Most forecasters and investors believe the Great Recession is over and look for a robust "V" recovery in 2010.
But cash-for-clunkers and other temporary stimuli that propelled third quarter growth will be absent in 2010. Excess inventories will keep housing subdued. More-than-ample commercial real estate and excess industrial capacity portend weak plant and equipment spending. Exports depend on economic growth abroad much more than on the dollar. And U.S. consumer retrenchment will subdue the growth of the many foreign export-led economies, including China. Also, the buck looks ready to rally.
A V recovery requires U.S. consumers to return to their profligate free-spending ways. We continue to believe, however, that they have reached a watershed and after a quarter-century borrowing-and-spending binge, are mounting a decade-long saving spree. And labor markets will remain depressed due to consumer retrenchment-inspired slow economic growth and zealous business cost-cutting.
Unfortunately, Christmas sales in 2009 were only marginally better than 2008's dismal performance. As a result, I believe that the recession will probably stretch into mid- to late-2010, and will only end if the massive fiscal stimulus results in job creation. That will disappoint stock optimists and probably be followed by a slow, jobless recovery. In this atmosphere, deflation will likely be chronic. So my advice is to take profits in top stocks market now while you still can.
As a reader of my Forbes columns, you're probably aware that the investment strategies I laid out early last year were extremely accurate. Subscribers to my Insight newsletter have profited handsomely by getting bearish on financials and real estate stocks way back in 2007 at the top of the market...and they've continued to rack up gains as we've taken advantage of the market's recovery in select areas.
Here is the situation that we now face: Government spending and borrowing are what kept the economy from going completely into a ditch in the past year, but the longer term impact of all of this government aid and growth in the size of government will choke our economic growth for several years to come.
It's tempting to conclude that the fallout from the financial crisis and housing bust are behind us, but what we now face is a period of economic stagnation similar to what we went through in the late 1970s under Jimmy Carter.
Years of Stagnation
Six forces will slow U.S. and global economic growth in the next decade. First and foremost is retrenchment by American consumers. Also at work will be financial sector deleveraging, weak commodity prices, increased government regulation and economic involvement, protectionism and deflation.
The combination of these forces should result in 2% annual growth in real GDP. That's considerably less than the 3.3% needed to keep the unemployment rate steady. We'll see it leap from a tad below 10% this year to 23.2% in 2018.
Dangerous Levels of Government Dependence
High and chronically rising unemployment is clearly unacceptable politically and will spawn massive federal job-creating projects—and many more Americans who are dependent on the government for major parts of their income. They already numbered 58.2% of the population in 2007.
From 1950 to 1980, those with their feet planted firmly in the government feeding trough swelled from 28.7% of the population to 61.2% as state and local aid programs brought on tens of millions of new food stamp recipients.
By 2018, 67.3% of the population will be financially dependent on government.
Think about that for a moment. If the livelihood of two-thirds of the U.S. population relies on government money, what does this imply about the size of our national debt...or for that matter the solvency of the U.S. government?
Private sector job growth will continue to be restrained by globalization and outsourcing abroad. In contrast, U.S. governmental bodies have no foreign competition and no incentives to promote productivity or efficiency. I've noted many times over the years that government productivity ranks with military intelligence, vegetarian vampires, beloved mothers-in-law, congressional ethics, postal service, jumbo shrimp, tax simplification, airline food, wild game management, the usual suspects, and working vacations in the realm of great oxymorons.
What's amazing, and perhaps speaks well of Americans' conservative fiscal instincts, is that the river of government goodies isn't already a flood with more than 50% of the population on the receiving end. Why haven't voters already voted themselves more handouts? And what will it be like if the ratio climbs above 60%? Will the threat of runaway deficits and worries over an increasingly government-controlled economy provide adequate restraints? Hopefully.
Our investment themes continue to center around a further weakness in housing and the deepening recession that is now the longest since World War II. The collapse in house prices eventually will benefit rental apartments and manufactured houses.
We also believe that a faltering economy will put more pressure on profits and top stocks to buy, and initiate chronic deflation, supporting lower Treasury yields. We expect the dollar to rally as economic weakness abroad exceeds that in the U.S. and as commodities resume their weakness.
Increased government regulation and economic involvement here and abroad are the normal results of severe economic and financial problems. By curtailing risk-taking and efficiency, they will impede economic growth. With most nations still zealous to produce and export while the U.S. is no longer the big importer, protectionism is a serious threat, too, especially with sluggish global business activity. Just look at the trade war that has erupted between the U.S. and China over tires.
I personally invite you to subscribe and benefit from our long-term economic outlook, spelled out in detail in every issue of Insight and in many useful and informative reports in future issues.
No comments:
Post a Comment