Hi ep,
Please read this in the spirit in which it is offered. This is sort of a "worse case" scenario for the conservative investor. I realize that you and I have a differing bias in this regard, and I would like to be able to accept a rosy scenario from here. However, like dabum, I see some serious impediments to a rapid turnaround to our present predicament. That said, here goes:
There was a misunderstand in our prior back and forth. I meant to agree with you that the recovery might come by late sping 2003, not, as your latest message indicated, within the next six months. I'm thinking more like 18 months. Certainly more of a Dr. Doom version than you are expressing.
Let me work through your litany of plusses for a Spring, 2002 recovery and comment:
1) Income tax refunds - people getting laid off now will have big refunds.
Keep in mind that the $300 and $600 "refund" checks that Americans have received recently are actually merely an advance on refunds that would have otherwise been returned to taxpayers next April. That amounts to about $280 Billion of stimulus which has already been front-loaded and won't have the usual impact in the spring.
When you think about where those big refunds of the unemployed will be spent, it will not be on vacations, travel, big ticket items or other stimuli to the consumer economy. People will be using the refunds to pay the mortgatge and the interest on their ballooning personal debts. Not much stimulus there.
2) Recent intrerest rate cuts & liguid increases will start to show up all over the economy in about 6 months.
Undoubtedly there will be a boom in mortgage refinancings, should mortgage rates decline dramatically. A mortgage banker friend of mine has pointed out that over the summer, there was no correlation between mortgage rates and the decrease in the Fed Funds and FRB discount rate. In other words, mortgage rates remained in a band, while the other rates were cut. I would suggest that in an economy headed toward 7% unemployment, that mortgage lenders are likely to tighten credit requirements rather than loosen them in order to keep their default rates at a reasonable level. Lender wariness is certainly anti-stimulative.
3) I think it takes time for people to digest events. After about six months of feeling down and fearfull, the will be a swing back.
It is not beyond reason that the al Qaeda forces will be aware of the psychological swing points in our national psyche and mount further attacks on our infrastructure to de-moralize our population. The result will be to put the American economy on more of a war footing and the consumer is going to be less inclined to feel that a trip to Disneyland is the patriotic choice of action. Probably preferring to beef up the fallout shelter instead.
4) Spring & more daylight will make peole feel optimistic.
It certainly does for me. Other things being equal (see point 3)
5) I expect the Christmas retail season to be a mess, and this will ahve negative effect for at least three months.
The American consumer has been primed to expect bargains in any time of great economic stress. The result is that the retailers are in a total bind here. They've got inventory headed toward the malls that simply will not be sold at a profit. I expect the earnings of the retailers to be exceptionally anemic in the fourth quarter and sector to be doing some consolidation next spring. We were dramatically over-stored in this country even before the tragic events of Sept. 11.
6) I expect year end bonuses in to be far smaller than ususual, and that will be a drag until tax returns put money in peoples pockets.
This will be true in the lower echelons of the investment banking industry. Keep in mind though that many of the star producers during the late bubble were able to negotiate iron-clad bonus packages for this year in advance, and a number of these will undoubtedly be honored. What will happen to the bonus pool this year is that the boodle will be shared with a far smaller circle of elite recipients.
7) Lower gasoline, heating oil and natural gas prices will get to the consumer by January, and the lower prices will have cummulative positive effect throught the winter months.
So far, I'm very impressed with the wisdom of OPEC to allow the present production levels to be maintained, in spite of the fact that they are going against their stated policy of maintaining a price of $22-27/bbl of crude oil. They are being exceptionally co-operative in trying to stabilize Western economies. This is certainly a positive note in all this mess.
I hope you are right about a 2002 recovery. I am really looking hard for the reasons that this would be the case. The energy story is the most positive aspect that I see. The disarray in the transport sector may work itself out by spring. That would be a very positive development. I'll keep my fingers crossed.
Best, Ray |
