What Gloomy CEOs See That Giddy Retail Investors Don’t

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter
CEOs have, in these crazy days of ours, one primary job: manipulating up the stock of their company. Few master this delicate art like Tesla Motors CEO Elon Musk, who has been able to take his highflyer into the stratosphere on a wing and a prayer, or in dollar terms, from $25 to $133 a share in less than a year. But behind the scenes, these CEOs and others perched at the top are wallowing in gloom about the economy’s future.
They’re the most negative since October 2009, the days of the Great Recession, according to Markit’s semiannual Global Business Outlook Survey that covered 11,000 companies in 17 countries. The culprits with the sharpest declines in confidence: executives in the US and China.
There were some exceptions: confidence improved in the UK and Brazil. Indian executives, rather the sinking deeper into their confidence morass, were able to hang on to their three-and-a-half year low. But in the US, optimism about future activity levels, revenues, inflows of new business, and profits, both in manufacturing and services, all fell to post-Financial Crisis lows.
In China, optimism of those who run manufacturing businesses skidded to the lowest level since October 2011, which is worrisome enough, but optimism of those who run service businesses dived to the lowest level since October 2007, lower even than the low point during the Financial Crisis. Everything went to heck: sentiments on future business revenues, new business inflows, and profits [my take on the fears of a guy deeply entangled in the world’s real economy, the CEO of industrial conglomerate Siemens: “During The Last Crisis, We Had China,” Now We Have No One].
“China is the biggest area of concern for investors,” said Michael Hartnett, Chief Investment Strategist at BofA Merrill Lynch, following the release of its July Fund Manager Survey that had taken the temperature of 238 fund managers around the world. Their sentiment toward China plunged to the lowest level since January 2009, during the darkest days of the Financial Crisis. They dreaded a “hard landing” of the Chinese economy more than anything else, far exceeding their fears of the next item on the worry list, an EU sovereign debt crisis.
In beat-up Eurozone periphery country Spain, executive optimism, if that’s the right word, ticked up a smidgen but in the Eurozone’s largest economies – Germany, France, and Italy – it tumbled, particularly in manufacturing, particularly in Germany! [My take... Blinded By Pre-Election Optimism, German Economy Now Below Stall Speed].

In Japan, Abenomics – the mix of spending on corporate welfare by the government and promises of prodigious money-printing and bond-buying by the Bank of Japan – was supposed to create a tsunami of hope to whip optimism into a frenzy and bamboozle everyone into borrowing and spending even more. It worked. Exporters, benefiting from the demolished yen, were still on cloud nine. But the air was already hissing out of that balloon among executives in service industries.
The good news about Russia was that optimism among the cream of the economic crop didn’t plunge, but “dipped only slightly”; the bad news was that it already hovered near post-Financial Crisis lows.
This worldwide swoon in business optimism and the resurgence of outright gloominess in the largest economies bode ill for investment in productive assets and job creation in the real economy, and for the so desperately hoped-for, but increasingly illusory, uptick in the second half. This, despite – or because of – the ongoing concerted efforts by central banks to douse the financial system with freshly printed money.
Institutional investors – the smart money – felt this undertow and didn’t want to get pulled out to sea. So, despite the hoopla in the stock markets and large sections of the media, they’ve been bailing out of stocks all year, according to BofA Merrill Lynch’s weekly data about its client trading patterns. But retail investors – the low men and women on the totem pole – have been buying stocks most of the year, interrupted only by a brief lack of enthusiasm in the spring, followed by a determined spurt since. These retail clients of BofA Merrill Lynch have plowed $7.4 billion into stocks so far this year, just as the smart money has yanked out over $10.7 billion.
This is the Great Rotation that the Fed has been waiting for, from those who benefited from its money-printing and bond-buying binge to those who will end up holding the bag, from Wall Street to Main Street. The hope is that the Fed can keep the rally and the Great Rotation going long enough to allow the smart money to unload and get out of harm’s way before the pendulum swings back from wealth effect to its inevitable consequence, capital destruction.
Unperturbed, stock markets have been setting new highs. The asset bubbles that the Fed has created are spectacular, Wall Street risk-taking with other people’s money a sight to behold. As the real economy struggles, and as executive gloom sets in, financial engineering has triumphed. Big winners were mortgage Real Estate Investment Trusts – and those who got fat on extracting fees. But there, the pendulum is now swinging back, and the bloodletting has started. Read…. Mother Of All Bubbles Pops, Mess Ensues.