Ray Hendon

Seeking Signs of Recovery

Correction on earlier answer: to Cetin Hakimoglu. My first answer shown. The beginning of the second paragraph read: "I'm not so sure I agree with you that spending will return to negative territory."

I used to word "spending" when I meant to write "savings." I have no rational explanation of how I could commit this bad an error in language. I apologize for the error.

Ray

Seeking Signs of Recovery

Thank you, Alphameister:
I appreciate your encouragement.

I am also glad the outlook for a recovery is shifting from an unambiguous pessimism to one of at least a mixed outlook. There are some encouraging signs, but there is still tons of bad news that is assaulting us every day.

The questions and comments on this article is the best I can remember. So many people with well informed opinions and questions. My thanks to all who have contributed. Each of you has added important information on a subject that takes arms much longer then mine to completely comprehend and convey. There are so many pieces that fit into a picture of our economic malaise that it would take an army to put it together--or at least that is what all the King's men are trying to do now.

Best Wishes,

Ray

Seeking Signs of Recovery

Chleoke:
Unemployment for this recession is of a different class than of two shown on the chart you suggested. This one is a major downturn--not a temporary dip. Also, unemployment is a lagging indicator. It will be the last thing to turn up, long (months) after the economy and stock market have begun recovering. Once unemployment has recovered to its normal level (4-5%) unemployment, the increased spending resulting from the expanded payrolls will itself propel the economy higher. But, this is the last stage of recovery, not the first. There is a different time-frame for the various stages of recovery. My article has dealt only with the beginning of the beginning.

Best wishes,

Ray


Best wishes,

Ray

Seeking Signs of Recovery

guitoon: I do not think we will have a robust recovery. I agree with you that the credit situation needs to be cleaned up first, and it seems to me to be a long way off. But, other influences are also at work in helping bring us back to a healthier economy. If the stimulus plan does put people to work, that, in itself, will be a big push, and generate much needed payrolls that, in turn, will help stimulate spending.

Yours is a good point as to whether the stimulus is enough. Paul Krugman doesn't think so, and neither do many others. My best guess is that if the current stimulus doesn't produce a self-sustaining surge, then more will be coming soon, and the other measures relating to recapitalizing our banks may get the financial markets back into something resembling sanity. At least, that is my hope.

Best wishes,

Ray

Seeking Signs of Recovery

Minlita: I agree with your analysis, that many of the signs are not encouraging. But, I do see some signs that the worst of the real estate price collapse is leveling off, and that many of the hardest hit homes are now being bought by first time buyers and speculators.

But, I don't think the recovery depends on housing prices. A stable real estate market will help, but, in my view, it is not the essential ingredient in a move to recover. We can live with lower house prices if they can be sold and supported by legitimate mortgages. Earlier buyers will take it on the chin, but that is the nature of investing of any time. Sometimes it doesn't pay off.

Also, there are many emerging market economies that are already in a slight recovery. There some basket cases are in Eastern Europe, but the IMF plan for currency intervention has already earmarked huge sums for that region. It would help if Germany would step up and offer some help, since they are the major trading partner of most of Eastern Europe. But, the IMF and
World Bank can bring off a recovery with the help of the other G20 members.

Thanks for you well informed comments.

Best wishes,

Ray

Seeking Signs of Recovery

fatcat: I think old trader is right. Price cuts are in order when you have produced too much product,and that describes much of American manufacturing right now. When a recovery begins, that will help manufacturers get back into production and use some of their idle capacity. But, it will be some time before there is any pressure on prices. This will be way down the road.

Best wishes,

Ray

Seeking Signs of Recovery

Bull Run: I must disagree with your predictions of inflation, at least for any time in the next year or so. American productive capacity is now running at about 66%. There is no room for price increases with this kind of excess capacity hanging around. Search the record and see it you can ever find a period of high inflation when capacity utilization was so low.

Don't be confused with the huge money supply increase with any change in prices. When a liquidity trap is working, as it is now, all the surplus cash pumped into the system just sloshes around financial institutions, doing no one any good, nor, doing any harm.

Once production recovers, then inflation become something to be concerned about, and at that time the Federal Reserve Open Market Committee will have a large agenda protecting price levels and the value of the dollar. But, to me, that seems a long way off.

I must confess, however, that I have no special looking glass that reveals the future. My guess are just that, guesses. It may turn out that my suppositions are 180 degrees off the mark.

Best wishes,

Ray

Seeking Signs of Recovery

tziv: No, the federal government is the only governmental entity that is empowered to create money. States and municipalities do not have this power.

Creating money, by the way, is much different than printing money--these two functions are quite different and should not be confused.

Best wishes,

Ray

Seeking Signs of Recovery

Duderonomy: I did not use unemployment numbers: I used job losses--a related, but different measurement. I agree that the unemployment rate is a lagging indicator. It will come down some months after the recovery begins.

Business inventories have been sold down--that was and is the aim of businesses that are selling less than they planned. Once demand (spending) recovers, then inventories will be replenished, and production of those goods will be stepped up. But, if the increase in demand is tepid, as I fear it might be, then the recovery of inventory production will also be tepid. I don't know if it will work out that way, but my analysis points me in that direction.
I don't see us returning to previous levels of production in many areas--the spending required for that level of income just isn't going to be there for some time. I do believe we will have a recovery, but it isn't going to be a V-shaped. More like an elongated U--very elongated if my worst fears are right.

As far as other variables, I chose the ones that I think are relevant to a turnaround this year. Interest rates are important, as is the money supply, but if the economy is in a liquidity trap, as we are now, then monetary policy must take a secondary role. You can pour money into the banking system, but you can't make borrowers borrow, and you can't make lenders lend it they don't see it as to their own benefit. If factories are closing, there is not going to be much demand for borrowed money to build new ones.

Best wishes,

Ray

Seeking Signs of Recovery

Cetin Hakimoglu: You are correct that homeowners cashing in (and spending) the equity of their home was not the only contributor to the spending bubble. My point is that spending was high for many reasons, including those you point out, but it was the last straw on an already supplied-constrained economy. It pushed prices much higher and contributed greatly to manufacturing output. Furthermore, this kind of bubble-associated spending will not return for a long time--and its presence will be missed, because it means a lower level of production and income for the nation. We will simply have to adjust to a little less than we got used to.

I'm not so sure I agree with you that spending will return to negative territory, later this year. The great depression left a huge mark on those who endured it. They saved more for all of the rest of their lives. They worked hard and spent frugally.

I am not saying that our current situation is near as traumatic as the great depression, but it is of significant magnitude to cause some permanent change. I think that Americans will be saving more for a long time, even past the beginning of the recovery. Confidence is shaken, and shaken citizens are more prone to pull back. I may be entirely wrong, and I hope I am, because a return to heavy spending would accelerate the recovery.

Thanks for the comments.

Best Wishes,

Ray