When Will Things Get Better?

Two days ago President Obama signed the 2009 stimulus package into law, committing an additional $787 billion to supporting the American economy. A number of banks - JPMorgan, Citigroup, Bank of America and Wells Fargo among them - have agreed on temporary moratoriums on foreclosures. Weekly mortgage applications jumped 46% last week, and (as noted in my last post) a variety of indexes seem to be slowing their decline.

Credit Suisse recently suggested that the much-bemoaned US debt to GDP ratio might not be in as bad a shape as commonly assumed. Yet the S&P500 lost -4.6% the day President Obama signed the American Recovery and Reinvestment Act, and the Dow Jones gave up -3.8%. As of February 18, the Dow Jones has lost roughly 14% for the year. I have no idea when equities are going to see a bottom or when the economy is going to reach a turning point. I do believe, though, that there are certain prerequisites to be met before a lasting recovery can begin:

1) We need some signs that the stimulus package is working.

In their January meeting, the minutes of which were published yesterday, the Federal Open Market Committee once again reduced their 2009 growth projections. The consumer confidence index stood at 37.7 in January, its all-time low since inception of the index in 1967. I think that consumer and investor confidence will only tick up again as the tax cuts and spending programs of the $787 billion stimulus package (hopefully) prove their effectiveness over time - per the Congressional Budget Office’s estimates the stimulus will add somewhere between 1.1 and 3.8 percentage points to real GDP in 2009, and have an effect of similar magnitude in 2010.

Take a look at the charts below for a breakdown of the stimulus package, and an estimate from JPMorgan showing the sizing of tax breaks and spending quarter by quarter. Please note that the JPMorgan graph dates to the first week of February and is thus not a fully accurate reflection of the stimulus package that was passed on February 13.

2) Systemic threats on both the national and international level need to be resolved.

Temporary calm returned to the US markets in December of 2008 after the government committed to “doing all that it takes” to thaw credit markets, stabilize the financial system and revive the economy. Talk of an impending collapse of the US financial system subsided as it became clear that the government would do everything possible to prevent another Lehman disaster. I believe that we need a similar commitment from the EU regarding the escalating situation in Eastern Europe, and from the US government and banks regarding the prevention of potential systemic shocks such as a large-scale municipal default (think California which just managed to corral the last vote needed to resolve the budget impasse) or a spike in mortgage defaults triggered by a wave of simultaneous interest rate resets.

3) We need to recalibrate our expectations regarding homeownership, leverage and GDP growth.

It seems that by now both Wall Street and Washington and have understood that we can’t go back to “business as usual” - i.e. our pre-crisis reality. For a while to come, banks and hedge funds won’t be as leveraged as they were over the last decade. American automakers need to revamp their business models. I personally don’t believe that almost 70% of households in the US can afford owning a home (stay tuned for a post outlining why). I don’t think that a personal savings rate in the zero to three percent range is sustainable. And I don’t see how increasing reliance on debt - both private and public - can continue to drive GDP growth going forward.

The charts below show the US debt to GDP ratio (the revised version from Credit Suisse) over the last 100 years, the growth of GDP compared to the increase of productivity in the US since 1965, and the development of homeownership over the same period. Looking at these long-term trends, I believe that we’re in for a prolonged period of pain - after all, the stimulus package addresses the symptoms of the crisis and not its causes: leverage is shifted from private to public, instead of being reduced; homeowners who can’t afford their homes are receiving support to avoid foreclosure.

What do you think needs to happen in order for things to get better?

Comments

[bosun.j:]

Things will get better when Main St. definitively rejects extremist-capitalist neo-CON tinkle down economics and forceably rejects its proponents. French Revolution style. Which, sadly, is to say things won't get better.

Feb 20 08:14 AM

[Larrysyr:]

I think there's a lot of relevant info presented here.

I'm interested in your indication that fewer people should own their own homes. I think that official policies have moved a higher tier of the rental market into a lower tier of the home-ownership market. This has had the unintended consequences of raising the risk of mortgage defaults/foreclosures along with leaving the rental market with fewer qualified renters. The results have not been beneficial for either home-owners, renters, or landlords.

I look forward to your article.

Feb 20 04:15 PM

[bs_o_meter:]

I assume when you pose the question "when will things get better" - your are referring to the stock market.

we are adjusting to a new normal. things will change - but the question is not when will things get better - but the question is what will things change into.

you can stand around all day wondering when the market will go up again. this is a waste of time. the market will simply change its dynamics, and everyone should position oneself for this event. there is money to be made, but the old ways are dead. you need to learn how to make money on a flat market (after it stops falling).

too many punters for too long have been telling the sheep we are close to recovery and hold on. this is being exposed as an obvious lie. the market can now reprice for the new normal.

Feb 21 01:49 AM

[ACCOUNTANT:]

The ratio of the S & P 500 to GDP is more than a full standard deviation below its average for the past 60 years. in only 10 of those years was ratio lower than where it currently is. To get back to the 60-year average it would have to increase by 75%, to get to the average of the 10 years that are below it, it only needs to decline 15% more.

We are 18 months into this bear market and probably have another 6 - 12 months to go, possibly a bit longer. But, there has only been one bear market in the past 125 years that has lasted longer than 36 months, and that only last an extra few months beyond the 36. We are down by 50% and are nearing the lowest valuations the market has had in the past 60 years, as adjusted for size of the GDP. Given where the market is in relation to GDP, it will bounce back - and when it does, it could potentially bounce by a huge amount very quickly. There are gobs of stocks right now that are valued ridiculously low by any objective standard one can apply - they're there due to the current fear that is present in the market - when that fear abates, and it will, they will take off like crazy. When this thing turns, i could easily see a 60 - 70% surge in the first 24 months. And the people standing on the sidelines talking how the bear is permanent, this is the new reality, are going to wonder what hit them and how they got left behind.

Feb 21 08:50 AM

[brick:]

i am on your side and agree with your thinking. the pendulum always swings too far in either direction.


On Feb 21 08:50 AM accountant wrote:

> The ratio of the S & P 500 to GDP is more than a full standard
> deviation below its average for the past 60 years. in only 10 of
> those years was ratio lower than where it currently is. To get back
> to the 60-year average it would have to increase by 75%, to get to
> the average of the 10 years that are below it, it only needs to decline
> 15% more.
>
> We are 18 months into this bear market and probably have another
> 6 - 12 months to go, possibly a bit longer. But, there has only been
> one bear market in the past 125 years that has lasted longer than
> 36 months, and that only last an extra few months beyond the 36.
> We are down by 50% and are nearing the lowest valuations the market
> has had in the past 60 years, as adjusted for size of the GDP. Given
> where the market is in relation to GDP, it will bounce back - and
> when it does, it could potentially bounce by a huge amount very quickly.
> There are gobs of stocks right now that are valued ridiculously low
> by any objective standard one can apply - they're there due to the
> current fear that is present in the market - when that fear abates,
> and it will, they will take off like crazy. When this thing turns,
> i could easily see a 60 - 70% surge in the first 24 months. And the
> people standing on the sidelines talking how the bear is permanent,
> this is the new reality, are going to wonder what hit them and how
> they got left behind.

Feb 21 10:10 AM

[auto44:]

The world is awash in a sea of debt that will never be properly paid off and the end holders of this paper will suffer extreme losses of their capitol. The world is also awash in a sea of lies, such as off balance sheet assets, how can a balance sheet show the health of a company if the bad assets are not shown there. Someone should be prosocuted for this. Another great misleading statistic earnings ex items. State the true earnings, because you suffered a loss just one time does not change the fact that the earnings are not what was stated. What people have come to realize is that they can't TRUST anyone. Not the gov't, not the accountants, not corporate officers and board members,not the banks and the list goes on and on. Nothing is going to get better until we begin to bring the crooks to justice and vote out the likes of the congress who's oversight was totally devoid of any sort of due dilligence but lots of finger pointing at everyone else. Things will get better when TRUST is restored. Lots of luck.

Feb 21 10:41 AM

[Ferdinand E...:]

Get better. Given that the election was only 3 months ago, things are about as good as they can get. Think about how they could be if we were hearing about how a 'surge' could save the day in Afghanistan.

Feb 21 10:46 AM

[Fred Voetsch:]

This is the type of article I love to see; filled with verifiable data and evidence.

To further add some evidence I suggest people research the "4th turning" which is about generational trends and how the 4th turning (every turning is about 20 years) ushers in a crisis era that leads to things like depressions and wars, all setup up by the loss of those who had learned the lessons of the previous crisis era. This is all well researched stuff and pretty simple to understand and apply and those who get it have a real advantage in preparing for what's coming.

A good starter article on this is at
www.bullnotbull.com/ar...

Feb 21 12:28 PM

[Fred Voetsch:]

"We are 18 months into this bear market and probably have another 6 - 12 months to go, possibly a bit longer. But, there has only been one bear market in the past 125 years that has lasted longer than 36 months, and that only last an extra few months beyond the 36. We are down by 50% and are nearing the lowest valuations the market has had in the past 60 years, as adjusted for size of the GDP. Given where the market is in relation to GDP, it will bounce back - and when it does, it could potentially bounce by a huge amount very quickly."

Sorry, a bit of critical thinking shows that you are reaching for something not there.

In one sentence you use a period of 125 years and the next you only go back 60 years; why? Because it give you the data you want and that makes you dishonest or foolish, take your pick.

Markets do often bounce back in a dramatic way but the reason the market bounced back so much and so fast in 1932 is that the market had fallen 90%. 90%!!! A 100% move from a 90% drop can be expected and leaves the market way below its high; a similar move from a 50% drop makes no sense and yet you once again mixed and matched data to make it sound that way.

Please, people, think critically and use real data and you will do fine in this market. There are plenty of opportunities.

Feb 21 12:39 PM

[silverfox:]

When will things get better?
in THE STOCK MARKET? when earnings turnaround
In creating more jobs? the infrustructure stimulus should help but could take awhile to implement.
you have to keep in mind that EARNINGS are the driving force behind every
companies performance.
when the taxpayer ( consumer) stops spending money then every company is affected on the balance sheet.
creating jobs and getting money back into circulation is the fastest way to get us on the right track.
this will probably take awhile 1 - 2 years beacause this time its the whole world that is in recession/depression
keep in mind it is the consumer that drives the economy.

Feb 21 12:53 PM

[sourceview:]

it is NOT trinkle down economics, it is PISS ON YOU economics. There is a difference.

On Feb 20 08:14 AM bosun.j wrote:

> Things will get better when Main St. definitively rejects extremist-capitalist
> neo-CON tinkle down economics and forceably rejects its proponents.
> French Revolution style. Which, sadly, is to say things won't get
> better.

Feb 21 01:02 PM

[Strongr:]

There is so conflicting opinion out there six ways to Sunday. Anyone who believes that President Obama is not trying to turn this Godawful triple mess around (housing prices, housing forclosure and the market) that are all interrelated, should allow some time for these programs to play a bit. We all love to argue about the best solution and be critical. It's human nature. You think my house and IRA are near where they were last year? Remember the previous tenant of the White House? We all know what a legacy he left. If President Clinton hadn't killed the Glass Segal act in his term to get more people into a house, there would probably be more people in their house. Few are talking about this one.

Feb 21 03:13 PM

[Urbane Gori...:]

Larry Kudlow is 'bullish' on America, and that's good enough for me! After all, he is on CNBC, right?

jegan

Feb 21 03:53 PM

[brahmburgers:]

Until 8-08 I had zero debt, but was poor as a church mouse, selling home-made potting soil in bags - out of the back of my beat up p.u. truck.
In 8-08 I came in to a modest inheritance, all in stocks and bonds. Instead of keeping it at Morgan Stanley (where it was parked), I opted to cash out 100% right away. Glad I did! Now I got cash in an Asian bank, and life's a bed of roses - albeit with a few thorns. Sorry for all the people who're worth half of what they were before the crash. Too bad they were so overextended. Interesting, it wasn't just the bottom falling out, but the crisis was has also been the top falling down. Nearly every person and every business which lived on credit suffered. Even GM paid its weekly payroll with borrowed money. Lesson: live within your means.

Feb 22 05:27 AM

[silverfox:]

As a Canadian with no mortgage i would like to give you some interesting data: this is according to the latest google data available.
+- 15% of Americans own their own homes ( no mortage)
By comparrison 70% of Canadians own their own homes.
So why is this?
the Canadian Government does not allow anyone to write off their intrest on their mortgage. this gives people a far greater incenative to pay off the mortage with a lot of sacrificing as soon as possible
Americans can write off their mortage intrest and have little incenative to ever pay off the house.
Me and my loving wife took out a $95,000 mortgage on a 4 level split
house in 1987 and with sacrifice, no vacations, no holiday trailer, no boat
no big ticket items scrimping & scrounging making weekly payments
we retired the mortage in 1999.
We still live in that house and have started renovations ( one room at a time).
It is possible and you have to be prpared to endure some hardship.
Do not give up the American dream can become reality.

Feb 22 06:54 PM