5 Indicators the Economy Is Recovering 32 comments
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What a relief. The markets are up. We’re all saved. It’s time to spend again. Borrow away. The panic’s over. A recovery is coming in 2010. We’re home free, right?
If you listened to Fed Chairman Bernanke yesterday that’s what we would be led to believe. He said “there is a reasonable prospect” the recession will end this year.
Now, I know we have too many houses in overbuilt suburbs that nobody wants at these prices. And the auto industry is sucking down billions of cash each month. Housing prices are still falling. It goes on and on. But the government has it all solved.
The credit bubble boom has burst. The government cried panic and scared people for long enough. They got their stimulus bill passed. Now it’s time to think positively.
Yet, all I can glean from this, is they’re saying, “This time is different.”
Of course, as anyone who has been through a stock market bubble knows, it’s never different this time.
5 Signs of a Recovery
Despite yesterday’s unusual cheeriness and lack of “it’s going to get worse before it gets better” talk, I still have no doubt the global economy will recover.
Whether it starts today or two years from now, nobody knows. One thing we do know though is what to watch. Chances are they’re not what everyone is watching.
Practically every day we get a new report stating this or that economic reading increased or declined by some insignificant amount. Then the total change from the past recession or last year is calculated and a “worst since” (i.e. - worst since 1997, the Great Depression, Carter Administration, etc.) headline is created.
But here’s the thing, we can watch the U.S. manufacturing data, business inventory levels, consumer confidence figures, and every other bit of econo-claptrap which moves the markets 3% a day and still have no idea where the economy is headed. It’s the trends that really matter. By the time an uptrend has been confirmed, it’s too late and the economy has already started its recovery.
That’s why I look to these five indicators to see if and when a recovery is underway.
Takeovers accelerate – There are dozens of great companies who prepared for this downturn. When they looked at potential takeovers before, the numbers just didn’t work out. These are the prudent few though.
Over the last few years we’ve watched a record number of takeovers. Most of them were leveraged buyouts. That’s when an acquirer would borrow about 90% of the money needed for the takeover (read: leverage themselves to the hilt) and hope their growth and cash flow productions were right. On top of that, the acquirer would pay themselves huge fees to do it.
Since then, the credit spigot has been turned off and these assets are not producing as well as projected, and they’re facing big interest and principal payments they won’t be able to make. As a result, some will head into bankruptcy and others will be so cheap they’ll simply be taken over.
When we start seeing assets and entire companies get irresistibly cheap, there will be loads of acquisitions. It’s not an easy process. Lenders will get caught short and there will be a lot of corporate restructurings (firings and layoffs), but it's part of the process. Historically, when the “crisis investing” style takeovers start to happen, an economic recovery is still in the early stages.
Number of people on unemployment starts to drop – Last week the total number of people in the U.S. cashing unemployment checks passed 5 million. To put it in perspective, if you lined everyone up back-to-front (assuming 2 ft for each person) the line for those waiting for weekly unemployment checks would be 1908 miles. That’s a line that stretches from New York City to Disneyworld in Orlando, Florida and back again.
That’s a lot of people. Everyone knows about it. It sounds awful, but it’s actually a good thing.
That’s because the clock on the nine months (usually six, but it was temporarily increased to nine months last year) of benefits keeps ticking with each day that passes. It’s not easy to live on unemployment, but it can be done. But when the seventh and eighth months roll around, people are much more willing to take a job in a different field.
This is part of the foundation of a turnaround. This is how people get back to work and spending. Sure we’ll have underemployment. We’ll hear stories of engineers working as dishwashers, real estate agents mopping floors, and investment bankers turned bus drivers, (I washed dishes professionally before, it’s not so bad), but it is all part of every turnaround.
Oil prices stabilize – Oil prices have historically been very volatile. Of course, when bubbles burst, they only go in one direction. Lately though, oil prices have started to stabilize.
If oil continues to trade in the $30 to $50 trading range, it’ll be clear there is increasing demand for oil. If oil demand starts to tick up, oil buyers will have to start replenishing their stocks and buying oil. The price won’t necessarily go up because of this, but it should stabilize. If there’s no recovery, oil buyers will have no place to store millions of barrels of crude and oil prices will fall.
The world is almost overflowing with oil stocks right now and only some semblance of a recovery will keep oil prices falling even lower.
China electricity consumption starts to increase – As we’ve learned over the past year and a half, China is not the driver of global economic growth. Granted, it’s going to play a big role in the future of the global economy, but it’s still a laggard.
It bet big on becoming the world’s manufacturing center. Remember, China is built for booms. But during times when shoppers and businesses are buying less, it’s not good at all.
So to see how well China’s economy is really doing, it’s best to keep an eye on its electricity consumption. Electricity consumption is highly correlated to the GDP. And it’s far less impacted by unreliable assumptions and different ways data is presented (i.e. – SAAR – Seasonally Adjusted Annual Rate). It’s how much electricity was used.
So when we see the manufacturer to the world start turning the lights back on in factories and running all their equipment, we’ll know they’re starting to get orders they have to fill. And we’ll see it well before positive trends appear in declining inventories or when orders for consumer durables start to pick up.
IPO market recovers – There are two reasons to take a company public: owners cashing out and to raise capital for expansion.
Don’t worry about when owners want to cash out. They do this in a good market when they can get a good valuation for their company. It puts more money in their pocket. In many cases they’ve been running the company for years so waiting an extra year or two to cash out usually isn’t much of a problem.
The other reason, raising capital, is what companies will be doing in a rough market. Only the ones which truly need new capital to expand will raise money now because it’s more dilutive. Think of a business that wants $200 million to expand. It can sell 20 million shares at $10 in a bad market or can sell 10 million shares at $20 in a good market. The more shares issued, the smaller the company’s founders will be after the IPO.
It’s no secret we’re in a bad market. So when we see they want the money badly enough to expand that the owners of the company are willing to sacrifice a bigger stake in the company, that’s when we’ll know they see good times ahead.
I realize it’s tough to believe there is any hope in all this mess right now. Any belief in a recovery coming soon will be tested many times by the markets. Remember, economists get a bad reputation for predicting 10 of the last three recessions. But the markets anticipated 10 of the last three recoveries as well.
There will be rallies and sell-offs. There will be periods of hope and periods when it seems all hope is lost. For now, we’ve got to roll with the punches, stay conservative, keep plenty of cash on the sidelines, and find the opportunities where they lie.
There’s always been a correlation between the size of market recovery and depth of the downturn during a recession. Considering the handsome rewards afforded those who stuck it out during the past few soft recessions, the rewards for sticking this harsh one out will likely be far greater than all of them.
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The economic data is flat, especially the employment data. The unemployed migrant workers are 25 million in the final count, which is 19% of 130 million migrant workers and show no sign of improvement.
Education is overpriced. Not everyone needs to go to college. The fact that everyone needs more than high school only proves the failure of the school system. When everyone has to go to college, standards will suffer, they have to. Education is either a mini-bubble or maybe a blister on the economy. Trying to force another Peace Dividend from the economy is also a questionable tactic since the last time they did that, the loss of industrial jobs only accelerated. Once again the military suppliers will go into competition with other manufacturing when they have no more defense work. TRW did this when the went into the air bag business.
The energy plan is a joke and a bad joke at that. It would take about a circle 250 miles in diameter to get enough solar energy to fuel the US before electric cars are widely available. If you put that on government owned property . you have to have a major breakthrough on energy transmission. Substituting more expensive energy for what we have now will not make GDP go up.
Too detailed, alot of the reasons not related to economics. Here are another 5 economic reasons why the US Economy will not recover this year:
1. China has recently reduced its Treasuries purchases to pre-Bailout
rates - China now fully realizes that the more US Treasuries she buys, the less they will be worth at maturation - all due to Bernanke's massive 'quantitative easing' play - where he is trying to 'inflate away' US foreign debts. Trouble is, this also reduces the dollar value - this will hit mainstreet pockets hard. It is very likely that China will tail off her purchases of Treasuries in preference to purchasing more gold.
2. The dollar will fall as a result of the above and many other reasons.
3. China will soon be introducing the Yuan as the reserve currency of Asia. Russia will also be a party in this currency play. The dollar will be given the boot in Asia as the reserve currency. Another reason for the dollar to fall.
4. OPEC has been slashing the number of its refineries and reducing its oil reserves - to reduce supply - in order to drive up the price of oil. This will happen soon - and the dollar will trash, just like it did last time. This will prevent the US coming out of the recession anytime soon.
5. George Soros, this week said that the markets still haven't found bottom - there is no indication of this yet.
5 reasonably good reasons why the US economy will not come out of recession in 2009.
I noticed that the author of the post only say how important the electricity generation and use is in relation to economic activities, but say nothing about the figures. Then he assume it is a positive figure and derive all conclusion from his own assumption. It is an extremely fraud post. The author may consider going back to school for a while.
got to keep a sense of humor in these interesting times.
On Feb 25 08:53 AM ecliptix543 wrote:
> Either way it goes, I've got a plan! For every 100 shares I buy while
> fishing for the bottom, I also buy 100 rounds of ammo in case it
> all goes down the toilet. One of the two will prove to be the smart
> investment... I'm already seeing +200% paper returns on the ammo,
> by the way...
look at real estate prices in after say 1926..down 80% (FL-Chicago-etc)
look at the dow from 1929....down 90%
This fundamental correction has at least 2 years downside, then sideways..
I guess they call that an "L" shape.
Leverage, tax codes, outsourcing, internet, lack of manufacturing,
growth of government, military spending, entitlements...
the US economy will take years to reset.. get used to it..
Electricity consumption in China increase, we are looking at the possibility as;
- all order were being cancel or being push out left and right during the last 2 months of 2008, are now being ask to continue to deliver, customer inventory have drop and need to factory to deliver goods in order to sustain revenue, which is the spike we were noticing lately, how long will this last? hard to tell, we may need to observe this for a few more month before we can conclude that recovery is on the way.
Of course, anyone who wants to work can always find a job, right (your implication)?
SOB.
The good thing about tough times is that it forces leaders to take strong action related to productivity (cut the deadwood) that they would not do otherwise. My company will lay off 13 of 57 workers tomorrow. The owners took a 33% pay cut.
What has to happen is that businesses increase dividends, not cut them, to encourage investment. Like buying a CD, that encourages families to save now because of increased consumption in the future, not just a hoped for promise of capital gains. Of all the stakeholders in a business, e.g. govt taxes, employees, etc., the distant owners get the least after everyone else gets their cut - the poster child is GM.
During this decade, I read financial commentators talking about a "mouth-watering" 3 % dividend - you have got to be kidding! Give the shareholders a real return on their investment since mgt does not need the cash for growth (and growth for its own sake - questionable benefit).
Example, Conoco has 6 bbls of oil for every share of stock, yet the share is priced below 1 bbl - why? The reason is that history has shown that the govt is the #1 recipient of the cash - 35% - then the employees then mgt -- with stock options, mgt has a disincentive to distribute dividends, rather try to grow the business. This is the opportunity to change this thinking.
take a swing, kid. see how it feels to try and knock one out of the park with your arms.
coincidence that the abandonment of Yankee Stadium is happening? and we all thought the Curse of the Babe was only against the dreaded Sawx.