Things Aren't as Bad as They Seem - Barron's 25 comments
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While many financial journalists and bloggers seem to think the sky is falling (or, has fallen and will fall much further), Barron's isn't buying it:
The economy has often proved more resilient than is commonly thought - and constructive factors that have gotten scant attention should help the U.S. skirt a deep recession. In fact, it's possible that the downturn could prove to be one of the briefest and mildest on record.
What constructive factors, you ask?
Number one, the huge boost to consumer spending that will come from a decline in energy costs. While oil's run-up to $150/barrel was front and center, its equally dramatic plunge back to $70 has garnered scant media coverage. Natural gas is also off about 50% since early July.
$80 crude produces an 'energy dividend' of about $170B, which Barron's author Gene Epstein assumes will make its way back into the economy during Q4 and Q1 2009, boosting consumer spending - which accounts for 70% of U.S. GDP - by 3.5%.
But most of that, he concedes, will be counteracted by shrinking credit markets and eroded home values.
So add to the mixture labor income growth. Spurred by relatively healthy unemployment (6.2% is still historically low), and falling food and energy prices which could produce a temporarily negative CPI, real wages should increase, leading to real consumer spending growth of 0.9% in Q4 and 1.5% in Q1 - enough to push waning GDP growth back into positive territory. The potential of looser credit markets, renewed growth in largely stagnant capital investment, and depleted inventories should further fuel growth.
If I'm right, then, the only quarter of contraction this time around (barring revisions) will have been 2007's fourth, in which GDP fell at an annualized 0.2%. The economy won't be great through the end of 2009, but it should do far better than the gloom-mongers expect.
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- A Sunday article in the NY Daily News notes that consumers waiting for oil prices to drop with the same magnitude they rose may be disappointed: "Much of the crude oil price increases could not be passed on at the pump," EIA oil analyst Douglas MacIntyre notes, so gas prices simply don't have that far to fall.
- Menzie Chinn notes a forecast released Friday night by Deutsche Bank gives a sobering new view of economic growth over the short- to medium-term, much worse than it thought just two weeks previously.
- Peter Schiff's outlook is almost diametrically opposed to Barron's'. "The structure of the U.S economy today is far weaker than it was in the fall of 1929," he writes. "Years of reckless consumer borrowing and spending, and enormous trade and budget deficits have resulted in a hollowed out industrial base and an unmanageable mountain of debt owed to foreign creditors... This will not be your grandfather's Depression. It may be much worse."
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This article has 25 comments:
I'm seeing a lot of people losing their jobs, store fronts closing, and real estate prices sinking, and I live in an area (Boston) that supposedly hasn't been hit as hard as many.
Sure, the market can do anything, particular with the likelihood of a few TRILLION dollars of stimulus. But arguing that things aren't that bad in the face of debt deflation of epic proportions seems shallow. Of course, maybe we should put Mr. Happy Face on after a 40 percent SPX drop...unless the monthly charts put us where no man has gone before.
Basing economic analysis on government statistics is like trusting a mafia-operated slot machine. Actually, the mafia probably has a more reliable code of ethics.
However, I still suspect a long recession to rebalance the misallocations of capital and labor brought about by a policy, sustained for over a decade, that diverted excessive resources towards the housing and finance sectors; at the expense of other sectors, especially the manufacturing sector.
There is bound to be a painful transition as the economy rebalances, and this will involve destruction of many of the current business models and profit-making patterns, with consequent losses in the stock market. Thus, I doubt that stocks have bottomed yet, except perhaps for a short period.
I agree that the gas price drop will be a boon for the consumer. It comes at just the right time of the year for the retailers. The holidays...the time of the year they go into the black.
The stock market behavior appears to be more liquidation driven than value or economy driven. That may be due to a confluence of factors such as hedge fund redemption selling, margin call forced liquidation selling, financials raising cash by selling equities, baby boomers that don't have the time to do it again and the fear mongers benefitting from short selling The current P/E of the S&P is around 13.5 against a 30 year average of 18. To me that says that the sell off was most certainly not value or economy driven but driven by the need to raise cash. The last time the P/E was at this level was 1988. The market returned to more traditional value 2 years later.
I don't think it is polyanna to be optimistic about the future. History is on my side.
I shopping for some stocks. They're still on sale this week.
No, it doesn't. The $170B spent somewhere else. How is that a benefit?
It isn't.
I've got news for the Barron's writer... The downturn has already long-passed the point where it could be considered "mild," let alone "one of the mildest on record" The people who believe this sophomoric analysis will be doomed to imprudent investment decisions which will undoubtedly separate them from their remaining assets.
We're in this mess because of easy money and world Governments are attempting to cure the problem with more of what caused it? The cure is the disease? I thought that only worked for vaccinations. Too late for that though.
all of this articles have no evidence to support their opinions. the truth is that nobody knows what will happen, and with the exception of the dropping of commodity prices all the other news is negative.
i also want to voice that the future will be good. but the question is when this good future will appear. to think it will be tomorrow is not realistic based on the information which is currently available.
I think Barrons has become a new "Franchise".....their selling "Kool Aid" for the government now......
Until the home prices are not stabilized and the accounting rules won't be changed for this not be repeated in the future i don't see people coming back to stocks.
All the doommongering fools screeching that the sky is falling can't add and have no idea what the US economy is to begin with, they are just repeating what their communist masters in the press tell them to say. Those have been predicting the immediate self destruction of capitalism for 160 years straight. And they are hopelessly wrong, and always will be.
The most convincing analysis I've seen suggesting that we are heading toward the 'end of the world scenario' in the not too distant future.
I agree with SecMaven's numbers. Senator Obama looks very likely to hold all of the Kerry states (it was looking dicey in Minnesota but things have definitely firmed lately, plus Iowa, and New Mexico. Unless he also takes Colorado as well it will b3 274-264 McCain (unless the 2nd district of Maine elector also goes Senator to McCain, a possibility).
If Obama does win Colorado he wins 273 (or 272) to 265 or 266.
BUT, he will run up enormous pluralities in California and New York, while losing very closely in Florida. So his PV numbers will be 3 million plus more than McCain-Palin's, and we will have a VERY tense situation.
We'll be an America in which the majority of its citizens are "anti-American". An interesting conundrum, No?
Re , you are spot on ! thing are soo much worse than goverment /media portrays . In the great depression , the US goverment was not indebted to foreigners as is the case now . Some folks had savings + owned their homes outright , which is now not the case . Also the US was the main manufacturing giant of the world . China , malaysia , now are + pay their workers ave 18 cents hour . The Us worker cannot compete with this . The US standard of living is plummeting = Greater Depression . Folks that can't see /accept this , are in total denial .