End of the Recession!
Yesterday, we declared after the retail sales report that the “Recovery is HERE!” Bernanke followed on a few hours later (glad he got my email ;) , suggesting that the recession is likely over. Many readers contacted us yesterday, asking whether our view has changed. In a word, “no”.
In combating the 2007-2009 crisis, policymakers have thrown, almost literally, everything at the problem. They managed to get a “code blue” patient (economy) stabilized, but the patient is still in critical condition, and the convalescence period – even assuming no setbacks like unintended consequences from the massive government intervention - is likely to take years – and run us right up to the start of the real problems with social security, Medicare and Medicaid. The economy right now is on a morphine “high”, stoked by cash for clunkers and homebuyer rebates. These programs and their salutary effects should not be confused as signs of sustainable health of the economy.
A bit of history: From 1929 to 1932, US industrial production collapsed to a level previously observed in 1921 – an 11 year low. Beginning in 1932, production began “recovering”. However, production did not reach the 1929 level – and then only briefly – until 1937, and sustainable new highs in production came only after the onset of WWII. Policymakers today sooth that this is NOT the Great Depression because, among other reasons, industrial production has not fallen as much. Well, actually it HAS, on a relative basis. Industrial production recently fell to its lowest level since 1998 – an 11 year low. Technically, Bernanke is correct. The “recession”, defined by the National Bureau of Economic Research as a “significant decline in economic activity lasting more than a few months,” is likely over. But then he would likely have said something similar in 1932…
Roubini Takes Issue
We went to see Nouriel Roubini speak last night at NYU’s Money Marketeers’ 2009-10 kick-off event. Roubini shrugged off the “Dr. Doom” mantle, opting instead for “Dr. Realist”. In brief, he sees some US rebounding, but from a very deep hole. He looks for a “U” shaped recovery due to structural unemployment and the vast damage suffered by the financial system. He does not believe in decoupling as EM countries simply cannot compensate on a sustained basis for the lost demand from developed country consumers. He sees further hurdles from CMBS and RMBS. He believes deflation remains the key problem right now – not inflation – due to the lack of bank lending and consumer spending. He frets that the exit strategy from the current massive stimulus runs the gauntlet between 1937 US or 1998-2000 Japan-style relapses and a significant rise in inflation. Finally, he believes that the stock market is significantly overvalued right now, reflecting a combination of irrational exuberance and excess liquidity (aka “bubble”).
We’re mostly on Roubini’s side
We might quibble on two issues. First, we think the economic trajectory will look more like a “W” with no upstroke on the right side and not a “U”. Such a trajectory “marries” the current “recovery” with the long-term sub-trend growth outlook. Second, we’re less sure that the stock market is overvalued at current levels. We adamantly oppose the notion that stocks have entered a new bull market – such talk strikes us as “sell-side” propaganda. However, the S&P was at 1200 before it truly comprehended the memo about the ship going down in Sep’08. Consequently, to the extent that the ship is, indeed, NOT going “down”, 1200 does not seem like an unreasonable target for the current bear market rally.