Monday, December 15, 2008

The "Recovery"

Now folks, I am thinking ahead of the curve so while everyone is obsessing about the recession and when it bottoms I want to already begin to obsess about the much hyped "recovery". And why I believe it's a completely narcissistic American view to believe we'll "be back" first. Let me outline for you what we are "right sizing" in America
  1. Automotive (16M yearly auto sales was based on house ATM)
  2. Newspaper/media (structural change as advertising moves online)
  3. Mortgage Brokers (based on house ATM, easy credit)
  4. Realtors (based on house ATM, easy credit)
  5. Investment Banking (based on house ATM, easy credit)
  6. Misc Financial of all types (house ATM, easy credit)
  7. Retail (house ATM, easy credit)
  8. State and local government jobs (house ATM, easy credit)
I'm sure I'm missing a few. Some of my favorite pundits appeared on CNBC in late 2007 and 2008 and after denying a recession, came to such far flung conclusion as "why does it matter anyhow? housing is only 4.5% of GDP! Stop obsessing!" As I outline above - well almost everything outside defense, healthcare, Walmart, McDonalds, agriculture, and federal government spending depends on our own nationwide Ponzi scheme of continued house appreciation layered with debt upon debt. Now, I will say with the $400B, err, $600B, err, $800B... err $1 Trillion Stimulus plan we will temporarily be offsetting some of those losses with construction jobs galore, but it's all on a relative basis and unless we plan on making this turn from a 2 year program to a 30 year program, those jobs disappear at some point (by which point the government hopes the housing bubble is reborn so an easy transfer from building bridges to homes is completed)

We have a country that of late has been built on the precepts of house ATM and easy credit - hence spending over our heads. If you are a staunch bull that believes the country shall soon re-emerge with those twin pillars (and trust me the government will do everything in its power to make sure Americans spend what they don't have so we can "stimulate") than you should be buying stocks hand over fist and telling me about 2nd half 2009 recoveries and how the U.S. shall lead the world in global recovery. If, on the other hand, you are thinking like me, about the shape and scope of the "recovery" we will be embarking on (whether it starts in 2010, 2011 or whenever) I ask you to tell me where the jobs come from? Employed people are the most important thing to our "recovery". In a country coming off a 25 year hangover of overspending, where median wages have not moved in a decade and inflation of goods (helped by all our paper printing) will re-emerge hard core in the next half decade. Ah yes, infrastructure. And government. And healthcare.

Got it. Again - we need technological innovations that create jobs "here" and not in the lowest labor cost markets the world over. And a lot of them. We will have a "V" shaped "rebound" from the gosh awful quarters that will be Q4 2008 and Q1 2009 - and then we'll be sitting in that lovely -0.5% to +1% GDP area for quarter after quarter after quarter. You are going to be lucky to get what you saw in 2003-2004; if you remember we called it a jobless Bush recovery for a reason. GDP improved but job creation was at best, muted; jobs were not being created in enough numbers in relation to population growth. But we solved that in 2005+ with easy credit and housing ATM. And then we got our "economic boom"; which versus booms of the 90s or 80s was still relatively limp and mostly based on financial engineering. I do believe this is what we face ahead as we "recover" - years of suboptimal growth as decades of over consumption and these more recent structural global issues manifest.

Now you have to tell me what will cause the 2010+ job recovery. Easy credit? House ATM? Are Americans going to be that stupid to expose themselves again to what just blew them up? I don't think memories are that short. Even for Americans who are notorious for going right back to bad habits once the crisis is over. On top of this is the inverse of the "wealth effect" - even the responsible folks which did not party in the 0% down, 2.9% interest rate for 2 years! party have seen savings sapped in their home. Then, those savers who owned the average mutual fund over the past decade, putting money away for that retirement like good soldiers (hand raised), are now staring at 2 vaporizing bear markets and a lost decade of returns. [Oct 7: Bloomberg - 2000s Stock Market Worse than 1930s] [Mar 26 - WSJ: Stocks Tarnished by Lost Decade] I still scratch my head almost every day when I hear all this "everything will be back to normal in 6 months" thinking - these are some major, historic structural changes we are undergoing - both domestically and globally. Putting head in sand and saying everything will be just fine is sort of what got us here in the first place - not so benign neglect of some huge big picture shifts happening on a macro scale. So this is what we need to think about as we drink up Kool Aid about "America is #1" and "we shall lead the globe in said recovery" and "we will never be like Japan". Maybe a new bubble like the alternative energy/green bubble shall lead us - I mean that is status quo - every time we need an economic accelerant, we create a new bubble that invariably destroys (many) people's wealth as it breaks down a few years later - but it's fun while it lasts! (and enriches a few who are the epicenter of said bubble)

We are right sizing industry after industry to what consumption SHOULD be, not what it WAS. What will that post super credit bubble world look like? What would a world of 1997 or 2002 level credit look like? Where do you think state, local, and federal taxes will be in 2 years? 5 years? 10? to pay for all we are promising? Is anyone paying attention to the structural global changes that are happening under the surface that are (mostly) unstoppable? [Do the Bottom 80% of Americans Stand a Chance?] Not everyone was simply "irresponsible" the past half decade - many in the middle class were tapping their home to survive in an increasingly expensive country as the percentage of profits in the United States devoted to labor fell to lows not seen since the 1920s. Income inequality and wealth distribution not seen at levels since the 1920s are not just coincidence - the "New Gilded Age" didn't really work for the many as "trickle down" economics didn't quite go to textbook the past decade. Further, on the global stage as median wages in high income countries continue to suffer as "global wage arbitrage" plays out, we can only hope the credit spigot returns so we can stave off reality for another half decade. Or the government is successful in finding new bubbles. Because, for the middle class to "rise" again, either (inflation adjusted) wages need to begin to rise, or their ability to leverage needs to be regained. The latter eventually putting us right back into the spot we are now at some point in the future.

So, while everyone screams at me how we are so superior than Japan (sit back and think about all the things we HAVE done, ARE doing, and WILL do and tell me how it's not Japan - twin bubbles in housing and stocks anyone? lack of disclosure in financial system? zombie banks supported by crony government actions? making money "free" as a solution? That's just the beginning of the list), I'll be focusing in investing in those motley crew of countries where people have 30-35% savings rates, the governments act like they are not irresponsible drunks, population is growing earnestly, and most of the populace has never seen a credit card. Or the American companies who focus on these countries (export driven) - that will be one area of true positive organic growth. And you can talk to me about the great American miracle we shall soon see in 2010 (I'm sorry.... 2nd half 2009). Worst economic situation post WWII? No problem! Done in 12 months! Or 18 at the worst! Government solved it (as they do all problems)! A healthcare, Walmart, or federal government job for everyone! Deficits to $2 trillion! 2.5% mortgage rates (with no appraisal necessary) for the people! 40 acres, a mule, and a solar panel on every roof!

Now, I do need to throw in some hopeful news - I am sure 4-5-6 years out some new industries will be birthed by ideas that are now just on the drawing board. The hope is a myriad of said industries emerge that are relatively proprietary and create jobs inside the country in a large scale. Because as we look at the fiscal obligations we face ahead of us, we're going to need all these jobs to provide a massive amount of tax revenue. Just like the "internets" was not on the radar 20 years ago, something shall come along in 5-10 years to help us manage. But 5-10 years is not "6 months" or "2nd half 2009".

End of tangental rant. Onward to the "recovery in 6 months" thinking and poking head back in sand.

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