Have you done any empirical homework?"
The answer, of course, would be no. I just talked to the bartenders. So, if you say something is anecdotal it means you are a fool and you have no clue of what you are talking about.
However, if it is empirical it means you have done the work.
I have felt the lash of those who speak for the White House or maintain close ties to the Fed for my view, which is increasingly being derided for anecdotal. Larry did not make such a charge, in fact he praised me for my work as I did him. But we disagree.
So, let's go over my empirical list of what has slowed and in some cases slowed dramatically and it has me concerned, certainly more than the Ted, which is stuck listening to the president and his people talk about a booming economy and at the same time proclaiming it would be nutty to keep raising rates. They want their cake and eat it, too.
Here, though, is what I see.
- We have had a definitive slowdown in autos and it is going to get worse. PPG (PPG) , which makes the paint for so many luxury cars just told us. Trinseo (TSE) , which makes chemicals that end up in cars and trucks said the same thing earlier this week. My sources within the auto industry are telling me that this is a particularly bad month as was September.
- Housing is either pausing or down for the count. I get this information from who? The largest homebuilder in America, Lennar (LEN) . That puts it in the empirical not anecdotal camp because Lennar has its pulse on every market.
- Although I don't agree with this one, enough people who are clued in to the data center world are telling me that's why Micron (MU) is hurting so much. If Micron is smarting then it is difficult to own both Nvidia (NVDA) and AMD (AMD) , two of my absolute favorite companies. The basic semis are really worrisome here.
- The best lead indicator I have in the entire economy is linerboard, corrugated stuff you ship product in. Pop sold linerboard and we always knew ahead of everyone that there was a slowdown coming when he had to cut price to move corrugated. That's what's happening right now which is how the stock of International Paper (IP) could be slashed every day and hit another 52 week low where it yields 4.6%.
- The stocks of the chemical companies, almost every single one, are getting killed because the most basic building blocks of all different kinds of plastic aren't moving. At the same time oil has pressured their margins in a hideous way.
- While the rails aren't coming off the rails, the last few weeks have seen a noticeable deceleration of carloads. We always have to stay close to the rails as so much commerce is shipped by them. The rails have had more business than they ca handle. Could that be ending?
- The luxury goods market's being smacked because of weakness in Japan and China. I have made a bunch of checks in this industry and I can tell you that China has really cracked down on Daigou, meaning those who bring in luxury goods to sell. We are really only used to the Chinese being rapacious consumers of western products. Suddenly it is the opposite. Is the Chinese market slowing or is it closing to imports? Either scenario is terrible for the world's economy.
- Building, in many parts of the country has become prohibitive because of the rising cost of steel which is a mandated price increase. Barry Sternlicht, CEO of Starwood Property Trust (STWD) , told us that just last night. Given that he is the largest non-bank lender to the space, I will trust him.
- Last night Fluor Corp. (FLR) , the gigantic engineering and construction company, pre-announced a weaker quarter. I know that the principal culprits were some overruns for hard -to-do projects, but also came away thinking that things are weaker. What will happen when we anniversary all the good will and the tax cuts six months from now.
- Finally, Sears (SHLD) . This iconic retailer and its doppelganger Kmart may close as early as Monday. That's more than 80,000 employees. Barry, who owns malls, too, suggests that JC Penney (JCP) may have to restructure. One hundred thousand people work there and while, unlike Sears, I certainly don't expect a liquidation there will not be anywhere near as many employees working there if this pace keeps up and Christmas isn't so merry.
So when you consider all of those industries and what is happening to them, when you recognize that my arguments are hardly anecdotal what you recognize is that I am thinking about the future and the Fed is thinking about how things are now. If they cared about the data, I have it. The data says one and then done for a while. But the Fed is using a current snapshot, without getting its hands dirty to find out more.
Look, I am not saying that the Fed's gone crazy. I am saying its gone lazy. I am not saying the president should knock it off. I am saying that it would be better if he were to get a little more empirical, too. It's a shame. I want to be positive, but I have to settle for being constructive, and my empirical work says the market's going down until everyone knows what I know. And only then can it put in a real bottom.
