the PRIVATE BANK of CALIFORNIA

To (Eat) Crow or Not to (Eat) Crow? That is the Question.

A Message From Our CEO

04.18.12

Have you ever noticed how many crows there are in Los Angeles? I suppose if you live in L.A. long enough the seeming enormity of the crow population in the City of the Angels might not seem unusual. I live in the Marina and I see more crows than seagulls. I am forced to metaphysically conclude that eating crow (aka admitting you were wrong) is a scarcity in this town.   

But I have only been in L.A. a scant five years, so I have no issue being introspective - especially about my economic predictions.

Many customers have had the (mis)fortune of being exposed to my economic musings over the past year, unfortunately not over a glass of Barolo when I assure you they are much more rational, amusing and palatable. And, yes, I have been a bit pessimistic. I recall answering the baleful question--“How long is this going to go on?”--at a CEO luncheon in October of 2010 with the sunny prediction of five to seven years. 

That would take us to 2015 at the earliest and, in fairness to my many fans, critics and myself, I thought it only fair to perform an acid test, as it were, on my prognostications.  So here’s the story: 

                                                     A Year Ago                          Today

DJIA                                             12,810                                  13,232

GDP Growth                                  2.3%                                     3.0%

Home Sales                                  < 4 mm units                        4.5 mm units

10 yr. T-Bond                                3.47%                                   2.20%

Inflation                                       2.0%                                     2.9%

Unemployment                             9.0%                                     8.3%

Consumer Confidence                  72                                         70.8

Not so bad. The economy is growing more rapidly. A higher percentage of people are working. More homes are getting sold. Inflation is up but in check. (What is this ex food and gas price concept about anyway? We all eat and drive.) Consumer confidence is steady. The stock market continues to trend up. We’re feeling good? Right?

I admit I am feeling better about things, as are most people I speak to. But that would mean that I have to eat crow. Since I am not that fond of crow, I decided to dig a little deeper.

Just before the crisis, we had a stock market at 13,900; we still have 700 points to go to get to that level but have clawed back significantly from a low of 7,000. At that same time, the 10-year bond was at 4.8% and inflation was at 5.6%, which indicated that economic growth was much more robust. (Ah, the salad days, when banks made money the easy way!!!) Housing sales were almost double at 7 million units per year. Consumer confidence was 40 at its trough and we have recovered well since then. That said, we were well over 100 in the 2007 era. Finally, GDP, which is now growing at 3% (if you can believe the numbers), was growing at 4-5% in the 2006 to 2007 era.

So, we feel good all right; but mostly because we felt so bad at the depths of this crisis. It’s kind of like a 90-degree day after a string of 110’s - feels great but it isn’t so great.

And storm clouds continue to pop-up on the horizon. Take Spain - where the under-30 unemployment rate is close to 40% and where Banco Santander’s stock has dropped almost 50% because of the perceived risky nature of its balance sheet. Or the Middle East - I don’t see this flash mob thing in Egypt resulting in a coalition government that is going to increase stability or Iran having a “come to Jesus” or “come to Moses” moment any time soon. Syria isn’t exactly stable either. Or any thaw in the gridlock in D.C. unless one party takes control of all branches of the government. And we still haven’t addressed the deficit issues, or the nearly 4 million housing units in delinquency or foreclosure (down from a peak of 4.5 million, but still up there from lows of under 1 million units.)  Even the Fed is saying it will keep short rates low until 2014. Lastly, the ratio of insiders selling to insiders buying is 40:1 (anything over 20:1 is considered a “bearish” indicator).

So, while I would love to eat crow because it would mean the economy was recovering much sooner and more rapidly than I expected, it looks like I was more right than wrong on this one and I must take a pass on this delicacy. I readily admit, though, that I thought things would be gloomier than they are at this point. And for that, I deserve some medicine. I would suggest Old Crow.  I’ll have a nip or two of that and hope I am more wrong than right in the near future.