One shouldn't forget that despite the stock market move since March, that by all measures the economy isn't out of the recession yet. There are a few signs that indicate it may emerge, weakly, in the coming quarter but while the stock market looks like a V, you can't expect the recovery to look like that.
Housing prices, demand for cars, and in general consumer spending are all going to be somewhat dampened by tighter credit. It is likely that all three will start to increase leading to some growth, but at best this growth will be slow. I would like to address some posts that talk about a shadow inventory of housing. Banks may not have put all the homes they took possession of on the market. This is actually a bullish indicator since it tells me they expect prices to increase and they think it is cheaper to maintain the house for a period of time and sell it on the rebound. Controlling one's inventory, whether it is in oil, houses or canned goods, is simply good business. I'm not aware of any requirement that every foreclosed house be dumped on the market without considering timing.
The stock market rebound that occurred after March was more likely a correction from an oversold situation,rather than the start of a rally based on economic factors. The Market's collapse over the first couple of months of this year probably pushed everything lower than it should have been and presented any number of buyers with an opportunity to get in at low prices. It is arguable whether that was the ultimate bottom, and the possibility does exist that we may see another sell off.
This idea of the Market going even lower was quite popular among those who thought we were going to recreate the great depression over the next 10 years. The difference between the great depression and this recession, is that there are areas of the world that are still growing economically. India, China and much of Asia have so much upside potential that it is unlikely that the world economy will collapse. Further, there was a major mistake made in the depression that we did not make this time. In order to try to protect jobs, onerous tariffs were enacted that in effect killed any germs of recovery since trade diminished tremendously.
It is difficult to predict how the Market is going to react but as we allow the dollar to fluctuate, keep the avenues of trade open, and protect the financial system, we probably are going to avoid panic and create the seeds of a healthy recovery.
We are starting to see companies posting profits due to great reductions in capacity and improved efficiencies, rather than increases in overall revenue. This is a very bullish indicator for the economy, although not necessarily for jobs. It is quite possible that the levels of consumer demand will not return to the levels of 2007 for quite a while. However, we can have a healthy economy at levels below that. Currently GM is gearing the company to be profitable if the demand for cars reaches 10 million. This is significantly less than the market highs, but clearly companies can be profitable at almost every level if they are geared up for them. Suppose the economy operates at levels of about 90% of bubble levels. This would be perfectly sustainable but it would mean a reduction in employment. We may need to live with higher levels of unemployment for quite a while.
Generally this should prevent any tremendous inflation, although we may very well see increases in commodity prices from the low levels they fell to. Once again, this is more of a correction than anything else.
The real question concerns whether there will some economic or political event that causes the economy to collapse. There are areas of concern, but it is hard to see any that would have the impact of the housing collapse. In fact, I would like to reiterate from an earlier post, that people who lost their homes because of onerous mortgage payments, no longer have those payments and have more disposable income. They should actually help the economy from that respect.
We have a large supply of cheaper housing than we have had in years. Yes, there was a great collapse in valuations, but we are seeing people buying these houses and buying at an affordable level with good mortgages.
There needs to be a growth industry to create jobs. I believe the conversion to renewable resources has great potential to absorb many of our unemployed. It has had false starts in the past, but let's hope this time it will actually take off.
It will be a while, but it does seem to me that we are building a basis for a sustained economic structure.
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