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| Daily Jurojin - Tuesday, May 12, 2009 |
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Tuesday, May 12, 2009 The long and winding road to recoveryMonday turned out to be one of those days where nothing goes right. You can see the bus coming but your effort to catch it before it leaves the stop is rewarded only by a car zooming through a puddle at the side of the road soaking you from head to foot.Investors must have felt the same way. S&P 500 index futures were lower before the market opened, and the market sat down all day before closing at its worst level of the day. Not much for them to get their teeth into, not much chance to get out. Bonds were already reflecting a safe haven bid and closed at the top of their daily range. The day was over before it even started with the main driving force the retrospective look back at the stress tests and the forward-looking statement out of HSBC as it said things were not only bad, but likely to remain tough throughout this year. Investors are slowly coming around to the view that maybe they partied just a tad too hard. Experts are hard at work debating the type of recovery we might get. Will it be a prolonged and drawn out affair or will it be a short, sharp revival? The latter falls under the business cycle theory made famous by one Victor Zarnowitz, whose studies revealed that the deeper the recession, the sharper the rebound. That would certainly fit today's evidence drawn the world over. As we have recently noted, such anecdotal evidence of returning consumer and business confidence spurred on by ultra-stimulative rates of interest and stock prices heading for the moon. Some are even drawn into arguing that the housing market must be at rock bottom, once again given the lessening pace of price declines as the summer draws near. Such new found optimism might create a couple of healthy quarters of economic growth before the longer-lasting hallmarks of the recession crimp output next year and beyond. What many economists have never seen before is such a prolonged expansion built on a wave of indebtedness slam into the rocks leaving grave consequences as the tide flows out. As much as the recent GDP report proved that the darkest days are behind us, there was also relief at the extent to which inventories had been depleted. When producers run inventories down they hold off from making new goods. That exacerbates the slowdown but does allow an economic cleansing. Beyond this point, manufacturers appear ready and willing to produce to the point that when demand does reappear, they snap too at lightning pace giving the appearance of a torrent of new orders. But the problem is not one of cleaning out the warehouses. This recession is all about the state of the consumer and the householder. Thanks to the fact that homeowners bought into the story that rising home equity would allow them to retire early, households have soaked up billions of dollars worth of debt driving debt as a percentage of net worth to 27% - the highest on record. A 27% slump from the highest reading of home prices combined with a 42% decline in equity prices from their all-time peak has left consumers return to the habit of savings. In the last decade the savings rate was a mere 1.7% and even turned negative for a period. Some see the potential for an 8% savings rate going forward. Ahead the U.S. and likely most other G20 nations will continue to record more job losses. An inventory slowdown won't matter one little bit to the Zarnowitz theory of business cycles. We should never forget the root cause of the problem lies with the nation's banking system, which choked on its own cocktail of greed and folly. Lenders won't have the same appetite to lend for many a year. It's going to be a long and winding road to recovery. The Supreme Council of the Secret Order of Jurojin |
