April 1, 2009

Have We Hit Rock Bottom?

As I began to think about writing this newsletter, the newspaper headlines (March 11) included:
S&P Downgrades GE,
Madoff Pleads Guilty,
Initial Jobless Claims Rise Again,
National Semiconductor to Cut Staff;
Difficult Year for BMW as Profit Falls 90%, and
Household Net Worth Tumbled Last Year.
Frankly, this did not help me in drafting the newsletter because I kept running to the liquor cabinet…

But, kidding aside, are we nearing the end of this? Or as Churchill said, is this just the “end of the beginning?”

One bit of bad news could shed some light on the future. The most recent ADP National Employment Report said that manufacturing employment in February had declined for the 36th consecutive month. That trend may be unprecedented. But if you are an optimist, it may portend better news because some of the macro economic forces that have caused this could be at inflection points. When you hit the floor, everything is up from there.

We’ve discussed China in past newsletters. Prices there appear to be deflating. That could encourage more consumption, both there and elsewhere. Some anecdotal evidence suggests that there has been de-stocking or inventory contraction in the US economy. That also could suggest potential for growth as businesses and consumers are forced to purchase items for replacement.

Despite much political infighting, the U.S. government has taken substantial action. One can argue about the merits of what was done and whether it constitutes bailing out any company or industry with good lobbyists. In any case, government officials have made the point that the financial system will be made to work, almost regardless of costs.

And even if you think that, say, 30 percent of the outstanding mortgages are in jeopardy, the amounts publicly committed by the Treasury and Federal Reserve would approach that amount (maybe $3 trillion or so by my estimate). So, at some point, we’ll clear the market and people will get back to buying and paying for their homes.

As to the more general spending measures, there’s pork to be sure. However, we need improved transportation infrastructure in order to be competitive and efficient. If the spending on this and other programs are done reasonably well, they should be highly stimulative. It may take longer than desired, but positive nonetheless. Same can be said of tax reductions. Giving people reductions via adjusting the withholding tables this month (April) should give another burst to consumption.

Then there’s the global stock market. Again, as I started writing, the picture was mixed. We just came off a period where the major U.S. indices reached twelve year lows. The Japanese Nikkei hit a 26-year low. Germany’s DAX was off by 50 percent in the last year. England’s FTSE is about where it was in 1996. Shanghai is down about 54 percent from its high.

Since these five countries account for over half of the world’s GDP, this is not exactly a vote of confidence. But again, there are some signs that we are near the bottom. And, in the last couple of weeks, the U.S. markets have rallied substantially. The S&P 500 for example, was up nearly 25 percent in March. If the rally holds, one could argue that the markets are betting that overall economic performance will be improved several months hence.

Let’s hope they’re right!

--Jeff Cosman


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