Home OP-ED It’s Over

It’s Over

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Unless you’ve been living in a cave, you’ve probably heard the good news.

The worst recession in a generation is no mas. Kaput. History.

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At least that’s the view of Fed Chairman Ben Bernanke. Who better than he would know?

Everybody seems to believe it. Even the Master himself, Warren Buffet.

Buffet and others of his ilk, have good reason to celebrate. U.S. stock values have hit a one-year high.

Pace of Recovery

The Standard & Poor’s 500 Index gained 0.4 percent to 1,056.83, and the Dow Jones Industrial Average added 25.62 points, or 0.3 percent, to reach 9,709.03. So far, about five stocks have advanced for every two that fell on the New York Stock Exchange.

The MSCI World Index, which tracks stock issues in 23 developed nations, has climbed 64 percent since March 9. With this upswing, it seems that Bernanke and Buffet are not alone in their pronouncement.

Since the bankruptcy of Lehman Brothers a year ago, the Fed kept its target rate for overnight lending between banks at near zero to unlock credit markets. If the success of the Fed’s “quantitative easing” policies is measured purely by the results achieved in the stock market, it’s simple to see why Bernanke is tooting his own horn.

There is no question we are on a path to recovery. In light of the latest reports, the economy is not getting worse. Now investors are waiting for the point where the improvement in corporate earnings comes less from cost cuts and more from top-line growth.

In the hinterlands – the world outside of Washington and New York – it still doesn’t feel like a recovery. Unemployment nationally is hovering around 9.7 percent with the rate expected to keep growing through mid-2010.

From an inflation point-of-view, the purchasing power of consumers is shrinking. The dollar is at a one-year low against the Euro of $1.47. At the same time gold has hit $1,020 an ounce approaching its all time high of $1,036.

For U.S. exporters, the weaker dollar is good news. It makes their products more competitive internationally. The plunging dollar also means that it is costing us less to pay down our expanding international debt to bondholders like China.

Consumers remain skittish. Main Street’s perspective continues to be flat to dismal.

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Cash-for-Clunkers may have given a temporary boost to the local car dealership. But it has done little for small and independent retailers. It only takes a trip to the local mall to see that the record pace in store closures has continued unabated.

For most small and medium-sized businesses, the key to survival has been maintaining cash flow. With credit lines being slashed or terminated, survival for these businesses is day-to-day.

Under Control?

Although consumers have been feeling the effect of higher prices at the pump, for the time being, inflation seems to be in check. Despite the flood of federal funds that now has started to enter the economy, consumer prices only rose 0.4 percent in August. If food and energy costs are taken out of the equation, the so-called core index only increased 0.1 percent.

While home prices have started to stabilize, the entire housing sector is still on life support. The foreclosure rate has continued rising. With the expanding number of mortgages set to adjust by mid-2010 and into 2011, the foreclosure rate is predicted to keep climbing unless the federal government steps up its intervention efforts.

The homeowners that are now predominantly in jeopardy are not the sub-prime borrowers. Rather, they are homeowners who took out interest-only loans that are facing increased monthly payments that now will include principal. With real income shrinking, most economists agree that the foreclosure rate among these middle-class homeowners will keep growing.

The psychological impact of these foreclosures on the economy is difficult to quantify. Stop anyone at the mall, and most can identify a family member, friend, neighbor or acquaintance who has lost a job or a home. Because these consumers are still feeling the psychological vise-grips of the recession, they are not yet prepared to start opening their wallets.

If the objective is to instill confidence in our otherwise moribund collective psyche, Bernanke and Buffet are sending out the right signals.

On the other hand, if the real aim was to show Americans that the light at the end of the recessionary tunnel is growing brighter, we are still squinting to see it.

John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com