Tuesday, July 28, 2009

Am I still optimistic on the economy?

I would say that my outlook is mixed. I believe that the panic has passed for investors. I believe that there is technical momentum in the market. But I am also concerned about the fundamentals of the economy -- commercial and credit card debt default, unemployment and finally, de-leveraging by households and its negative impact upon consumer spending. The financial marketplace has gone way up, but why? Earnings have exceeded expectations. But I worry about the quality of the earnings, and especially the impact of lower demand will have on declining revenues.

With that said, here are some thoughts on why we might want to be more positive:

1. The 2nd quarter of this year was better than the 1st...in every measure save unemployment.
2. All the data is historical, so the real question is whether we have hit bottom. I think the answer is either yes, or we are very close.
3. The stock market is a barometer for economic activity. The cost-cutting has been aggressive and this has led to profit. Inventories are low. This is why the market has increased 40% since March 2nd.
4. Interest rates are near 0%, and this is good news for consumers -- mortagages, credit cards; and for businesses -- small and large.
5. The big downers are unemployment and job insecurity. But even these figures have been less extreme than expected.
6. We are not Japan -- we have immigration, innovation and vast resources which will keep us from stagnation and deflation.
7. There has been more flexibility in the labor force. Rather than strikes, employees have accepted furlongs and shorter work weeks and unpaid vacations. This has meant that we are sharing the pain more evenly than in the past.
8. Real incomes continue to rise as pay packages are going up for key groups -- education, energy and yes, financials.
9. China is going to do whatever it takes to both succeed itself, and keep its key trading partner (us) moving forward.
10. Brazil and India are doing better than ever before -- they appear to NOT be dependent upon the USA for recovery.
11. The housing market will recover. Our population growth will outstrip even today's excess inventory by 2011. High demand over supply means prices will increase.
12. Foreign investors love us. The dollar is the safe haven. Period. All negative commentaries about the dollar are silly.
13. The black economy is flourishing. Business goes underground in recessions.
14. The non-financial benefits of recession are grand -- waiters are friendly and plumbers are available.
15. Finally, Capitalism works. It is already self correcting and we will be better off for this painful recession.

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