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Can You See the Light?


Have you noticed how gloomy the national media seems to be? The business press and CNBC (when I take short peeks with only one eye) are awash in bad news of job loss and crashing markets. Low Dobbs is nearly apoplectic. Any good news has taken leave and we are left with reports of the impending demise of the auto industry and the millions of jobs that will be destroyed along with it. The euphoria from the recent election wore away very quickly and all of the "gloom and doom" purveyors, who took only a few days off, are back in business.To some degree this is to be expected. Regardless of his good qualities, the president-elect can hardly be expected to wave his magic pen and by executive order cure all of the economic woes that have arisen over the past several years. Heck, if he could do that he could also do something really difficult, like give us a college football playoff system. But I digress. What I really want to consider is what can we expect in the coming year and if there is any reason for hope. Can things get any worse? And can anyone see any light at the end of the tunnel? During times such as these it is sometimes difficult to maintain one's perspective, so let's consider where we are and where we may be going.

No doubt these are unusual and difficult times. A number of our economic underpinnings became unbalanced , (think home prices, lending standards, credit use, leverage, stock prices, etc.) and they all seemed to reset at once in a matter of a few weeks. This was unprecedented in most of our lifetimes. Something like 65 billion dollars per day in retirement assets were wiped out in October 2008. This has been described as a financial tsunami, and I can attest that it felt that way to me. Unemployment has recently been reported at 6.4%, and is likely headed much higher. I have read reports that have it topping out anywhere from 7.5% to as high as 10%. The consensus though is that it will go much higher in 2009. Of course that will impact consumer spending and thus, corporate profits. And bottom line, corporate profits impact stock prices. Thus, economic activity and stock prices can, and probably will decline further during 2009. As our economy works its way through the mess "the smartest guys in the room" in Washington and New York helped create, 2009 is not likely to be a very good year economically for a sizable portion of our citizens. Though the stock market could begin a slow climb from its current level at some point during the coming year, it may very well not. It may be that the markets require most of 2009 to digest what has happened to it and to decide that the United States is not really going "out of business." Unfortunately, what happens in the markets will be very much affected by what happens in Washington. Let us all hope that President Obama doesn't attempt to implement all that he promised on the campaign trail too quickly.

A recent survey of 50 members of the National Association for Business Economics revealed that these learned folks expect that the first half of 2009 will be challenging with job losses averaging 100,000 per month during the first six months. Numerous "experts" that I have read believe that the first six months of 2009 will see GDP decline. Virtually all of these same experts also see economic activity increasing during the latter stages of next year. They may, or may not, be right; but even if they are wrong, and this recession stretches into 2010, eventually the American consumer will begin to consume again. Americans will only put off purchasing new cars, new dish washers, and new homes for so long. Eventually this recession, like previous ones, will run its course. We may not come "charging" back from this one; it may be more like a slow crawl, but we will move forward at some point.

Already some encouraging signs are starting to emerge amid the gloom. Real estate in some of the areas hit especially hard is starting to show some signs of life. Housing sales in California, for example, have been up for the last five months. Eventually capacity will come into line with demand and housing prices will again stabilize. Most experts expect this to happen during 2009. The rampant speculation that help feed this bubble is not likely to reappear for years. As our economy has contracted inflationary pressures have eased. This makes it easier for businesses and consumers to plan future purchases. As energy demand has fallen across America, fuel prices have retreated from their ridiculous levels of the past summer. As recently as September I paid $4/gallon for gasoline. I recently paid less that $2. For each ten cent drop in gas prices $12 billion per year goes back into the pockets of consumers. The fall from $4 to $2 per gallon has resulted in an extra $240 billion (with a B) per year that consumers can spend somewhere other than on gas for their cars. That is a pretty significant economic incentive program without a penny of government money required. In fact this decline in energy costs is likely to be reflected in a wide array of products across our economy with bargains appearing in everything from air travel to grocery prices.

Already banks are beginning to loosen their purse strings and to lend again. Gone are the days when loans were made on a signature however. We can expect lending standards to remain tight for the indefinite future, and this is the way it should be. We have seen the mess created when folks could borrow money with no reasonable expectation of repaying it; we don't need that again.

There could well be much good to come from our current situation. Belt-tightening may well be good for us as a country. Perhaps living within one's means may come back into vogue. Bad spending habits need to be unlearned. If we as a country saved more we might not have to turn to China to finance our government. A new frugal mindset that eschews debt may serve our country very well.

From times such as these often comes new and innovative businesses. The next "big thing" may even now be incubating in some laid off worker's garage. Since necessity is the mother of invention, I feel sure that many are looking at starting their own business, and some of these businesses will surely flourish. The fact is that most Americans work for businesses employing fewer that 500 workers. We may see more of those businesses because of the economic times and the creativity of the American worker.

States and municipalities that are floundering with budget problems may, just may, use these times to rethink and reset their spending priorities. Many states and cities have over spent and over promised during the good times, and now find themselves with huge budget shortfalls (see New York state and New York City for prime examples). Increasing taxes further is not an option for most, so many will have to make the hard decisions that should have been made years ago.

Investors can now get more shares for their investment dollars since stock prices have reset. Home buyers can get more house for their dollars since home prices have reset. This is especially nice for young investors and home buyers as this period of bargains is likely to last for a while; not so nice for us older investors since many of our dollars went to buy more expensive homes and shares. Many of us will simply have to work longer.

So, much good can come out of our current scenario if we will only learn, and already the seeds of the recovery are being sown. Can you see the light? It is out there at the end of the tunnel of hard times; it is quite dim at present, but it is there. You may need to squint to see it, but it is there, waiting to show itself more brightly when confidence returns to America.  Don't bet against us!


Fly/Drive Safely


19 November 2008




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