Sunday, August 02, 2009

The U.S. Economy -- 18 months into recession

In my last posting, I made the statement that "fundamental" factors were weak or absent in supporting the theory of an economic recovery ("green shoots). What exactly are the fundatmental factors for us to monitor and consider?

- Unemployment
- Consumer Spending
- Consumer Debt


The US economy appears to be stabilizing, and perhaps it has reached the "half-way point" or the "bottom" of the present recession. What is driving this confidence? Government spending and cheap money are the dominant reasons. Many people commented upon my last post with warnings of "excessive government employment and spending." They may well be right. Our government increased expenditures and direct payments to our citizens by 6 percent last quarter according to the Financial Times of London. Also, the federal reserve is "printing" money by keeping interest rates near ZERO, making the residential and commercial real estate crisis seem less intense. These same dollars are chasing the stock and bond market and driving them upwards.

So back to fundamentals: if consumers spend less and save more in order to lower their household debt (mortgage, second mortgage, credit cards), then the economy will not recover to 2007 levels. Consumer spending accounts for 60%+ of our GDP. The fear of job loss or lower future incomes, or the reality of high and increasing unemployment, will also depress consumer spending. Obviously those out of work will spend less. And while it is a bitter pill for us all in the short-term, households, much like our government, need to lower our debt burden.

This is all to say that I believe we will be better and stronger after this recession, but the reasons will be 1) lower household debt with some lasting lessons for savings versus credit 2) fundamental shifts in our employment patterns from less productive and competitive industries to more competitive and productive ones and 3) new processes and approaches to business. On this last point I am speaking primarily through software technology, but also through the elimination of "good old boy" networks and approaches which were more about "who you knew" and not "what makes most sense?" The recession will help to shatter inefficient business practices, and we should all be thankful for that.

Turning to the notion of investing today based upon the above POV, I think people should be buying equities with a 5+ year perspective. In th short term, I believe that there we may see a correction as the S&P 500 approaches 1,000, and therefore use of some inverse funds (I have previously recommended BGZ) may make sense to profit from any pull back. Another defensive strategy is gold (GLD) and food commodities (MOO).

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