Now, as I predicted the white knights of government would come in to "fix" these problems - but even I did not imagine the scope they were willing to go. Thankfully for them, the U.S. dollar is the world reserve currency so what I did miss was that the US dollar would indeed sharply rally as more and more fiscal and monetary juicing took place. Contrast that to the United Kingdom, which are embarking on almost identical "solutions" as the U.S. for example - who had no such luck.
- Today sterling is weaker than it was 17 years ago. Its near 30pc decline on a trade-weighted basis since mid-2007 is the steepest on record. Of the 17 currencies that make up its trade-weighted basket, sterling has fallen against all but three. It has even fallen against the Hungarian forint – a currency that has already received two dollops of IMF aid; and believe it or not, the Iraqi dinar.
Now, of course I could eventually join the majority of punditry over the past 2 years, and be found completely wrong about these latest views. All good streaks must eventually end. We never know until we look back, but so far so good on the economic calls. If my view however is once more correct, we will follow an identical pattern of fall 2007 when we were in complete denial (no recession & Fed has our backside covered) and the market raced to all time highs, or multiple periods in 2008 (use early 90s, early 00s recession playbook - buy early cyclical stocks because recovery is coming in 6 months and oh yes, the Fed has it covered). This will be yet another cycle of divergence as we outlined in [Apr 3: The Current (and Coming) Disassociation Between Economics and Stock Markets] With the "paper printing prosperity" we'll see in economic figures bulls will begin preparing the game plan for the return to normalcy in 2010.
But this will be where our 2 paths shall diverge as I believe many of America's problems are not cyclical but indeed structural. Once the normal "inventory rebuilds" are over with, and every American who can will be refinanced into sub 4.4% mortagages to get one last sugar high of house ATM, and every car that can be will be sold once more at 0.0% 72 month loans (backstopped by you dear taxpayer) with unemployment insurance so that you are covered by "someone" even if you lose your job and the like - we'll once again face what got us here in the first place. A lack of productive assets in relation to what we used to have (making stuff other people want), a lack of savings by the citizenry [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] who now have 3 bubbles to "make up" (2 stock, and 1 real estate), and wage competition (stagnation) due to the flatter globe. We can continue to mask it through repeated Federal Reserve bubbles - and we have chosen to. Indeed many of these loans we will be backstopping to "Kick the Can down the road" (paper printing recovery) will now be your obligation - as it will be sitting on the Federal Reserve balance sheet (only AAA loans mind you!!) But the reality still lays beneath and won't go away; a country where 70% of the engine is based loosely on "shopping" does not really work once the Ponzi scheme of ever growing paper currency creation is acknowledged. Layered on top of these structural deficits will be yawning national debts created by this "recovery" [Mar 25, 2009: Taxpayer Welfare to the System $3 Trillion Down, $9 Trillion to Go] , in addition to entitlement program deficits we have not even begun to plan for [Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears], structrually broken state and local budgets, and new higher taxes/fees to pay for said debts. And the potential specter (if the Fed is "successful) for damning inflation which is indeed the most regressive tax on the planet.
Or if you are a bull, the thesis is we can print away all these problems with more and more US currency and hope China's a miracle unto itself to push the entire world into recovery. As we move to the "new normal" (the economy after we bounce from traumatic lows to more of a "replacement cycle" level i.e. annual car sales won't be 9 million a year, but 12-13) let us see what the more optimistic among us believe with this story from CNBC below. Because as we stated above, we must always allow for the fact (a) that we are wrong and (b) even if we are correct, the market believes for long periods of time we are wrong.
- You've heard all the gloom and doom about this recession. Now here's some good news: the economic recovery could happen much sooner—and be much stronger—than anyone thought possible. Suddenly, a small but growing group of private-sector economists is disputing the idea that the recession will drag on for months and that the rebound will be as weak as those following the the 1991 and 2001 downturns.
- “People have been talking about an L-shaped recession,” adds Michael Mussa, senior fellow at the Peterson Institute for International Economics. “The record shows you come back sharply from deep recessions” like the current one. These economists and others see a V-shaped pattern, similar to that of the recession-recovery periods of the 1970s and 1980s. And they say there is ample evidence to support it.
- Among the reasons for the new optimism: a significant easing of the credit crunch, improvement in consumer spending—including better auto sales—a potential bottom in housing, a less-grim jobs picture and expectations that the government's massive stimulus spending could start boosting economic growth almost immediately.
- .... those forecasting a strong recovery point first and foremost to the waning effects of the Lehman Brothers collapse last fall, which roughly coincides with the worst of the credit crunch, and triggered a massive chain reaction in payroll and production cuts.
- “The initial adjustment tends to be too big, then there’s some reversal of that,” says Ram Bhagavatula, managing director at the hedge fund, Combinatorics Capital. That dynamic will lead to swifter and stronger recovery in both the economy and employment that many economists are forecasting.
- Economists also cite several reasons for better labor market conditions this time. They expect job losses as well as the unemployment rate to peak close to the time growth bottoms out, as was the case in the 80s and 90s, and thus not resemble the jobless recoveries of the two most recent recessions. “Once recovery starts, it won’t be long before the unemployment rate begins to decline,” says Mussa, who doesn’t see the jobless rate breaking 10 percent.
- Though the recession of 2001 ended in November of that year, 12 months later the economy had added just 200,000 jobs. Moreover, the jobless rate kept rising through June of 2003. By contrast, payroll losses bottomed out one month after the recession of 1982 ended in November. Payrolls were 3 million higher a year later.
- No one is expecting such robust job growth this time, but economists say the relatively strong showing in productivity during this recession points to lean payrolls, which will have to be fattened up--in some cases, quickly--as the economy improves. "When you have high peaks in jobless claims, you have sharp declines in claims," says Brusca.
- More broadly, economists also point to a number of economic factors that bode well, despite lingering concerns about he credit crunch. “Cyclical forces trump secular forces,” says Brusca, referring to the massive de-leveraging by both consumers and business. “This is especially true when authorities have stepped in to stabilize it,” after a shocking event like Lehman.
- Macroeconomic Advisers, whose economist forecast for 2010 is more optimistic than that of the White House, estimates the government fiscal stimulus package will add 2 percent to GDP in the second quarter, one reason why the firm expects the economy to shrink by only 0.5 percent during the period. (this is part of the "paper prosperity" I speak of, similar to how the Bush rebate checks created an illusion of "things were not as bad as the bears said" because aggregrate economic data didn't show it)
- Then there are a handful of cyclical elements on the verge of being positives. Consumer spending is growing again, while inventories are being wound down. Housing and autos, in particular, says economists, hint at both pent-up demand and a production rebound. “When you look at how quickly motor vehicles sales fell off the table last year--that big decline had a lot to due with the lack of financing.”