Recovery alphabet, government soup
Commentary: No 'V' in 'Great Recession'
By Lou Barnes, Friday, July 24, 2009.
Flickr photo by Hobbes vs Boyle.Signs of economic bottom, a wild stock market and relentless Treasury borrowing combined to send long-term rates to six-week highs: The 10-year T-note jumped 30 basis points to 4.7 percent, and no-point mortgages reached 5.5 percent.
A crowd of spinners in expensive suits (Larry Kudlow in front) tried to sell bottoming data as recovery, preying on hopes for an end to the Great Recession. The authentic debate is about the shape of recovery: will U.S. gross domestic product "V," like old times? Are we stuck in "L" or "W" futures? Or "V" with a limp and wandering right-side?
Stocks took off again on news that sales of existing homes had risen for a third-straight month, to 4.9 million annual from 4.5 million bottom. At 2005 peak, 7.5 million homes sold, essentially none distressed; at least one-third of today's sales are distressed, the fraction rising.
We will soon get some news of rising prices, but that will merely reflect downside overshoot. Las Vegas prices collapsed 40 percent in 2007 and again in 2008; a modest rise from its current $125,000 median ... that's bottom, not recovery.
For every "V" datum there are two or three "L" pieces. Stocks got silly on some positive corporate-earning reports and ignored the centerline -- especially businesses reflective of the overall economy.
Microsoft earnings were off 29 percent, and its chief financial officer spoke of "tough economic conditions" not getting better, but "some sense we have hit bottom." UPS second-quarter income fell 49 percent, trends "stabilizing," no rebound in sight, and the nation's two largest railroads offered near-verbatim confirmation. If it ain't sellin', it ain't shippin'.
The index of leading indicators is up, but based on prior cycles not resembling this one. For the best snapshot of Main Street, visit www.NFIB.com and click on "Small Business Economic Trends." Sales, compensation, prices and earnings are all in record-low "L."
This week, as with last week, it's still silly season. The depth of August is ahead.
The newest stock-market road to suicide: "high-frequency" trading (see this enlightening New York Times piece). It's an utterly mindless computer competition in which you must get your machine to Lower Manhattan, trades from New Jersey too slow to arrive.
Micro-nano-leapfrog gives new meaning to irrational exuberance, and may be the driver in this whole rally. We did learn about the hazards of amoral financial innovation? Newly alert SEC on it, right? Uh-huh. Sure. ...CONTINUED
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Submitted by John Rakoci on July 24, 2009 - 4:20pm.
When obama says things like Obama's plaintive, "We inherited a $9 trillion deficit for the next 10 years and we've got it down to $7 trillion." his credability falls and reputation of liar soars.
Submitted by John Rakoci on July 24, 2009 - 4:23pm.
The economy will recover inspite of what obama does. Hopefully, the "L" does not continue until 2012 when a fiscally sane administration takes over.
Submitted by Sal Antsipenka on July 24, 2009 - 6:35pm.
It is better to spend money on your own economy than spend it on Blackwater, Iraq, satellite governments, connected individuals and insane policies.The economy will recover without conservative whining about Obama.
Sal Antsipenka
VIP Realty, Inc
Naples, Florida
http://www.naplesrealestateseller.com
International RealEstate Buyer Leads
http://www.realestatefair.net
Submitted by Tim Ryan on July 24, 2009 - 6:40pm.
We have been working on this recession for a long time with as much irresponsibility as possible. It will take much longer to recover from this than most economists dare to say.
Tim Ryan-Amerivest Realty
http://www.naplesguru.com
http://www.enaplesrealestate.com
Submitted by Abe Ulug on July 27, 2009 - 11:38am.
The answer is "L".
By the way, another good Article Lou. Back to the original question. Is it gonna be L, W, V? My opinion is: it will be an "L".
The reason is to make this into a V or W, we need a strong economic growth engine to kick in around now or in the near future. One that would involve a lot of investment (in this country), a lot of new jobs being created. An example would be the late nineties dot com wave. An engine so strong that will spur investment in the 1-3 Trillion dollar range resulting in at least 3 million new jobs over its cycle.
The money to make this happen is available today (US money market accounts) but unfortunately, I do not see the other key ingredient, a growth engine, to make this happen. A growth engine that will promise lofty returns to investors. One capable of changing our productivity, possibly our use of energy or the way we move or live. An engine capable of adding at least a 1-2 trillion dollars to national GDP over the next 2-3 years thus it can only be in the large sectors of the economy.
It is my opinion that until such an engine kicks in we will be stuck in a "L" shaped economic outlook. the bottom of the "L" will slope upwards gently say at 1-2% growth range but adjusted for population growth, this is practically miniscule growth that no one will notice in their daily lives. Meanwhile, high unemployment will go on forcing the government to borrow and run up the deficit. Depleted credit availability will further choke "good old" economic growth engines that we know how to do, such as build homes, but mortgage financing competing against treasury bills, it is hard to forecast strong rebound in new construction. Even if we rebounded to building a million homes a year, that is only 1/4 trillion dollar total or 150B above current level at best, not enough to bend the "L" into a "V".
In summary we need a new growth engine to break the "L" into a "V" or "W'. An engine to put trillions in capital and millions of people to work with the potential to substantially change certain part of our lives. Until then, I am in the "L" camp.
Abe Ulug
abe@realedge.com