As is normally the case, at any point in time there are positives and negative circumstances in the environment to confront investors. Fortunately, we don't have to dig quite as deeply as we did in spring to locate some positives in the economic world today
Positives:
The economic decline has ceased. We are no longer retracing the trajectory of 1929-30. Foreign economies are also bouncing back, and in many cases, growing very quickly. In general, the sense of panic that gripped the economic world at the end of 2008 and in early 2009 has abated.
Despite the handwringing over the imminent arrival of inflation, it has not occurred. Despite the handwringing over the imminent arrival of deflation, it has not occurred. Core consumer prices are increasing somewhere between 1-2% annualized.
Corporate profit margins have held up surprisingly well. Most companies continue to operate "lean and mean" and that is driving strong productivity growth. This is the under-reported positive news about a poor jobs market.
The G-7 Group of Industrialized Nations is now defunct, and has been replaced by the G-20. Bringing more - and vital - economies such as China, Brazil, and India into the decision making process can only be a good thing. The group is in frequent conferences and consultations. Free trade has generally resisted any protectionism, with the occasional hiccup such as the United States tariff on Chinese tires. Fortunately, other nations are not following the poor US example.
Cyclicality still seems to be the model that best describes the functioning of asset class investments. The most obvious example is the large down and up swings over the past year! Why would we categorize cyclicality as a positive and take comfort from it? Because the clear implication is that what goes down eventually comes back up. And we have been in a very very down period. Over the past decade the total return from investing in US stocks as defined by the S&P 500 is negative, even including dividends. Cyclicality would suggest a decade of no worse than average returns ahead. This seems even more likely when we think of markets on a global scale and not within the confines of the American stock market and the American economy, which is facing challenges others aren't.
Negatives:
The most pressing problem facing the American economy - that of excessive spending and borrowing - has not been addressed. In fact, it has been perpetuated with the Federal government replacing the consumer at the borrowing window.
In conjunction with this, savers are being penalized - earning nothing on their cash while facing the likelihood of higher taxes. Spending, whether reckless or not, is being encouraged and supported by programs like Cash for Clunkers, cash handouts to first time homebuyers, or various mortgage adjustment schemes to bail out overextended borrowers.
The G-20 nor any subset thereof, has not yet addressed in any way the mis-valuations of currencies that continues to destabilize the world economy.
Developed world budget deficits are seemingly out of control. Although in many cases, the TOTAL borrowing as a percent of GDP is still salvagable, in other nations such as Japan it appears there is no way back.
An opportunity lost - "too big to fail" is now an acknowledged commitment by policymakers. The taxpayers are now officially on call to support "critical" corporations when they become ensnared in difficulties. There is still insufficient (understatement!) regulation of those corporations given the scale of that taxpayer commitment.
Summary
So, clearly, there are ample positives and negatives and investors are free to choose some from Column A and some from Column B in forming their own views about the future. While we, as always, consider it unwise to try and predict the short-term outcomes for investors (and thus we won't try!) here is how we'd summarize the meaning of the crisis and its aftermath:
The crisis revealed the fallacies behind the simple-minded notion that the "market is always right" that underpinned much of the theory of laissez faire economics and whose most prominent supporter was Alan Greenspan. Years, in fact decades, of growing influence by the large financial companies led first to their "capture" of their regulators in the executive and legislative branches and then the transformation of those regulators into aiders and abettors in dismantling the remainders of a proper regulatory structure. The crisis is the bill come due from slavish devotion to an incorrect economic model and the flaws in our system of governance and regulation.
And what about the actions that have produced the economic stabilization of today? What are we to make of them? History will be the ultimate judge, but what I believe is that the cost of the crisis will go far beyond the dreadfully high cost of the various stimulus programs. In fact, it could be that we - citizens and taxpayers - have not begun to pay the price at all. As to how this will play out, time will tell. Something to discuss on our next call, or in further discussions on the website or in our client meetings.
