Back in March (Friday the 13th to be specific) shortly after the DOW hit new lows....our department started a "pool party" on when and at what point the DOW hits bottom.
I will be out of the money here shortly as I had guessed July 8th at 6394. Thinking CRE was still to hit the fan as well as inflation.
I'd like to get everyone's thoughts on our macroeconomic situation here.....in particular the answers to some of the questions below.....
In theory the stock market is a foreword looking indicator (not sure I agree). Curious to know what others think, was March 9th bottom, or is this another false rally...yet to plumb the depths of the market?
Opinion on the recession..... are we really past bottom...bumping along bottom? If so, long recovery (L) or short recovery (V)? If not, why not?
I've also heard a lot of conflicting thoughts on inflation. Some think we are in a liquidity trap, others think inflation is going to take off very shortly here. What do you think?
Will market volitility ever abate?...in particular I am refering to commodities like oil. Steep swings in prices are really tough for industries like aviation to digest and will be a huge drag on recovery. Is it speculators driving the wild swings or legitimate concerns about the dollar and inflation?
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I'm no economist and my crystal ball hasn't worked well lately, but from news readings and personal observations, my sentiment is that:
1. US economy will bottom out by the end of the year. Especially Q4 2008 being a low reference base, Q4 2009 gdp should show growth.
2. Recovery will be slow at 2% gdp growth level instead of 3%. Same in EU and even less in Japan. Emerging countries especially China and India will grow at high single digits which will help the global recovery.
3. Inflation will not be a problem for a couple of years but will be an issue in the long run. Right now, US treasury has increased the money supply enormously but the velocity of the money has not increased, i.e, the money is sitting at the banks and financial institutions. Demand for credit is not high and whoever needs it is not getting much, especially mortgages and refinancings.
4. The dollar will weaken inevitably due to the money printing but it will continue to be the universal currency, so commodities will rise in cost for us. With the US auto industry debacle and legislation changes as the recent energy climate bill, we'll probably depend less on oil in the long run. We need to.
Well, those were my 2 cents FWIW.
Quick answers:
1. "Short" rally, but who know when it ends. There was no psychological capitulation in March.
2. Recession will end this year, but we won't find out until 2Q 2010. By then, we'll be having a sovereign debt crisis in Europe which will dampen the enthusiasm of the market. Follow-on effects will put the US back in recession by the end of 2010. "W" shaped.
3. Whether we spend the next 10 years in an inflation or deflation is a pure guess. Inflation is a policy choice that the Fed could make at any time; right now they're taking actions that are inflationary, but the debt deflation is more than counteracting the effects. I wouldn't put much stock in an inflationary outcome until wages start growing. By that metric, we've been in a deflation for a long time, with credit masking the effects.
4. Volatility will continue as long as speculation is permitted in core commodities. Last year's oil spike was pure speculative pumping, and it won't stop until the investment banks are banned from these kind of activities.
There's my two cents, all of it probably wrong. :)
I'm inclined to stop guessing what will specifically happen, or when, but...
I have a sense that the best course of action for me personally is to save money, earn as much as possible while I can (before the gov. starts seizing more of it) and to resist buying anything large like a house or a new car.
And now that I think of it, my reaction is probably pretty typical. That would mean: Americans in general will be saving more and spending less, which means lean times for consumer businesses, poor earnings for stocks, followed by more cost-cutting, higher unemployment, etc., etc.
Bottom in 2009? I think not.
The market went from pricing in a depression to now pricing in V recovery. No supporting evidence for that.
Maybe the recession technically ends this year, but only technically. Jobs are the real problem, we have an continue to lose so many that it will take years or decades to recover.
And you still have a problem with overbuilding. There is a huge supply out there and not enough demand.
So I predict that the recession technically ends between 4Q09 to 2Q10.
We continue to lose jobs all of 09, maybe in 2010 we stop losing jobs and start adding a few back (though nowhere close to what was lost).
I am not sure that the market has seen the bottom yet. Big problems are the CRE loans and CC portfolios. CC companies are seeing 10% or worse losses and that is not sustainable.
Even after the recession ends and we start to add jobs, home prices will continue to decline. Maybe they find a bottom in 2010 or 2011, but probably not until 2012.
Rubbing my two shiny coppers together...
Market fluctuation is driven by media and fear. One mention of the swine flu and the market tumbles. August is a typical month when the market is down be/c of the psychology of the calendar year; ie, end of summer, payments for college, gearing up for the fall and there is a need for cash. I don't think we will see that this year.
Recovery will not be based on historical indicators but will be redefined and we won't know those definitions because of their lagged effect. I think it will be like easing a car into first gear and coming off the clutch, it will be slower than we think but once there is traction it will move steadily forward until it is time to shift gears.
The FED has a spinning compass as to inflation and when to change their school of thought. The problem is going to be long term in soaking up all the money they put in the market. As the economy takes traction inflation will rise but the FEDs will stay ahead of it and thus slow growth to keep inflation in check.
I think Giacomo hits the nail on the head with the old "green" slogan, think globally but act locally. We all want someone else to start spending while the every day folk remain sceptical and continue to save until they see some signs things are moving ahead. What is Mr. Buffett doing these days? What is being bought and sold?
I think the best view is going to come 20-30 years down the road and there will be a forced lifestyle change that will include SSI and Medicare. What we know today will be very different in 10 years.
Preparation is going to come in the old adage, take care of yourself and charity will be within the community.
The air conditioning went out on one of our trucks yesterday. Ordinarily, we would have had it fixed within the week. But with some of our clients shaky, AND the government coming out with expensive proposals and new targets for taxation and regulation every other week-- we will probably just keep the money in the bank and do without the repair. For the next couple of months, whoever draws that ride will just be uncomfortable.
Multiply that type of decision several million times, imagine the job losses that follow, and you can guess at the nation's near-term appetite for taking on new vehicles, new houses, or new debt.
I'm thinking first about my family and my business when I decide how to spent and invest. I'm NOT thinking about Sacramento's revenue stream, any Obama/Pelosi agendas, or any NAR/MSM projections.
A caveat before you read the post. I didn't back up anything I said with data, these are just my sentiments from readings and personal encounters with people I know.
Consumer confidence seems to play a very large role in this recovery worldwide. Look at the stock market today.
In emerging economies like China, despite the tens of millions of unemployed workers as a result of drop in exports, I see that the still small ascending middle class is eager to consume, and even 10% of the population is a lot of people there. A couple of weeks ago, a local friend told me: "we are not going to give up the "American Dream",now that our turn has arrived." It seems that China will grow the 8% the government set as the minimum to avoid social unrest.
In Japan, where I live, consumers have always been cautious, saving lots for rainy days - which have arrived. I don't see a whole lot of change in their attitude despite the horrible gdp statistics and the looming unemployment (it takes longer for Japanese companies to effect the lay-offs they announce).
In Korea, where I am today, my friends tell me that they are downsizing their standard of living, but that it is diffcicult to give up the after school education for the kids (expensive English, piano, dance, etc classes, so they are trying to cope, but in a gradual way.
It is in the US that I see the strongest resolve to change the lifestyle, as Giacomo testifies. Not addressed to him, but in general, I wonder if we Americans will give up the overcomsumption lifestyle and start saving as the Japanese do for the long run. Credit will be plenty again sometime down the road, and despite all the regulations we are seeing in place, it is not possible to regulate an individual's desire of consuming beyond her own financial safety levels.
Well, sorry for straying a bit from the OP, but here it is FWIW. Good luck to everyone.
Cheers to all as we round the corner on the new fiscal year here in California. I am being told as an analyst for the State, that I am to receive yet another mandatory furlough day thus lowering my pay by 14.6% Thank you very much. Since the SacBee does a decent job of rant and rave about state workers I will let it go at that.
In the past as I still do today, the person who "wins" is the person who plans their journey to reach the destination of their desire. In this case, it was our family's goal to save enough money so we were able to retire on our terms in our choice of locations. The market what it is today means we have had to take a deep breath and perhaps rethink or just pause the course. No worries we will get there but under a differnt definition perhaps.
This last fall we did not realize we were in the market to move and after repeated questions from neighbors while painting the exterior of our home, we ran the numbers and did move. The prize as we saw it, we had saved our money, we did not over extend / consume and in the process was able to carry two mortgages until our old home sold. We were able to move it quickly be/c we were not greedy and had not taken out a series of seconds or HELOCS to "tap the equity". We viewed our home for what it was, a home and not a cash cow.
I have an experiment for Giacomo, if you have a truck without A/C and you choose not to replace or repair at the moment, then perhaps you could offer a small financial incentitive to the driver. I theorize at some point the AC will not be the issue but the added incentitive. To take it one step further, it could force a change across your crew where they have a choice in what they want/do. Would it ever get to the point where no one wanted A/C but the incentitive? And that would become social change in a small experienment.
If you look at the economy today and think about decisions and choices in both the short and long term, if the incentives for change are great enough, people will change. It is unfortunate that some decisions are forced upon people through the cutback of social services but where did it become a right that family members should be paid to take care of relatives when it used to be family obligation in the past? We want the government to pay for what we should be doing anyway?
Off my economic soap box for the moment. I might set up a blog that will allow further economic discussions as these to continue. Hat Tip to Average Buyer for the hosting and informative blog.
Jeff,
Sorry to hear about the mandatory furlough - this kind of thing throws one off the track of any long term financial planning. Not your case, it seems, thanks to your wise and conservative approach to spending and to preserving your home equity. I wonder how many people out there were prepared for times like these.
The other side of the coin will be the inevitable rise in taxes in Ca and most states deeply off budget. I've been looking into purchasing a home in the Sacramento area where I'd like to settle, but state taxes may be a big obstacle. I've read in the blogs that many retirees are moving away from Cali simply to avoid the tax load.
I like the concept of your little social experiment with Giacomo's broken A/C truck.
As you said, if the incentives are great enough, people will change. The trick may be that, as in the Marlowe's pyramid, we will have to descend one level to be motivated by basic incentives. Our comsumption desire has a lot to do with social acceptance as illustrated by our need to keep up with the Joneses.
Oh, well, I suppose the New-New Economy is taking care of moving us a step down the pyramid, and we will eventually adapt to the new rules.
Thanks to AB for the great blog site. I've learned a lot about the Sacramento real estate and community through her and everyone else's posts here. I hope you will continue posting here interesting discussions as this one.
There is a lot of discussion that says people are motivated by pain and or pleasure. I think it is better defined by "willing to pay" and "willing accept". When I managed people and would have to have discussions with them I would explain there are only two boxes; Yes and No. They get to pick either one because there is no Maybe box. Kept in perspective, it then becomes a Game Theory matrix of Yes / No decisions.
California has some really great things going for it. However, you have to pay at several points along the way to enjoy them. Sacramento is very unique in the standpoint that it is both isolated as a metro area of itself and yet maintains a great location in proximity to the ocean and the mountains. We came out of the Bay Area where we were priced out of the housing market in 2000. We were WTA not being close to San Francisco (I used to have a sailboat and lived in a marina on the bay) because we were not WTP to rent or pay the higher costs.
Every place has its pros and cons. I would like to live in China for several years to explore and learn their culture. I have traveled through several Asian countries and truly enjoyed it. However, there is nothing like coming home; in my case, that is Sacramento and I feel as though I and my family have put down our life long roots here. For that I am WTA the government and WTP for what I enjoy and will make the financial decisions to enhance that.
Again, ~tip of the hat to AB.
Thanks all for the thought provoking responses. We definetly live in interesting times. I especially enjoyed the more global perspective.
Been on vacation and haven't picked up a newspaper for a week.
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