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.

Comments

Anonymous said…
Right on!

You always get it right, Jeff.

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

Very inspirational.
12:12 PM
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.
12:13 PM
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.
11:26 AM
Post a Comment

Popular posts from this blog

57 Years After the March on Washington, Have MLK’s Dreams been Realized?

I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident, that all men are created equal."  – Dr. Martin Luther King, Jr. (August 28, 1963) Fifty-seven years ago, Dr. Martin Luther King, Jr. led the March on Washington D.C., where 250,000 people gathered in one of the largest political rallies in U.S. history. The March is credited with helping pass the landmark Civil Rights Act of 1964, and Dr. King delivered his famous “I Have a Dream” speech from the steps of the Lincoln Memorial. While Dr. King’s speech is rightfully immortalized, fewer remember that the March’s organizers at the time also had very concrete political demands that were as much about economic justice as racial equality. On the recent anniversary of the March, I began to wonder whether or not the March’s “10 Demands” for freedom, education and equality have been realized – and, more importantly, what we still need to do as a nat...
Read more
MEGATHREATS? MAYBE, BUT NOT INEVITABLE I recently read "Megathreats: The Ten Trends That Imperil Our Future, and How to Survive Them" by Nouriel Roubini (made famous as the predictor of the 2008-9 housing crisis). It is purposefully, "alarming. Roubini lists 10 "Megathreats:" The mother of all debt crises -- he points out that public and private debt is 350% of Gross World Product. He forecasts that defaults like Argentina (9 times since 1816 independence) will be commonplace. The bailout trap -- when banks go bad, government bails them out; when autos go bad, government bails them out; when utilities fail...you get the point. The demographic time bomb -- western civilization (and Japan) are rapidly aging. Old people don't produce, and young people don't save. The easy money trap leading to cycles of booms and busts. Stagflation Currency meltdowns Border closings and deglobalization -- immigration into the north from the south has kept labor ...
Read more

Will We Waste the Lessons of the Covid Crisis?

 We find ourselves at a critical moment in the world’s history. Our country has weathered a global pandemic and economic collapse just a decade following a catastrophic financial crisis—the Great Recession. We have survived, but is that enough? Don’t we want more for every citizen and our communities? For ourselves and our families? A sense of urgency can serve as a catalyst to improve our lives, but we must avoid falling prey to the hysteria trap set by many in politics and the media. The world is not ending. And clearly, the 2020 coronavirus pandemic has accelerated many changes and advancements in the way we work, including greater flexibility in where and when. This, in turn, has created tremendous workplace diversity from a geographic perspective. The global pandemic has also energized innovation and progress in the way we obtain professional services. Perhaps the biggest example is telemedicine, which leverages technology to make a board-certified profession available to ever...
Read more