Sloooooowdooooown territory

I’ve got to admit it: the slowdown is finally upon us.

You don’t see it in the price of oil, gold or hotel rooms, but it’s there. Back in early August, the risk presented by the Euro crisis pushed me to go to 20% cash on the personal investing side (see prior post “Decade of Daddy Mirror Fund Annual Report #4” Aug 15-12). At the time, there was nothing in the North American economy — particularly our firm’s “Innovation” corner — that suggested to me that the economy was being impacted by the unresolvable mayhem in Greece and Spain. That was 8 weeks ago, and the benefit of hindsight makes it clear now.

Since early July, there’s been a noticeable change based upon our visibility into the North American innovation sector (think of private, VC-backed companies with between $5 million – $100 million in revenue): folks are still doing fine, but the topline growth isn’t the same as it was during the first half of 2012. M&A remains a theme (two more of our portfolio companies were acquired during the last 8 weeks), unlike the Fall of 2008 when you couldn’t give away a tech company for neither love nor money. But it might be fair to say that CFOs are returning to a more cautious stance, even within the growth-oriented sector of the economy.

According to a report by RBC Europe Economics this morning, Euro area industrial production surprised to the upside for the second consecutive month:

The past two months have brought welcome upside news on the state of the euro area industrial sector. Rising levels of output in both July and August (a pair of 0.6% m/m gains) mean that the sector has now recorded consecutive monthly increases for the first time in a year. And, as a result, production in July/August is 1.0% above than that recorded in Q2; consequently, unless there is a very sharp deterioration in September’s figures, the sector looks likely to achieve positive q/q growth for the first time since Q3/11. So, time to pop the champagne corks and declare the crisis over? Sadly, no. Without wishing to dampen spirits too much there are a couple of important caveats worth noting. First, the apparent strength of the IP figures is a stark contrast to the miserable survey-based indicators of activity – given the broad-based and consistently glum message from those surveys, we think it more likely that actual output will converge down towards them rather than vice versa. Second, approximately half of the euro area m/m gain in August can be accounted for by a strong Italian reading – and the Italian statistics authorities, in prior years, have had demonstrable difficulties in adjusting for August seasonality: in other words, we think much of that ostensible strength may well get revised away in future releases. Overall, therefore, while today’s data are a positive development that might prompt the most pessimistic of forecasters to revise up their GDP forecasts, they do not indicate a renewed and sustainable upturn in economic fortunes, in our view. We still think that the euro area is probably heading into a short-lived and shallow recession, followed by an anaemic recovery.

But just yesterday, another economics report showed the German economy was suffering from a lack of buying by many of its key Eurozone customers.

A series of recent conversations with executives in other areas of the North American economy confirms what we are seeing. One trucking and shipping owner with interests across the continent said there was a noticeable slowdown in the first week of August, and there’s no end in sight. Another CEO, in the infrastructure business, said that his customers have pushed big purchases out a year: if a billion dollar project was on the books for 2014, it is now going to start in 2015.

If you believe in anecotal evidence, which is what allowed us to see the 2008 mess coming many months in advance (see prior post “Credit where it’s not due – Part 2” Feb 17-07), the results of last week’s auctions in New York are telling. While the media coverage of the huge gains in “blue chip, blue ribbon” art collecting is accurate, most buyers don’t have US$40 million to spend on a painting by Monet or Rothko.

If last week’s Sotheby’s and Christie’s New York photography auctions are any indication, things are substantially weaker on another front. It is a unique asset class, but I think photography collecting is another tiny bellweather of the disposable income and confidence of the well-off. The professional dealers largely sat on their hands last week, making notes of what was going on; but they sure weren’t bidding. Which either means they’re tapped out, their clients didn’t give them any bids to place, or they didn’t want to buy any pieces on spec for fear that they couldn’t turn around and sell them at higher prices from their own galleries over the next 3-6 months.

Photos by international stars Margaret Bourke-White and Irving Penn, for example, sold for as much as half what the very same images went for 12 or 18 months ago at similar auctions in Paris, London or New York. That’s not to say that one Peter Beard work didn’t clear US$550k plus hammer, but most of the 250+ photos that went out the door did worse that either estimated or than the last time the same work went up post crisis. Many didn’t even reach the reserve bid, which goes to show you the disconnect between buyers and sellers right now.

When you wrap it all together, we are in slowdown territory.

MRM