Saturday, July 1, 2017

"Jim Chanos: U.S. Economy is Worse Than You Think"

One of the hazards of the short side is allowing your investing predilection to influence your real-life world-view.
Now Chanos is a very sharp guy and I think he probably checks himself to avoid falling into that trap but the headline prompted me to wheel out the boilerplate warning.

From the Institute for New Economic Thinking (a George Soros philanthropy):
The famed short-seller offers a mid-2017 reality check for “fake fiscal news,” economic pipe dreams, and “portents of even worse things”
Since the election of Donald Trump, the stock market has soared and many pundits have noted positive economic trends in the US. Jim Chanos of Kynikos Associates, known for his financial prescience, is less sanguine. He sat down with INET’s Lynn Parramore to discuss the underlying components of the economy, in which he finds several areas of concern. Chanos is a member of INET’s Global Partners Council.
Lynn Parramore: Let’s talk about perceptions of the U.S. economy. You’ve pointed out that surveys asking how people feel about the economy show optimism, while actual hard numbers look disappointing. What do you make of this gap?
Jim Chanos: It’s intriguing that people are reporting they’re feeling better, particularly in the corporate sector, but even among consumers. People say they feel good about the economy and yet they apparently don’t have any money at the end of every month to keep spending.

We’re seeing weak consumer spending numbers in both auto and housing, which are big drivers of the economy. With unemployment so low and the expansion where it is, these figures should be better than they are. There are portents of even worse things when you look at state and federal tax receipts, which are down, and other leading indicators.

It could all just be a soft spot in an ongoing expansion — time will tell. But the narrative we were told is that animal spirits would take us to the next level of economic activity. That clearly is not happening in mid-2017. We’re 8 years into an economic expansion, and economists say that the modern U.S. economy has never gone more than 10 years without a recession. So as recoveries go we are well into it.

People have bought their cars and remodeled their houses and done a lot of things that one does in an economic recovery. I think incremental spending [spending based on increased disposable income] is going to be harder and harder to come by as time goes on.

LP: What about the health care industry? What impact would the GOP plans have on the economy?

JC:  The Senate bill is really onerous on the backs of consumers and patients. It appears that they need it to get tax cuts and tax reform done. But I don’t think the GOP understands the political minefield they’re laying for themselves here.

Americans are getting unexpectedly higher copay and deductible expenses. They’re shouldering more and more of the health care obligation themselves, and that’s something a lot of families haven’t budgeted for. It was already a going trend in our employer-based system at the time of Obama’s election — remember, about 50 percent of us get health care through our employers. But now it’s also happening in Obamacare’s individual and small group markets. That means people have less money to spend even if their income isn’t shrinking.

Winter is coming for the U.S. health care industry. So many businesses have been structured for ongoing health care usage and inflation that they’ve just gotten fat. People tend to extrapolate from the near-term past and by and large that’s ok, but it catches you flatfooted when there’s a real tectonic shift. I think we have one of those coming in U.S. health care. Just as the shale revolution has changed the energy business, I think the advent of the consumer paying more out of pocket is changing the politics of U.S. health care. Remember, the government pays about half the top line for U.S. health care companies in the form of reimbursement. So politics does matter.

LP: In terms of the energy business, how is it changing and how do those changes impact the economic road ahead?
JC: The energy business will be far more troubled going forward. Much of it is uneconomical. Global demand for oil, gas and fossil fuel is dropping, but supply keeps increasing. Exxon used to have returns on capital in the high 20s, now they’re in the single digits.

The good news is that America, because of the shale revolution, has lots of cheap natural gas. The bad news is that coal is not coming back, whatever President Trump might think. More good news is the increasing adaption of solar and wind and renewables. The bad news is that it’s going to leave a lot of energy companies out in the cold, for lack of a better term. I keep pointing to the fact that Saudi Arabia seems to be rushing to sell the public part of its oil patrimony via the Aramco IPO [the state-owned Saudi Arabian Oil Company] and I think there’s a reason for that.

Frackers are in trouble. They’ve raised so much capital and they’ve been very successful in increasing production, but not in creating cash flow for their investors. A couple of years ago when the Saudis began to put pressure on oil prices intentionally, it was to pressure the frackers and hasten their demise — but the business brought costs down just as fast as oil prices. Frackers were able to stay in business. The capital markets, which froze to them for about six months, opened back up, and that was key because this is a negative cash flow business and the fact that they could access capital again meant they just kept drilling. They keep drilling, but they will have to figure out a way to turn a profit.

LP: Much has been made of the tech companies, the celebrated “disrupters,” as drivers of American prosperity. What’s your view of these firms, the Facebooks and Ubers and Netflixes?

JC: With the exception of Facebook, the disrupters — Netflix, Uber, etc.— don’t seem to be scaling. The Harvard Business Review has a great story out which concludes that unlike dotcom 1.0 when Amazon and Facebook were inventing whole new markets and were relatively cash-flow positive right away, companies like Uber and Tesla are more personal fiefdoms of their CEOs....

HT: naked capitalism