Expect an 'L-Shaped' Recovery

| About: General Motors (GM)

Yesterday was a tough day for the market, tough day for GM and Chrysler dealers, tough day overall. In case you missed it, GM and Chrysler are planning on collectively closing down 1,800-2,000 franchises and the announcement of who is on the chopping block should come out this week. Each of those dealerships - between sales and service - probably employ dozens of people. And there will be knock on effects to those servicing these dealerships with services or products.

Not a good day for the dealers and not a good week for GM stockholders. The stock hit $1.09, its lowest since 1933, in part due to insiders dumping shares.

Here is an excellent piece by Tim Duy on why we ain't going back to our spending ways and absent finding a better way to support our GDP, things are not looking pretty. It is what I have been calling the new reality.

So there were a couple of troubling economic news items yesterday. Retail sales resumed their decline, albeit at slower rate of decline than in the fourth quarter or the start of ’09. Not what economists had forecast, but with continuing job losses, not all that shocking.

Foreclosures also set a new record last month, after a record the month before. Certain financial institutions had a temporary moratorium on foreclosing (either self or government imposed), though delinquencies continued to mount during the moratorium. Well, the moratoriums are now done so the foreclosures have resumed with a bit of pent up demand in that area coming to light. This is what happens when you kick the can down the road instead of dealing with it. Expect a good bit of REOs hitting the market in months to come, putting further pressure on real estate prices. Couple that with rising unemployment and home prices will continue their decline. More homeowners then under water, more job losses and more people becoming delinquent on mortgages – especially those in the prime category. You can expect to repeat this cycle until we have reached bottom and we are not there yet.

Now individuals are deleveraging and this could be long and dangerous. At the end of the day we will wake up and it will be over. I am not saying we will return to where we were, just that we will get to bottom. Growth from there will be anemic at best. With $10 trillion in wealth drained away, with no easy credit on the horizon and with baby boomers focused more on building retirement than a new car, the good times are gone for a very long time. We need a more sustainable economic model than consumer spending providing 70% of the GDP and being fueled by debt. Until we find that model, many are starting to realize that this will be an L shaped recovery.

For a good read on this, I recommend Sudden Debt.

Disclosures: None.