Sunday, May 16, 2010

This Insanity Won’t Stop!

Now for some words of wisdom from that great financier Buffet…..

I took off for a weekend last month
Just to try and recall the whole year.
All of the faces and all of the places,
wonderin' where they all disappeared

It's these changes in latitudes, changes in attitudes
Nothing remains quite the same
With all of our running and all of our cunning
If we couldn't laugh we would all go insane

Things are getting better. Attitudes are improving. The great majority of experts believe that the worst is behind us and the recovery has begun.

Yes, the economy is recovering faster than many expected, but we still have a long way to go. Things are not quite as good as they seem. Some factors to consider:

- The "percentage change" bias factor: Most economic statistics for 2010 are quoted as a percentage change over 2009. Since 2009 was such a horrible year, the 2010 percentage increases look better than they really are. On many factors it is more enlightening to look at the statistics over time. Many economic indicators (and industries for that matter) won’t “recover” until 2011 or 2012.

- Several sectors (housing, auto, finance, etc.) are being propped up by the government. There could be issues when the total government stimulus effort wears off. Expect economic growth to slow in Q4.

- A recent article in Business Week concluded that the banks are not doing as well as it appears on paper (love those creative accountants!).

- There are still problems in the housing sector and experts are uncertain what happens when all the so called “shadow inventory” (vacant houses owned by banks and individuals that are not on the market yet) comes back into play.

- There is a structural unemployment problem. The number of long-termed unemployed continues to grow. There are many people who have been unemployed for over a year. The number of people in the job-seeker groups that I previously belonged to is not decreasing.

On the other hand, there are many positives:

- Wages and hours worked are increasing. This means business activity is growing and more companies will need more workers at some point.

- Industrial production and capacity utilization keeps increasing.

- Freight growth is up. Trucking and railroad freight is growing faster than forecasted. UPS recently increased its forecast. Businesses continue to replenish inventories to support future sales increases.

- Retail sales are up. Consumer confidence is growing stronger by the week. The people with jobs are spending more money. I even did my part by finally buying a new, very expensive, big-screen TV so I could watch the Cleveland Cavaliers win the NBA championship (not making this up!).

- Auto sales are much stronger than forecast.

The Model T Got This One Right

While the Model T has not been accurate recently as a stock market predictor (its intended purpose), it has been very accurate charting the economic recovery. Back in October (seven months ago!), The Model T predicted what I called the “UL” recovery. It wasn’t a “V” shaped, it wasn’t an “L” shaped, but it was weaker than a standard “U” and it wasn’t a “double dip”. Here is the graph from October, and this basically reflects where we are at seven months later. We may be doing a little better than the graph right now, but if the economy does slow down in Q4, it should just about balance out. (I will publish a new graph soon)

What About Stocks?

This will be an extended recovery due to the damage to the financial and housing sectors. Because the business cycle has been extended, the stock market fluctuations within the cycle may be more pronounced. There is still a concern that the market has priced in a “V” shaped recovery, but is actually getting a much weaker “UL”. If this is the case, get ready for another wild ride. Remember, if we all weren’t crazy, we would just go insane.

Reading departure signs in some big airport
Reminds me of the places I've been
Visions of good times that brought so much pleasure
Makes me want to go back again (not quite)

If it suddenly ended tomorrow
I could somehow adjust to the fall
Good times and riches and sons of a bitches
I've seen more than I can recall

1 comment:

  1. Don I hope you are right with your thoughts above, but I think the impact of the collapse of the Euro and much of Europe along with it will have a much greater impact on the US than people now believe. The more even the US dollar draws with the Euro the more expensive it will make out exports and thus decrease a sector of our economy.

    Additionally, (as you noted) the stimulus will eventually cease and the states will be forced to deal with the long over due problem of lack of income to pay for all of the free lunches they are providing. This in turn will most likely lead to tax increases as the spineless political leaders struggle to actually cut the budget. As Dr. Kim taught me in Cost Accounting there are only two ways for you to impact the bottom line -- sell more and spend less. The problem with selling more is you need to continue to sell more, but spend less is much easier to continue going forward. Political leaders don't have any clue what this means and are not willing to make the hard decisions. This could all change dependent on the Governor of New Jersey's success cutting his state's budget.

    The solution our political leaders continue to toss around is taxes and the VAT. These will only lead to further impacting our economy negatively. If they could actually pull it off where they removed some taxes in put the VAT in place I actually think it could be a success, but we know that isn't going to happen.

    Hope all is well in the new job.