So the sky did not fall in. While the Chicken Littles of the world economy, led by Gordon Brown, George Soros and Warren Buffett, may still repeat mechanically the IMF’s surprising judgment that the world – especially America – faces its worst financial crisis since the 1930s, their hearts are no longer in it. Mr Brown, after his election woe, can no longer blame the world economy for his political failure. Mr Buffett, having speculated against the dollar for years and declared that credit derivatives are financial weapons of mass destruction, has finally begun to find attractive opportunities to invest his money and told his shareholders last week that the worst of the credit crisis was probably over. Mr Soros, in his forthcoming book, The New Paradigm for Financial Markets, states unequivocally: “We are in the midst of a financial crisis the likes of which has not been seen since the Great Depression.” But after making $3 billion for Quantum Endowment Fund by anticipating last year’s bear markets, he is now hedging his bets, as is only to be expected from the world’s most successful hedge fund manager. “I may well be proven wrong,” he told The New York Times last week, adding that he might yet again turn out to be “the boy who cried wolf”.
The main explanation for all this revisionism is simply the change in facts. The near-unanimity of a few weeks ago that the US was sinking into a deep, prolonged recession has been dispelled by recent data on jobs, GDP, business confidence, industrial orders and consumer spending – all telling a consistent story that although the US economy weakened abruptly last autumn, it is not nearly as weak as at the start of previous recessions, and that there have been no signs of further deterioration since February in the key economic variables apart from house prices.
Moreover, the time of greatest risk of a US recession is almost past, since tax rebates worth more than 1 per cent of disposable income will start landing in US taxpayers’ bank accounts from this week, almost guaranteeing that consumer spending will pick up, at least temporarily, in the year’s second half. And just as the stimulus to consumption from tax cuts runs out, benefits of the Fed’s big cuts in interest rates should start to be felt fully in the first few months of 2009. So, it is increasingly likely that the US economy will not experience even a minor recession, at least as defined in the official statistics, as a result of the credit crunch last year.
The real danger facing the country is not the “credit crunch” but energy costs. Not only the cost of gasoline, but the fact that this is also reflected in the price of virtually all goods, both in the costs of production and of transportation and distribution.
We could have addressed much of this problem years ago through developing our own energy sources, but all efforts to do so have been blocked, whether it be ANWR, offshore drilling, new refineries, or nuclear energy. Also we could have addressed it by encouraging conservation and efficiency. Instead, we encouraged people to buy gas-guzzling SUVs. We will now pay the price.
Note that a “credit crunch” is often a transitional phenomenon. Having taken risk too lightly, lenders overreact by conserving cash and shying away from making good loans. Once burned, twice shy.
Once the larger financial picture stabilize, liquidity begins returning to the system and the normal profit motive starts reasserting itself. Credit becomes more available, albeit at higher cost and on stricter terms.
This too shall pass.
I offer this article for those who wonder about the methodologies used in finding that “all is well” (TM).
http://www.lewrockwell.com/orig6/karlsson8.html
In addition, I point out that during the Great Depression, there was initial stabilization. Stocks did not reach their nadir for some 4 years after Black Tuesday, and neither did the economy. Many prominent businessmen said that the “crisis was over” when indeed it had barely begun. Indeed most of the folks who jumped out of windows did not jump in 1929. No. Those who jumped were the “smart money” who were conservatively invested in 1929, and came back in at what they thought was the “market bottom” six months, a year, or two years later.
This recession is not over. This recession has barely begun. The amount of leverage that needs to unwind is almost 500 trillion. The total output of the entire world is barely 50 trillion. However one moves around those numbers, somebody is going to lose dreadfully.
Shari (who was fully invested in index funds through the long bull market, pulled them into treasuries six months before the tech crash, put them back into index funds in 2004, and pulled them out entirely into non-paper investments last July.
I do not plan to reenter the market before 2016, and I would not look for large returns before 2020.
#1 Jim,
Jim you hit the nail on the head. There are multibillion dollars of energy sources waiting to be tapped. Of course the energy industry will not move off their maximus glutimus until their olld equipment finally falls apart.