Wednesday, May 06, 2009

A Recovery or a Reflexive Rebound?

April was good for stocks and generally for investors. The markets continue to move higher in early May as we get more information about housing, unemployment and the financial sector.

Are we seeing light at the end of the tunnel? Is it a train? Yes, there are those who argue that this is "going to be ugly for some time." There are arguments to be made supporting their position.

1. Banks may need to write off $4 trillion globally -- bad loans and worse investments. They could earn $400 billion in profit annually and we would still see a 10 year recovery period (source: Financial Times of London).

2. Consumers have radically increased savings by reducing spending and credit usage. When you strip away Medicaid/Medicare and other funny elements of Consumer Spending, you find that true discretionary spending is down 20%. If this lasts then yes, we are in for a prolonged recession or stagnation (no growth) for 3-5 years. At that time, net worth/income to debt ratios will be at historical levels (source: Wall Street Journal)

3. Related to numbers 1 and 2, "If you think residential housing was a problem, wait until the commercial real estate bubble bursts, followed by credit card defaults!" There are more than enough rumblings that banks are most exposed to commercial real estate and that prices are going to implode. Vacancies are up. Construction is down. Also, if unemployment stays at 400,000 or more each month, then credit cards defaults are bound to increase (source: USA Today, WSJ)

So am I a bull or a bear? More bullish, really.

I understand all three issues and recognize their gravity. But I stick to what I wrote last about the economy:

1. There is very little inventory overhang, so companies will recover quickly when demand increases.
2. Companies have down-sized quickly and perhaps excessively, to lower cost and improve profit.
3. Money is cheap and available to consumers and companies.

The wild card is emotion. If optimism begins then lots of virtuous cycles emerge.

1. Companies re-hire
2. Output rises, and with it profits
3. Consumer demand grows with employment, rising equity (and yes housing) markets
4. Growth begins again

We should all benefit from greater transparency and consistent regulation of financial markets.
We should all benefit from living within our means (save more, borrow less).
We hopefully can use this recession to fix some systemic problems in business and government.

Look for my new posts next week on the marketing and advertising industries specifically.


Anonymous said...

Right on!

You always get it right, Jeff.

It's time for people like you to be heard.

Very inspirational.

Anonymous said...

Excellent post, my friend.

Time and time again, you seem to be spot on with your assessment.

Thanks for doing what you do.

Anonymous said...

Two months ago, I stumbled on your blog. I have spent that time reading some of your previous posts.

Unconventional thinking is what makes your writing stand out. You make far more sense than the other bloggers who spend their time rehashing mindless drivel.

Keep up the great work.

Can't wait for your next posting.