Bill Laggner Sees Trouble for Stocks in 2014
If you are part of the political economy, you are doing really well. But your progress is coming at the expense of the productive sector.
Epoch Times: How come?
Mr. Laggner: The political economy doesn’t take its foot off the accelerator. And so you misallocate more and more resources toward these political experiments, central banks’ experiments, however you want to phrase it.
But the entrepreneurs today are very apprehensive, because the signals they receive are very distorted. They cannot tell what is real or just an unintended consequence of intervention.
The growth of the leviathan has essentially come at the expense of the small- and medium-sized business. That’s the backbone of America. The growth of government comes with a cost and we are only in the early stages of witnessing these costs.
Epoch Times: How can you tell?
Mr. Laggner: Clearly we are going into a profit recession, everybody who is intellectually honest can see that. Profits are continuing to roll over. We are talking about nonfinancial operating businesses, their profit margins are shrinking. Their top-line growth has rolled over.
Let’s forget about the financials for a moment because there is so much hocus-pocus there. Let’s just focus on some of the operating companies. The operating companies are having trouble.
Listen to the Cisco Systems conference call. There is a company with a global footprint, definitely a good business in terms of gaging corporate demand. They lowered the bar considerably for fiscal 2014 and I never really heard their CEO John Chambers that cautious.
He has a pretty good handle on what corporations are seeing. People are apprehensive and they hoard cash. They may buy back some stock or fire a few people. But there is very little investment or vision into the near-term future. The same thing with IBM.
You are going to see this play out through a variety of businesses. Look at even some of these mid-sized companies. Hertz for example is saying their holiday bookings are the lowest in years.
Epoch Times: So what’s going to happen next?
Mr. Laggner: There are very high expectations on earnings. As always, they will be disappointed and they’ll lower the estimates. We think earnings are going to be extremely poor. And now that real interest rates have gone up in the United States and elsewhere, the difficulty lies in sustaining this false economy.
The economic actors are in trouble and probably a lot of things that should have happened this year and the second half of last year, which were essentially delayed due to unlimited money printing by central banks rolling over sovereign debt. All of the events that should have taken place will come to fruition in 2014.
Epoch Times: For example?
Mr. Laggner: We are looking at a deflationary contractionary shock. The bulk of the money being printed just finances fiscal deficits around the world and the real economy is becoming more and more fragile.
If the real economy continues to contract, which it is, then the fiscal deficits for next year [will be much higher.] That will force the central banks to print even more money to mop up the sovereign issuance, because most people are becoming apprehensive about the global economy and they are becoming reluctant to lend to sovereigns at such low interest rates.
Epoch Times: What is going to be the trigger for that shock?
Mr. Laggner: I think the financial markets today are a very distorted bunch. They are run by high-frequency traders, carry trading, algorithmic models where people rent [assets] for a week, a day or an hour.
You have got commodity prices that are down now for the last several years. Are these traders posting commodities as collateral and then borrowing and investing in stocks? Or are they posting sovereign debt as collateral as a lot of these primary dealers just speculate?
Knight Capital in 2012, their algorithmic desk blew up. And that was a small broker-dealer. If you get a larger player like a big bank in the United States like Goldman Sachs or JPMorgan or Morgan Stanley…
Epoch Times: So what’s the first shoe to drop?
Mr. Laggner: It could be any number of things. We don’t know what particular pool of collateral is impaired. If you go back to the 2007/2008 bubble, we saw the housing collateral roll over in 2005/2006 but it really didn’t do much of anything to the broad market until early 2007. That’s what all the manufactured credit was based upon.
This time it’s based upon sovereign debt. If the economy keeps shrinking, it will force the professional speculator to move to the side line. I don’t know what goes first, what goes second; I don’t know what the domino order looks like.
Bill Laggner is the co-founder of Bearing Asset Management, a Dallas-based hedge fund. With almost 30 years of Wall Street experience, Mr. Laggner worked as a stockbroker and fund manager before founding Bearing in 2002. Mr. Laggner and his partner Kevin Duffy correctly predicted the bursting of the subprime bubble using Austrian economic theory.
The interview has been edited for brevity and clarity.