Don't Listen To Lou DobbsYesterday, the S&P officially "corrected" by sinking 10% off its recent high. Investors apparently swallowed their eggs and coffee with Lawrence Summers’ terribly gloomy piece in the Financial Times. Summers predicts--no, ordains--a recession.
Or maybe investors caught a glimpse of this appalling photo-op and immediately discounted a huge carbon tax.
Amid the angst, it's nice to read a piece like this one from David Brooks.
Highlights:
In the first place, despite the ups and downs of the business cycle, the United States still possesses the most potent economy on earth. Recently, the World Economic Forum and the International Institute for Management Development produced global competitiveness indexes, and once again they both ranked the United States first in the world.
And this:
[America] leads the world in a range of categories: higher education and training, labor market flexibility, the ability to attract global talent, the availability of venture capital, the quality of corporate management and the capacity to innovate.
William W. Lewis of McKinsey surveyed global competition in dozens of business sectors a few years ago and concluded, “The United States is the productivity leader in virtually every industry.”
And finally, this:
The U.S. standard of living first surpassed the rest of the world in about 1740, and despite dozens of cycles of declinist foreboding, the country has resolutely refused to decay.
Good job, David Brooks.
What do you think? By the way, if you think my citation of David Brooks' piece is yet more evidence of shallow optimism, let me tell you that I'm feeling the pain. My largest account of stocks is not off 10% from July 2007. It is off 20%. I'm in bear territory!
But I remain optimistic, both about the U.S. economy and U.S. stocks.
Post your comments below.
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America has always had a culture of productivity. There is no question that we are the most productive country, which makes it all the more remarkable that we are doing this with a tax and regulatory millstone around our necks.
Imagine how productive we could be with a system that actually encouraged our best attributes rather than our worst.
To keep the miracle going we badly need structural government reforms.
A country, like an entertainer, is only as good as its last few years. I hope we don't end up like Elvis, a huge ledgend that died on the toilet of a lude overdose.
Lawrence Summers is writing on our economy for the near term.
David Brooks is taking the long term view.
Both are right, we're in a recession now, but America, of course, is bullish long term.
ye know? i never have any slightest idea of why people are so afraid of a recession. from the very birth day of capitalism, recession is destined to be part of it. so why are people afraid of it?
actually, without recessions, capitalism won't be so great.
speaking of the portfolio, 20% off the high is too big. i or so remember that in July , even the T-Bills were trading at 4.
9x% yield. and a lot of time to go to a defensive portfolio. if an investor was not so confident about his stock-pickings, he will have enough time to adjust the position into a ,say, 40-50% Treasuries, when the yield is good. now the yield of treasuries are paper thin, this short term tactics won't fit any more.
but, let's do not forget the U.S. stock markets are the biggest in the world. so even now it is not too late to change a portfolio from a highly speculative one into a conservative, defensive , value-oriented one. if i were, if i were a U.S. investor, i would now choose some high dividend stocks along with some closed end bond funds. that's a fools-proof formula investing for some layman investors. and don't forget to enroll the DRIP. because with the DRIP, and provided that your picks stay within the intrinsic value range, you could rather be happy to see the price plummet in a turbulent period. and my estimation is you can get a 15% annual return on such a portfolio without too much trouble. and when the recession are short-lived like the recent dozen, and thanks to the possible down in price temporarily, the annual return could be easily above that 15%.
My question is: Can Rich optimism us out of this crisis? That doesn't sound quite right but I am not the one for words. The biggest problem is not the mortgage market, the willy nilly printing of money as stated above or Lou Dobbs(Use your clicker and shut him off). The problem is the energy for transportation cost, or oil. I asume you all there at Forbes help write Rudy Giuliani campagne notes. Tell him to address this fuel issue. I see him daily talking about the lowering highest corporate tax versus socialism(Which I know came from Forbes), instead of a fair tax to all. Don't keep forgetting that the middle class keeps the ball rolling.
BTW, since I have read your blog, you have owned a Zune, a crackberry, and now the I-glitch. What happened to the Zune?
--continued
what investors of all sorts should be concerned about is the possibility of the stagflation (not a recession).
so if the powerhouses on Wall Street keeps asking more from Fed, and if the Fed played the Wall Street's ball, then no one investor's any one portfolio in this world is safe.
Where the heck are you getting investment advice? My portfolio is up 2 percent this month and 10% year to year.
We are seeing a very effective and needed correction. Housing, especially in urban areas is horribly overpriced and needs to come down. Speculative real estate areas, like Vegas, was not horribly overpriced....it was dangerously insane.
But that doesn't mean a lot of people are not going to feel any pain. The mortgage industry got greedy and they are paying for it now.
Productivity growth is off-the-charts; unemployment is about 4.5%; and immigrants still stream to this country by the millions in order to get a piece of the action. Oh, and restaurant service is pretty bad at Morton's. How can this be a recession?
What we have is indigestion caused by speculators who financed long-term purchases with short-term financing.
Goatrope, I agree with your thinking. I also do not see any pullbacks by consumers. Reports I read show that Friday purchases were 8% higher than 2006 levels. Airline industry bookings show that air travel was probably 4% above year ago levels. Neither of those sound recessionary.
All that you quoted from David Brooks are true, and likely continue to be true for years to come. But that does not mean a recession won't come. Indeed, given the horrendous economic excesses and recklessness of the past decade, a recession is good. Nothing fixes like a good recession. Unlike the past, this time we have a convergence of excesses in many fundamentals, a house-of-card type of risks. Readers of this blog should not be swayed by self-interest agenda from those connected with big media and Wall Street, but should take a good look at data, facts on the ground.
Excerpt from Nouriel 'The Prof of Doom' Roubini, (Professor at NYU Stern School of Business) - recently predicting a generalized meltdown of financial system:
"I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized."
Full article at:
www.rgemonitor.com/blog/roubini/228234/
The thing with Roubini predictions is - he has proven to be right just about every time. Interested readers may find enlightenment from Roubini recent presentation at the IMF. Just go to imf.org and search for Roubini.
Long-term - optimistic, although failure to invest in infrastructure (we are too busy blowing up Iraq) will come back to bite us on the butt.
Short-term - every binge creates a hang-over, and the Bush hangover is gonna be a big one. Bush thinks that because Wall Street and K Street are prosperous that everyone is prosperous. Such fantasy land thinking has led to bad policy on both federal revenue and federal spending (general fund deficit this year about $550B).
Rich, Why should your portfolio not have taken a serious beating?
We've talked about market anxiety.
We've talked about further write downsd once accounting firms stick their nose in the numbers.
We've talked about the Bush White House making a mess of our credibility.
Is all of this catastrophic? Not really. Consumers still have a lot of room to spend. We're not facing a mortgage crisis but a liquidity crisis, worsened by tightening credit standards . Our natinal debt relative to national productivity still remains one of the lowest in the world. Corporate balance sheets are healthier than have been in years.
I assume you've invested soundly and not put all your eggs in one or two baskets. Even if the Fed is poor at resolving the problem, you're young enough to recover from another decade of inflation and flat markets.
Think positively. How long has any crisis lasted in history of financial markets? And to be positive, how many markets other than the US markets can survive a decade of turmoil such as the last decade?
The numbers are in your favor. History is in your favor. Angst is against you right now, but the consumer will soon forget that. Stay put.
The fact that a company is a great company doesn't automatically mean that it's stock is a good buy. Valuation is always a concern. Similarly, the fact that a country has a great economy doesn't automatically mean that equities in that country are a good buy.
GE in 2001 was a great company, but it's stock wasn't worth what people were paying for it.
Don Wills...I share your concerns about inflation, but when you say "$8B got created yesterday"...I assume you're talking about the activities in the repo market? My understanding is that these transactions represent short-term secured loans to banks. Is this really creating $8B in new money? Seems like *at most* if these repo transactions were repeated every month for a year, they would have effectively added $8B to the monetary base--not $8B times 12 months. Any economists want to address this?
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5tREH0PkNj0&refer=home
Rich,
You know I love you, man, but all of this recession talk reminds me of the tobacco and global warming debates. Very simply, those who want to paint a certain picture will always point to the millions who DID NOT die of lung cancer...or will ignore what seems to be obvious signs of climate change...or will reassure us all that, contrary to how the stock market is behaving, a glorious bull run in on.
Someone put it very well the other day. They said that Americans require a much higher degree of proof before they will act/change. In fact, we often demand that there actually be blood on the floor before we move.
So...when we see this see-sawing in the market, it reminds me of the big drop in the 90s. I kept seeing these big drops, followed by strong rises. It was as if the market was trying to decide: UP or DOWN? Since it's safer to be out of the market than in it at such times, down inevitably wins...until it is low enough that it is crazy to be out of the market.
Wait for it. It's coming.
IMO, the biggest difference between the coming
recession/correction (whatever you want to call it)
and most previous downturns is the fundamental
weakness of the dollar vs. the world. The trade
deficit, debt held by foreigners, budget deficit,
and most importantly, huge liabilities due in the
next 25 years to baby boomers, along with willy-
nilly printing of money ($8B got created yesterday)
may result in a wholesale collapse of the dollar,
not unlike what happened to Germany in the 1920s.
I certainly hope that it does not happen, but it is
a possibility that is hanging over the head of all
who hold dollar-denominated assets.