The Nature of This Recovery

There is still debate about whether the US economy is really recovering, and there is a lot of concern about the sustainability of the recovery.

I have little doubt that the recovery is real, despite the debt and the loss of wealth suffered by many.

This deepest recession was triggered by a credit crisis, which was itself triggered by the bursting of the housing bubble. Some grave policy errors aggravated the crisis, but policy makers generally made very good moves after they recognized the gravity of the problem.

A lot of Americans are still suffering, and the threat of more layoffs is real. However, asset values are rebounding, helping to ease the credit crisis. While many have suffered losses in wealth others are enjoying gains. This recession and subsequent recovery have produced a lot of churning and redistribution of wealth.

I can understand the anger of those who have suffered. This anguish and the disbelief that accompanies it are reflected in the negative commentaries found on any analyses that predict recovery. But they won’t change the fact of recovery, as firms have to replenish their depleted inventories and as overseas demand recover. In time, too, job losses will turn into job gains, and the recovery will gain momentum.

The stock market had been going ahead of itself and needed corrections from time to time, but the trend will be up if the recovery is real. I am bewildered by the strong gains among the financials that have yet to recover from their heavy losses. But the evidence remains that this recovery is real and sustainable.

So far economies that have already shown good growth in the second quarter include China, India, Singapore, Hong Kong, Japan, and to a less extent Australia. Even the Eurozone and North America are showing signs of life. Economies that have PMIs at or (or ISM index) exceeding 50 and thus are indicated to be growing include the US, Canada, and the Euro zone.

Job losses in America are declining. Housing prices as well as stock prices are rising. The tight credit situation is easing. Export orders are rising. Based on these I continue to predict earlier-than-expected peaking of the unemployment rate in the US.

Many people are worried about reversal of easy money. I am also worried too: because policy makers can err. But reversing quantitative easing at the right time and pace need not be harmful to the economy. While reversing quantitative easing in the form of reining in commercial lending would be bad for the economy, reversing quantitative easing by first reducing the scale of bond purchases and then by gradually selling some bonds may be unnoticeable. Because there is so much excess capacity in the economy there is really no threat about run-away inflation and thus no need for a major and sudden reversal of quantitative easing. I see talks about run-away inflation at this time as esssentially alarmist.

There are people who worry about asset prices rising too fast because of quantitative easing. If I were the policy makers I would not worry about this at all. I might rein in credit for speculators in asset markets, but I would not rein in loans for homebuyers or for businesses. If policy makers worry about asset prices rising too fast and start doing something silly like raising interest rates before any genuine overheating of the economy is in sight, I cannot rule out the economy slipping into recession again. I am hopeful that Mr. Bernanke will not fall into this trap.

Comments

[whidbey:]

" If policy makers worry about asset prices rising too fast and start doing something silly like raising interest rates before any genuine overheating of the economy is in sight..."

Useless comments. Who knows when the time will come to retract the QE? You have no idea and neither does the FED.

Sep 02 05:17 PM

[Socialism c...:]

"Because there is so much excess capacity in the economy there is really no threat about run-away inflation and thus no need for a major and sudden reversal of quantitative easing. I see talks about run-away inflation at this time as esssentially alarmist."

When the dollar nose-dives, there IS NO excess capacity -- exports will suck up the extra capacity, while Americans will be unable to afford extras. Good luck.

Sep 02 05:48 PM

[Jasper M:]

On Sep 02 05:48 PM Socialism cannot compete! wrote:
> When the dollar nose-dives, there IS NO excess capacity -- exports
> will suck up the extra capacity, while Americans will be unable to
> afford extras. Good luck.

Your assumption re the dollar's direction is not supported. Collapsing debt reMOVes money supply, which removes purchasing power, far FAR faster than the Fed can create it. Those dollars remaining will be much sought after.

As for "The nature of the recovery", I think that is obvious - non-existence.

Sep 02 06:05 PM

[raylndn:]

Great article. I moved back to fixed income today from natural resourses. I do not know up, down or sideways, but I do know I want off of the ride for a while. I suspect sideways to down for a while. A great man I love to hate >>> Cramer<<< likes to say" Pigs get slaughtered<<< I say sell the news of the likely recovery.

Sep 02 06:19 PM

[Kevin_T:]

After all the money printed worldwide, all the stimulus, all the incentives to borrow even more money in an already over-leveraged economy we are to believe everything will just quickly go back to normal. As if nothing ever happened. No side effects. No inflation from the extra money supply chasing goods and services. Excess leverage which caused the current problem will cease to be a problem. Homeowners will again be able to tap their equity to buy luxury cruises and SUV's. Easy loans will flow from the banks for everything from mortgages to leveraged buyouts. Nationalizations and increased regulation put in place during the crisis will have no ongoing negative effects. Economic problems created by decades of government overspending, counterproductive regulation and mismanagement will disappear and it will be all utopia again.

Your view makes me feel better. Hope you are right. But I am being extra cautious just in case you are not.

Sep 02 07:22 PM

[punk_ash:]

these will be many such rallies and they will be there for one reason alone, that we suck in the retail investors each time. Ultimately, the retail investors will stop playing the game since this game will cost them their hard earned savings. Then, the bottom will be in and we will be in a new bull market.

Sep 02 10:09 PM

[Joe Shareho...:]

QE won't allow for deleveraging. QE supports debting up and continued spending even though we can't afford. Contraction, deflation, deleveraging have to happen. If not, we're not going to recover - we're reinflating bubbles. It all has to happen eventually, why not let it now?

Sep 02 11:44 PM

[bogoMIPs:]

Maybe Obama and Bernanke plan on playing the QE trump suit over and over until his entire term(s) are done. Then let the next guy catch the heat while they sail off into history as the good guys.

Sep 03 12:38 AM

[Mad Hedge F...:]

fghjkl. Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor. The bulk of the trading volume is now accounted for by worthless zombie stocks like Citibank (C), (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and not consumption. Puzzled CEO’s of every stripe are seeing no recovery in their businesses whatsoever. But bears who have sold into the summer rally have gotten a severe spanking. We are left with momentum players and chartists to grind out ever diminishing returns. I have used the big up days to sell short dated out of the money calls in small size which, mercifully, expired worthless, sometimes just by pennies. That’s because I keep my favorite quote from John Maynard Keynes pasted to my monitor; “Markets can remain irrational longer than you can remain liquid.” Better to wait for a more convincing break on the charts before piling on those shorts again.

Sep 03 12:59 AM

[Mike Kane:]

the credit crisis is still with us. Let us not forget that. This will only get solved with the passage of time and lots of pain, not through more stimulus

Sep 03 01:06 AM