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Double Dip Recovery W or V Shaped Recovery?

Friday, September 11, 2009

Double Dip Recovery W or V Shaped Recovery?

The match is set. It’s GDP versus Unemployment and we are currently only in the mid-rounds of this heavy weight match.
Up until our current round we have seen some back and forth between the two fighters. GDP has taken some pretty heavy punches on the ropes and even received a KO count in the initial rounds. Unemployment on the other hand has been growing stronger through the match, but in the most recent rounds this growth in strength has been increasing at diminishing increments while the visual impairment, from the heavy hits GDP has taken, seems to be on the mend.

All the while, the stock market crowd has moved from a state of despair and frenzy to one of optimism.  The state of despair came as the economy tanked and the amount of unemployed grew at a staggering pace.  The reversal to a state of optimism has grown at just as staggering a pace; however, this optimism has brewed as a result of analysts dire forecasts not being substantiated for the most part, not because the economy has been seriously improving.

So, where is this match going in the final rounds and whose forecasts can we trust?

This is where things get interesting. Do you want to believe the majority, the general consensus of all the Analysts that didn’t predict this recession, or do you want to believe the minority, a small group of analysts that were credited with predicting the current recession?

Let’s face it, most analysts simply wait for someone else to make a prediction and then they try to pull together the evidence to support that claim and call it their own. This is obviously not the way to accurate forecasts. On the other side though, the naysayer minority forecasts that diverge from the crowd sometime just make their predictions different than the consensus to receive attention.

Here’s what we know now:

General Consensus

• We are in recovery mode

• Unemployment in America should top out around 10%

• Jobs will continue to be lost in the coming months but at a slowed pace

• Company Balance Sheets are improving and expansion is around the corner

Naysayer Analyst (predictors of the recession)

• We are in a short term up cycle in the market with a further down turn to occur in the coming months

• Unemployment will pass 10% and likely reach levels nearer to 13%

• Job losses have slowed, but are still being lost and will keep being lost for longer than the majority think

• Companies will not begin hiring again for some time

• A total meltdown of the financial system is still a real potential

I personally want to be an optimist, I really do; however, there are so many factors pointing me to a more pessimistic view of the stock market and economy in general.

1. Consumer mentality has shifted. People are not buying like they used to; they are becoming savers instead of spenders

2. Debt levels of the average consumer are still at unprecedented levels and bankruptcies are still high.

3. Banks have not been required to disclose losses on their balance sheets.

4. The Bank Stress Test was based on 10% unemployment. Anything above that would make the test faulty in predicting defaults of the remaining banks.

5. Commercial Real Estate Vacancies are on the rise and these properties are highly levered with similar NINJA mortgages to what was written for Residential Real Estate. These mortgages are beginning to default and could lead to a second mortgage crisis in America. Look at General Growth Properties Inc (GGWPQ), used to be the largest REIT in the US. (this has the potential to be the knockout punch.)

6. The American Dollar is still collapsing. As the dollar decreases Americans are able to afford to less and less imports leading to even less global trade.

7. There is a stock market bubble forming in China due to lack lending standards. Chinese citizens are can easily borrow with no collateral and have been throwing everything they have into the stock market there. A short drop could cause a snowball here that would be felt throughout the world.

8. Oil prices continue to rise and this will make goods more expensive due to higher transport costs.

9. The stock market has rebounded far too quickly from this recession and this rebound has been based on purely speculation with lower and lower volume as prices increase.

10. Most fund manager have been taking profits and getting ready for the next shock wave in the stock market.

11. Gold Prices are still increasing as more and more money is diverted from the stock market into gold because of many fund managers concerns about the current market environment.

12. The US has thrown a ton of money at fighting this recession and that is leading to a lack of confidence in the US$ around the rest of the world. This could lead to a drastic drop in the value of the US Dollar.

13. The recession stimulus spending needs to be paid for and this will happen through increased taxes, which will detract from future growth.

These are just of a few of my concerns on the horizon that make me feel a bit pessimistic about the current stock market environment. There is also a list of positives, but I am still swayed this way for now.

If you are interested in what the analysts that predicted the recession are forecasting, take a look at Thomas Watson’s article “Economic forecast: Double Trouble“

1 comment:

Alan said...

#13: Most of the deficit will be paid for with naturally increasing revenues. As employment picks up and as companies return to profitability, government revenues automatically increase.

But apart from that, increased taxes -aka insurance premiums- do not reduce growth, if applied intelligently, they can increase growth by removing risk from the marketplace.