Joe Duran calls current market hoopla The Great Perception Recession of 2011

Brooke’s Note: Joe Duran has not built his reputation on making calls on the stock market and economy. Yet, as a successful serial entrepreneur, the CEO of United Capital is known among RIAs for seeing things for what they are and acting on those observations to achieve success. It’s what you might call uncorrelated brain power. With that in mind, I am pleased to pass along Duran’s view of these spooked, dog-days-of-August global markets.

Joe Duran isn’t buying it.

The founder and CEO of United Capital Financial Advisers, a giant RIA made up of dozens of smaller advisory practices acquired and melded in the last few years, is certain that economic circumstances in the United States are simply not as bad as equity prices reflect. See: Goldman Sachs’ O’Neill gives optimistic report on conference call despite Standard & Poor’s downgrade of US bonds.

He spelled it out in a letter to clients and he drove home his points on CNBC in an appearance on Thursday.

“This is very different from 2008…Perception is way ahead of reality but because of what we just experienced, it’s magnifying the perception of all of these issues. I’ve seen this before and I know where this is going.”

Here are the six major points made by Duran in his letter to clients:

1. The big picture

“Over the past two weeks we have seen amazing swings in the market unfold over the course of a single day. These intraday swings would cause any normal person to have heart palpitations if they occurred over the course of a month. As of yesterday [Wednesday], investors had lost $2.8 trillion in value since the stock market to slide began on July 22.”

But in reality, such volatility is the norm, Duran writes. Despite an average intra-year drop or correction of 14.3% since 1980, markets have finished in positive territory in 24 of those 31 years.

“The current intra-year decline of 16% is well within the normal realm of expectations. In times of inexplicable turmoil people often look for patterns. Being just three years removed from the great recession of 2008, how can we not all feel we are in the early stages of a repeat performance?”

2. The perception of bank failures

“As was the case a few years ago, rumors of bank trouble abound. Back then, U.S. banks were overwhelmed with the overly aggressive loans given to subprime homebuyers. Now, popular perception is that European banks are loaded with bad loans given to subprime European nations, and some French banks might actually be at risk.

“U.S. banks have spent the last three years cleaning up their balance sheets. There is still much work to do but much of the pain has already been suffered. Over the past few years, banks have been stricter and more responsible loans when issuing loans. European banks may indeed have major debt issues but one would be hard pressed to compare the magnitude of this situation to the massive write-downs that occurred during the 2008 bank crisis.”

3. The perception of impending recession

“In 2008 we were already two years into a real estate collapse and a rapidly slowing economy. Now we are two years into an anemic recovery that appears to be stalling and perhaps 'double dipping.’

'We are clearly still in a sluggish economy that has been stubbornly unable to create jobs and grow. This is true in large part because banks have been less comfortable lending since the last recession, and companies and consumers have been building up cash just in case they face another economic crisis.

“No bank, company or person wants to experience a repeat of the 2008 debacle. Corporate earnings today are higher than they were prior to the last collapse, even though the market is more than 20% lower. Valuations are far more reasonable than they were a few years ago and corporate cash has never been higher. In addition, Americans have been saving, home ownership is at the lowest level it has been in decades and our debt levels as individuals has dropped precipitously. This debt reduction will continue for years to come, but will be expected and anticipated by the markets.

“While the economy is clearly slowing, and the recent debt ceiling fiasco has certainly caused many to defer big financial investments, we believe it is a temporary lull. It may be safe to presume that in the current quarter the U.S. economy actually shrank, but it is not rational to assume that this will be true over the long term. In fact, if the perception changes just a little, we could see a surge in catch-up spending over the next year. However, the fact remains that during a recession, corporate earnings and the equity market both typically go down on average between 25% and 35%, so a recession is already in the process of being priced in.”

4. Perception versus reality of a leadership vacuum

“Three years ago it seemed leadership was asleep at the helm, and whenever the government announced a new strategy to deal with the problems, it led to further market disappointment. Today it once again seems that we have no one stepping up with a compelling vision to soothe the markets.

“We clearly are all frustrated by the lack of leadership to create a unified vision to help dig us out of the current mess. There has been no call to action and no apparent urgency in our government to proactively cope with the major issues facing our country. This has led to an unprecedented downgrade in our debt, which, while embarrassing to all Americans, doesn’t change the fact that we set the standard for the world and we are the world’s reserve currency. Regardless of our rating, the world’s interest rates are benchmarked to our Treasury interest rate. Despite all the noise from detractors, that will not change anytime soon.”

5. Sometimes perception can become reality

“When the security of banks is called into question, there is the possibility of a run on those banks that are perceived as unsafe. We all remember what happened with Bear Stearns and Lehman Brothers. When those once-respected institutions lost the trust and confidence of the market, clients pulled their assets and these at-risk banks were no longer able to fund their operations. This led to the majority of banks abruptly pulling back lending, exacerbating an already weak economy. Consumers and corporations hoarded cash and slowed investments and spending which further weakened an already slowing economy.”

6. Bottom line

“We are pragmatists first and foremost. We intend to do what we have always done: concentrate on making prudent, well-informed and objective decisions that help to protect you from harm. In certain investment strategies where we have the mandate we have been increasing protection for weeks, and for those with more passive portfolios we are well diversified into bonds, which have helped dampen the declines in stocks. To be clear, we do not believe this is a redux of the 2008 debacle, but we are being cautious just in case. Finding market bottoms is a messy process. It is possible that our worst fears may be confirmed over the coming weeks and months, but given the current situation it is not extremely likely.”

For more on Joe’s views on industry matters, see: Why Joe Duran believes that classic RIA firms face extinction.

and

Joe Duran tries out novel financial planning strategy on himself and his wife.