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The long-range problem
07/16/2009 5:30 am EST
Yes, the economy is getting less worse, less quickly.
And yes, there are signs that the economy is starting to stabilize.
And, yes, if you’re really optimistic you can see a day in 2010 (or 2011) when unemployment will stop climbing.
But all this means is that the economy is ready to crawl off the mat. But it’s sure not ready to challenge for the champ’s belt.
It’s not ready to start producing millions of jobs, or providing the rising incomes needed for a comfortable retirement by all those who took a beat in the bear markets of 2000-2003 and of 2007-2009, or to give us a painful way to pay off the huge debt we’re run up in this crisis.
The truth is that the economy went into this crisis with major long-term problems. And we’re going to come out of this crisis with the same problems—and then some.
Economists know—or they’re supposed to know—that to get a true picture of the long-term health of an economy, you don’t measure from the bottom of an economic cycle to some point in the recovery and conclude that everything is wonderful simply because things aren’t as bad as they were at the very rock bottom. Instead you measure from the top of one cycle to the top of the next (or bottom to bottom) to see if your economy is making progress.
And on that measure, we’re in deep, I mean really deep, trouble. As of June 2009, in the current recession the economy has lost all the jobs that it added in the last cycle of economic growth that began in 2000. Yep, the 6.5 million jobs lost in this recession equal all the jobs created in the last nine years.
And that’s never happened before—well, not unless you go back to the Great Depression. This is the only recession since the Depression of the 1930s to wipe out all the progress made in the prior recovery.
So, if you feel that you’re not better off than you were in 2000, you’re not alone. The entire country is stuck in the same boat.
What was and is the problem? By historical standards the good times of 2000-2007 weren’t all that good. Job growth in the recovery was below the norm for a recovery and the jobs that were created weren’t all that great. If you held a job in those “boom” times there was a good chance that you were working fewer hours than during the previous boom, that you were working at a job that paid less, and that offered fewer benefits.
To get by, to keep up with, not the Joneses, but our own expectations that tomorrow must be better than today, we borrowed. And by “we” I mean everybody in the U.S. economy from the government in Washington or Sacramento to CEOs to homeowners to car buyers. That worked for a while, but since most of that borrowing went for current consumption it didn’t fix any of the problems in our economy, and it left the system more fragile so that when the next downturn came, and they always do come, the results were a Great Recession more than powerful enough to wipe out all the gains of the prior “boom.”
So we go into the next “boom” in the boom/bust cycle dragging the debt that we accumulated during the good days of the cycle and with the extra burden of the debt that we built up during the bad days of the cycle. That burden, by itself, is enough to ensure that the economy will grow more slowly that it grew in earlier booms, and to threaten the real possibility that the economy will grow more slowly that it did even in the weaker than normal recovery of 2000-2007.
And, of course, the economy still faces the same problems that made the last recovery so weak. Despite the rhetoric of the economic stimulus package, the to-ing and fro-ing that passes for the legislative process these days took most of the funding for the desperately needed rebuilding of our crumbling infrastructure out of the bill. (And much of what remained in the bill is being distributed following the rules of political clout rather than economic need.)
We were losing ground during the last boom because our educational system isn’t good enough when measured against those of our global economic competitors, because we get only middle of the pack outcomes even though we lead the world in spending on healthcare, because our economy is among the least energy efficient in the developed world, because we have a tax system that for decades as mis-allocated capital, and…
I could go on. I’m sure you can add to the list.
But can anyone of us say that the bust and its huge burden of debt will make it easier to solve these problems in the years ahead than it was to solve them during the “boom” years of the cycle?
We’ve not alone. The United Kingdom, Ireland, Italy, Spain, Greece, much of Eastern Europe will spend years digging out. Some at least of the emerging world’s biggest stars—Russia, for example, look diminished in the long run. The world as a whole can look forward to slower growth in the good times ahead than in the last boom part of the cycle.
Exactly how much slower? Economists, as of their June forecasts, are predicting a bit less than 2% real economic growth for the U.S. in 2010. ("Real" growth means after substracting for inflation.) For Japan about 1.3%. The Eurozone economies about 0.3%.
That's hugely disappointing for an economy coming off the bottom. After the mild recession of 1991, for example, when the economy contracted by 0.2%, it then grew by 3.3% in 1992 and 2.7% in 1993. After the much more sevcere recession of the early 1980s, the economy, which had contracted by 1.9% in 1982, went on a growth spree picking up 4.5% in 1983 and 7.2% in 1984.
Projected growth of aobut 2% for the United States in 2010 isn't no growth. That would be excruiating. But it sure is slow growth and that will be painful enough.
If growth is slower, the dog eats dog competition of the boom years of the cycle will get even fiercer. Growth will be harder to come by so companies will scrap for even the smallest and most fleeting advantage. Countries that can afford to do so will subsidize job creation and economic growth, leading to excess global capacity in key industries and falling prices. Any new product or business that shows above average return on investment will draw a horde of hungry competitors.
This isn’t going to be an easy environment for investors. Opportunities for making money will be bid out of existence much faster in this next cycle than the excess returns from hedge funds and alternative investments were in the last. Companies that on the fundamentals should be long-term buy and hold candidates will face competitors with state-provided capital that don’t care about the logic of fundamentals.
To cope—and to profit—investors will have to shorten their long-term investment horizons. They’ll have to learn new markets that offer—temporarily—inefficiencies that can be exploited for gain. The herd will stampede to the fad of the moment so investors will have to become adept at riding with the herd in the early going and in jumping off before it’s too late. They’ll have to develop their own internal disciplines so that they won’t be swept along with the fad of the moment and so that they can read and profit from the short-term swings of market over-reaction.
That sounds like a tall task and it is. I think we’re looking at a recovery that will be far less kind to the average investor than that part of the cycle has been historically.
I’ll post a buy later today that give you a idea of one of the kinds of stocks I’m looking for in the tough “boom” ahead.
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