Jacks Random Reflections
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Whither the economy?

Permanent Linkby Jack on Fri Oct 02, 2009 11:11 pm

The powers that be have coined a phrase - "green shoots". I think they've made a mistake, not only in calling a turn, but politically and emotionally.

Our problem boils down to employment. Until we start generating large numbers of stable, well-paying jobs, there is no foundation to support recovery anywhere else in the economy. Housing involves mortgages - which imply a steady income on the part of the borrower. Likewise, increased consumer spending requires a source of income. Note that such spending can no longer grow from expansion of consumer credit - the banks have increased rates, increased payment rates, and cut lines of credit.

The stock market has increased since the March lows; however, if we look back over the past century (as done in Mauldin's work, Bull's eye investing), we find that bear markets end when stocks represent excellent values. Dividends on quality companies rise to as much as 6%. PE ratios decline. None of these have happened - yet. In addition, our last bull market lasted a quarter century. To imagine the bear would only last a couple years seems wildly optimistic. My thinking - we've got another leg down, one that will go lower than we saw in March. The economy will join in the debacle.

And this comes back to the opening sentence. People were afraid; then they developed the hope that the corner had been turned, and recovery was at hand. If those hopes are dashed, then the reaction is likely to involve deep disappointment combined with fear and anger. This has implications for spending - people who are afraid hold on to their money. They are frugal. They tend to avoid risk. That means impairment of capital formation. And, there is anger - which has implications for the political and social environment.

I think those with assets - including well-equipped doomsteads - would be well advised to be discrete.

A further observation. RV sales are up. Now why would that be? Are people feeling that confident? Or are they purchasing replacements for the house they will soon walk away from? And - since the motor homes are highly mobile - do the new purchasers really plan to keep up the payments? I wonder.

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