Shape of Recovery?

The recovery of choice is the V-shaped recovery that bounces right back like a rubber ball thrown at the ground.  Our current projected recovery is expected to at best appear as a U shaped recovery which is still better than the dreaded “L” or double dip “W” according to IHS Global Insights.

The USA TODAY IHS Global Insight economic outlook index predicts GDP growth starting in September which is the first increase since July 2008.  Their prediction is based on 11 forward facing indicators, seven of which have turned positive.  The positive predictors include hours worked, building permits, real non-defense capital good orders, stock prices, bond spreads, light vehicle sales, and export orders.  The four negatives are money supply, crude oil, fed funds rate and the yield curve.

 Nouriel Roubini, professor at NYU’s Stern School of Business who predicted the financial crisis, has a different view.  He is saying the chance of a double-dip “W” shaped recession is increasing. 

UPTURN TOO EARLY TO CALL  Tom Irwin, armchair economist

This armchair economic observer for much of the past several decades is hoping for “green shoots” but feels that an upturn is too early to call.  Stock market indicators play to the beat of a different drummer and job growth and hence consumer spending just isn’t happening.  The banks took tens of billions without any mandate that they fulfill the purpose of their Federal and State Charters to lend.  They are not lending and that contributes to the continued contraction in the money supply. 

ECONOMIC STRENGTH CAN BE SEEN IN TERMS OF EXPECTATIONS.  BUT THE REBOUND HAS THUS FAR NOT SHOWN MUCH ELEVATION BEYOND THE HORIZONTAL BASE OF WHAT APPEARS TO BE AN ”L” SHAPED RECOVERY.

The US economy has been 70% consumer driven for a long time and those with money are saving, not spending.  This leaves the heavy lifting to be done by the government.  While Cash for Clunkers put a blip in the screen, overall government stimulus has been extremely weak given the magnitude of dollars aimed at recovery.   Since most financial injections are expected to take 12-24 months to kick in I am still looking for signs or growth in monetary aggregates and velocity. 

SHOW ME THE MONEY!

Feel Free to post comments on your thoughts on the shape of the pending recovery.

Tom Irwin

If you’re not different, you’d better have a low price.

Differentiation is one of the most powerful yet misunderstood of marketing concepts.  A differentiating idea is a competitive mental angle.   This does not necessarily mean a better product/service but rather that there must be an element of being different as percieved by the customer. 

How to differentiate your business?

To formulate a differentiating strategy look for an angle, concept or opinion on the part of the prospect that conflicts with the positions held by your competitors.  But the idea is not enough.  The differentiating ideas must find a position, not necessarily with the product or in the marketplace, but where the ultimate marketing battleground takes place- in the customer’s mind.  

 GetMorBiz Marketing can be a powerful partner in crafting a cost effective differentiating strategy to allow your business, product or service stand apart from look alike competitors.

 Working harder is not as good as working smarter.

The recession is likely to end in September, with a mild recovery beginning in October according to Global Insight. Their Economic Outlook Index tracks predictive indicators to forecast future trends. 

It may take some time after a recovery is underway before we see positive job growth.  But their data does offer light at the end of the tunnel for small business owners as well as job seekers.  The report did not address inflation but it is difficult to expect that our huge stimulus driven deficits can avoid it. 

The full article is in the current issue of USA Today-  http://www.usatoday.com/money/economy/economic-outlook.htm?loc=interstitialskip

If your interests include economics and which policies can best deal with our current situation you’ll enjoy Paul McCulley’s May, ‘09 essay on PIMCO’s website.

Paul, a prominent investment professional and Managing Director at PIMCO, explains how the unregulated Shadow Banking System became such a powerful global force and cites Hyman Minsky’s Keynesian based theories that predicted the current meltdown with uncanny accuracy.

McCulley goes on to provide an excellent assessment of and compelling justification for implementing stimulus to counter this severe economic contraction.  He does not reject classical economic models of Adam Smith or free market theories.  Rather they are viewed within a larger context.  Simply put, some models work some of the time but not necessarily all of the time.

A most interesting and enlightening read for anyone with a philosophical interest in financial theories along with a basic understanding of Wall Street economics.   

http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2009/Global+Central+Bank+Focus+May+2009+Shadow+Banking+and+Minsky+McCulley.htm

Berkshire Hathaway’s Buffet on the Economy- “Everything I see about the economy is that we have had no bounce” Warren Buffett told CNBC anchor Becky Quick in a TV interview. His position is that unemployment will continue to be a drag on the economy suppressing demand for everything from energy to cars and homes.

In an interview with Bloomberg News he said “It looks like we’re going to need more medicine, not less” and he believes the government may need a second stimulus package to turn things around.

Oil rose to $71 a barrel yesterday, a big jump from the low of $30 in February.  The increase is attributed to higher demand, news that proven reserves had fallen plus continued weakness in the dollar.  As the $2 trillion stimulus package makes it’s way into the economy expect a weaker dollar causing higher oil prices ahead.

Oil’s ripple effect will affect not only prices at the pump but prices in general.  May be time to rethink the value of electric/hybrid cars.

74% expected it to end in the 3rd quarter of 2009 with 19% anticipating an end in the 4th quarter while 7% picked the 1st quarter of 2010. This forecast is in line with the outlook from Fed Chairman Ben Bernanke.

WHAT SO YOU THINK?
Provide us your projection via Comments section.

Where will the $75B come from?
What does it mean for banking?
What does it mean for our standard of living?

Feds announced on Thursday results of their stress test designed to determine bank capital requirements in a worst-case economic downturn. BofA needs $34B, Wells $14B, and GMAC $11B.

It means that for the banks to maintain their required 10% Tier 1 & 2 capital in the event assets are written down to worst case estimates the banks would need $75B to remain solvent. The truth is that no one knows the downside exposure and the $75B figure may be too low.

For every $100 of assets (bank loans) the other side of the balance sheet requires about $10 capital leaving $90 to be made up of deposits (bank liabilities).  If the loan asset values were to drop 5% this would reduce assets to $95 with the $5 loss posting against the $10 capital account reducing it to $5 in support of $95 of assets.  This would be below the required 10% and the bank would need to find a way to improve capital to 10% in order to prevent government takeover.

The $75B potential capital shortfall can come from three places:
1. Banks sell stock to add capital.
2. Banks sell good assets to shrink the bank, lower the capital requirements obtain funds to strengthen capital.
3. Government steps in with capital and manages the bank.

Considerations:
1. Undercapitalized banks risk depositors making a run on the bank that could cause serious trouble. The government is trying to soft pedal this possibility by allowing time for funds to be raised.
2. Banks forced to sell assets to raise capital could shrink significantly. Twenty years ago problems at CalFed forced the sale of good assets causing the bank to shrink to 40% of its previous size. Left without the good asset they were acquired.
3. Government takeover of banks that fail to obtain capital could alter who gets loans and at what rates. Lending policies could even be an extension of social redistribution agendas.

Capitalism’s Weak Link:
The concept of free market capitalism has encouraged the flow of resources to foster productivity and provided us a standard of living envied around the world. But free markets consolidate as the strong consume the weak until competition is thwarted. Antitrust laws were created to maintain balance.

Twenty years ago we had hundreds of banks competing for our business. Today we have a banking oligopoly lacking in competition necessary to prevent punitive and abusive bank policies and fees levied by a few giants controlling the industry. Lobbyist agendas have served special interests that have prevented the use of antitrust laws to sustain competition.

The solution is not for the government to run industry because that would be the biggest monopoly of all. Government’s priority is to sustain itself rather than serve its constituents or clients. Without the checks and balances of stockholders, boards of directors and competitive markets our economic system will loose productivity, gain inefficiencies, and our living standard will be lowered.