Recovery scenario

The stock markets had a very bullish week in the second week of earnings season and even on a day where there was some disappointing earning from Microsoft and American Express it held on to its levels.

Right now the numbers seem to indicate that there is still significant money that is likely to enter the market once general acceptance of economic recovery becomes more assured. There are clearly signs that things are starting to get better. Starting to get better is not the same as being better and often people seem to miss that distinction. If you have a patient who is running a high fever as a result of a debilitating illness and the fever goes down, that is a positive sign. He may still be running a small fever and his system may take weeks to fully recover, but the improvement usually means that the worst is over.

Yes, there are potentials for relapse but if the illness is a common one with a known course of treatment, a relapse becomes much less likely.

The economy has been through economic downturns before. This was a severe one and I know there are those out are convinced we will still revert to economic collapse, but, earning season should really put those expectations to rest.

Since I started writing down my thoughts here, I have argued that the size of the American economy may have undergone a long term adjustment. I hear this being called the new normal on some shows and I think the faster we accept it the better off we will be.

A good example may very well be seen in the Automobile market. Auto makers need to scale production for sales that are 33% less than they used to be. There is no reason an industry that sells 9-10 million cars a year can't be profitable, unless of course you are geared up to sell 15 million. If demand exceeds supply, they need to be careful about expansion and avoid the overzealous pursuit of profits and market share that almost ruined them last time.

Similarly, many other industries also need to assure that profitability can be achieved at lower revenue levels. The recent earnings season shows that has happened for the most part. Profitability is what is important for success not market share.

Having established that most companies can be profitable at lower levels, growth from those levels will result in significant margin improvements. However, if the economy is smaller than it was it will result in a reduction in jobs unless there is a new growth industry. I believe renewable energy can be that growth industry. However, even if we fail to create as many jobs as we have lost is that a catastrophe?

For years economists have been predicting a labor shortage as the baby boomer generation leave the workforce. Yes, that trend has only just started and because of the recent economic problems, the trend may have been slowed, but, inevitably they will leave the workforce.

So, how problematic is the loss of jobs? I think there is plenty of evidence that unmeasured economic activity (people working off the books or engaged in illicit activities) is picking up some of that slack. With equities regaining value and if we can get some increased values in housing, the baby boomers who saw their retirement nest eggs wiped out, may find a lot of the value returned. If they then start to retire in large numbers, we may actually have a significant labor shortage that will need to be supplemented by immigration or exportation of jobs.

So for those hoping for Armageddon, I think you have a problem.