[img]511|left|||no_popup[/img]Anyone who has had taken a road trip with their kids has heard it.
Children under the age of ten have no real sense of time let alone patience. They like the idea of an adventure. Unfortunately, their tiny bladders are not well-suited to the confines of the road.
As any parent of small child will tell you, it doesn’t take much to please their youngster, and frequently even less to divert their attention. If not for antsy 10-year olds, Darwin, Minnesota, home of the World’s Largest Ball of Twine wouldn’t be on the map.
Investors who have had their portfolios slammed by the recession are no different from little kids in a car. They’re anxious for the worst economic downturn in a generation to be over, and are constantly looking for signs along the road that this painful journey may be close to an end.
Following the two-month rally staged by the stock market from the middle of March through this point in May, it’s easy to believe that the worst may have passed and the economy soon will be back on track.
The stock markets appear to be pricing in the notion of a rapid recovery. Since the rally began, the markets have restored nearly $8.9 trillion in lost equity.
Caution, however, is the watchword by most veteran market observers.
Many prominent economists like 2008 Nobel laureate Paul Krugman are downright skeptical about the genuine prospects for a quick turn-a-round.
Although governments throughout the industrialized world, including the United States, have committed more than $2 trillion to stimulate their flagging economies, Krugman and other like-minded academics doubt whether the economy will be able to recover by year’s end, let alone by the end of 2010.
Previously, the International Monetary Fund (IMF) was projecting 0.5 percent economic growth for the world economy for 2009. On April 22, it too tempered its optimism, and revised it predictions calling for the global economy to shrink by 1.3 percent through the end 2009.
[img]512|left|||no_popup[/img]Economists like Krugman and New York University’s Nouriel Roubini think that the underlying conditions that triggered this current financial crisis may be vastly worse and more complex that the those which led to the Great Depression.
In their view, this means there are no quick fixes, and that the Dow at 8500 may simply be no more than a big ball of twine to divert our attention from an economic downturn that will run its course no matter the extent of governmental intervention.
Although initial claims for jobless benefits have begun to level off, unemployment nationwide is still hovering at 8 percent and projected to crest at about 9.6 percent next year. Most economists agree that unemployment will remain in the neighborhood of 8.5 percent through 2011.
The U.S. trade deficit also widened in March for the first time in eight months as the global economic slump pushed U.S. exports to the lowest level in more than two years. Early Commerce Department figures showed there was an initial narrowing of the gap due to decreased demand for industrial supplies such as natural gas and steel offset by an increase in oil.
The Commerce report may signal that most of the improvement in the U.S. trade deficit is already over as fuel costs climb and stimulus programs resuscitate American consumers’ demand. No matter their stripe, most economists agree that rising imports and a bigger trade gap will further hurt the prospects for an early recovery, blunting some of the benefit from a rebound in exports that companies such as Caterpillar Inc. are beginning to detect.
Companies like Boeing and chipmaker Intel have seen their exports fall off dramatically. Last week the aircraft maker sustained another 25 cancellations of its 787 Dreamliner. Cancellations for the Chicago-based company now total nearly 60 for the year resulting in a projected loss of revenue of nearly $10 billion. Likewise, Intel, the world’s largest chipmaker has seen export demand steadily slide, and doesn’t project a recovery in demand until at least mid-2010.
These industrial concerns have also been hampered by their inability to raise needed capital through corporate bonds sales. With the bond rating downgrades recently issued by Standard & Poors along with Moody’s, the spigot for essential expansion capital has been reduced to a trickle.
This means that many manufacturers like Boeing and Intel will be forced to dip into their already thin cash reserves to hold the line. With this slowdown in export demand coupled with a mounting inability to raise fresh money, these companies will likely institute an additional round of lay-offs.
A weaker than expected recovery will keep pressure on the Obama administration, lawmakers and Federal Reserve officials to maintain the emergency lending and stimulus programs implemented during the past year. Now that we’ve embarked on this course of action, the danger, according to economists like Krugman and Roubini, is that the government may succumb to the political pressure to terminate its intervention programs too soon.
Are we there yet?
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
