02 Mar 2012 Tick…Tock…Tick…Tock
It is now two and a half years since the Great Recession officially ended. The 18-month downturn was the longest and most severe since World War II according to the National Bureau of Economic Research, a private, nonprofit research group which officially calls the beginning and ends of recessions. But things are getting better you say. Why bring up the ugly past? Some economic data have indeed shown improvements, particularly of late. Manufacturing has been a steady stalwart of the recovery. Exports have been generally strong for months, while the much touted automobile industry has made a ‘remarkable’ turnaround domestically. GM regained the lead over Toyota for goodness sake.
Yesterday the Commerce Department announced that it revised fourth quarter GDP growth up to 3.0% (GDP is a measure of the nation’s economic output) from an initial estimate of 2.8%. This figure compares to .4% 1.3% and 1.8% for the prior three quarters of 2011. So the near-term trend looks pretty good, but is it really?
Since the Great Recession started, the US government has invested/spent/squandered (depending upon your viewpoint) an unprecidented $4.5 trillion more than it has realized in taxes and TARP paybacks. That’s just on the fiscal side. On the monetary side, the Fed is giving it away for free (when inflation is considered) and promises to do so for another two years.
With free money well into the future and literally trillions washing around in the economy already, shouldn’t we expect to be doing far better than the chart above indicates we are? The gray bars are shorter than they should be relative to the years ‘03-‘06 and the red line demonstrates a big rollover after peaking at growth of 3.5%. What’s different, why arent we partying like’s it’s 1999?
True, unemployment is getting better, but at rates not even approaching previous recoveries. And the rates of grwoth in consumer spending are slowing. Remember, rising employment doesn’t bring more spending, it’s the other way around. Businesses don’t hire until they begin selling more stuff that they will have to replace. And they are not. The rise in employment could well roll over just like that red line above in GDP.
Since the Great Recession was officially declared ended in June of 2009 the S&P has rallied almost 50% (not including dividends), but there’s not much celebrating there. The average still remains 7% below the level it occupied when the recession officially began. Adding to the conumdrum is the fact that Treasuries (as measured by the Barclay’s 7-10 year index), which should have been clobbered as stocks rose 50%, are 16% higher (not incluiding interest) since the recession ended.
Bond buyers typically look much further into the future than do stock buyers. This is because they are making a relative static commitment to a steady stream of income payments that will not change as prices rise or fall. Inflation is their biggest concern, and strong economies are much more apt to gnerate rising prices than weak ones.
Stock investors, on the other hand, invest with the hopes that companies will increase their earnings at the expense of their competitors or as everyone wins when the broad economy grows. It could well be that stock investors are beginning to question whether stock prices may already reflect the potential ahead. This week State Street announced that confidence among institutional investors may be breaking down. Their monthly index fell to a weak 86.5 in February which reflects an easing in demand for equities. State Street said that the North American sample shows the greatest weakness, at 80.5, representing its lowest reading in more than three years. Europe is at 95.2 and Asia is at 96.3. A reading below 100 indicates demand for safety (bonds – Treasuries in essence).
Now, back to the question of why this recovery seems to be so anemic given the gigantic stimulus measures thrown at it. The usual suspects like Europe, high energy and food costs, high unemployment, and falling home prices seem daunting, but our economy has tossed aside hurdles more challenging than these with impressive growth in previous recoveries. Could it possibly be that a significant majority of our collective economy have become like bond buyers? Are more of us coming to the conclusion that the stimulus is no longer nourishing, but poisionous, that the deficits and mounting debt will eventually swamp our productive will?
Since December of 2009 our government has spent $4.5 trillion that’s $4,500,000,000,000 more than it brought in. This number represents a full third of the US economy and that’s on top of the $9.1 trillion government collected and spent during the same period. US Government debt now stands at $15.4 trillion which is very close to 100% of the nations total economic output and projections take the debt to 108% in 2014. The last time debt was this high relative to our output we were at war on two fronts with Nazi Germany and Imperial Japan. It is difficult to think of a time the US population was more united than it was in that period. Today its hard to think of a time we were more diveded and still at peace within our borders.
Some like to to blame the nations’s financial problems on presidents. After all, they are the guys who submit the budgets. But if you like to speak from a political point of view, the numbers below don’t provide much moral high ground, relatively speaking, for pride by either party. They do however suggest a trend.
Others realize that it is the Congress and the “Washington Machine” that are to blame. That’s where the money is appropriated and spent, and overspent. In fact the Congress has increased the US debt limit 74 times since 2001.
And there are a very few who remember that we are a democracy and that “WE THE PEOPLE” are ultimately to blame the mess in which we find ourselves trapped. Out of abject neglect we have stood by for decades and allowed an elected few squander the greatest natural and material blessings ever bestowed on one nation. Our future, just like many of our homes is ‘underwater.’ We are mortgaged to the hilt and its politics as usual.
And there are a very few who remember that we are a democracy and that “WE THE PEOPLE” are ultimately to blame for the mess in which we find ourselves trapped. Out of abject neglect we have stood by for decades and allowed an elected few to squander the greatest natural and material blessings ever bestowed on a single nation. As a result our very future is now nearly ‘underwater,’ buried in a rising sea of debt.
In the language of an investor, the US’s next quarter ends this November with few signs of improvement. Analysts estimate that profits and growth are expected to be sub-optimal for years, possibly decades to come due to an inexperienced, self-serving management, a lousy balance sheet (near-bankrupt in many industries), an aging physical plant, an outdated, inefficient corporate bureaucracy and culture, inept training, little innovation, and union incalcitrance. If and only if the shareholders can mount a coup and replace management at all levels, there is a chance this giant company may once again be that “shining city on a hill” as proudly proclaimed by a former CEO.
If not, the bonds may be a better way to go. Their 2% returns will be safe from the threat of inflation as there will be little chance that the US economy will grow fast enough to erode spending power.