2010: Glimmers of Hope

- Private Sector takes up the slack
While it’s been clear that a lot of demand in Q3 and Q4 has been government driven, the idea is that the government stimulus is only to keep the economy chugging along until private demand is ready to takeover.  I think it’s clear to most that over the last 12month fear of the recession has receded, wealth has increased (in at least that people’s investments/retirement funds have risen, and house prices have stabilized for the moment), and the rate of redundancies/firings have decreased.  This has led to improvements in confidence, and shouldn’t this confidence show itself up in better business conditions, leading to the virtuous circle of production, profit, increased employment and increased demand.  That’s the hope. 

- Consumer Spending
During 2002, Our Man’s first boss used to constantly tell him “Never doubt the US consumers’ ability to spend”!  At first, Our Man put this down to his boss’ French background and seeming disdain for spending money on anything other than cabs, style and French food.  However, he quickly learnt it was useful advice – yes, the US consumer could spend their way down to a 1.4% annual savings rate (May-08).  While this annual rate has risen to over 4.5% as of November, that level is so 1990’s and habits are hard to break!

- The V-shaped recovery
The above are key premises behind the V-shaped recovery; it’s the way business cycles work, people get too excited at the top, produce too much, then have to make adjustments when demand comes in lower, so cut costs (and the biggest cost is staff), right the ship and boom…off we go again.  It’s happened in every recession since the War…and if you look at the numbers, the bigger the fall the bigger the comeback.  So stop whining about how this time’s a credit/solvency crisis, and look at history (excluding the Depression, and those crazy Japanese, since they were one-offs that can’t happen here)…the V’s the way it is!

- Stimulus II: The Return of the Thing-That-Shall-Not-Be-Named
But just in case there’s any sign that the private sector isn’t quite ready to take up the slack, Our Man fully expects the government to do the only thing it knows – throw money at the problem, and hope it disappears.  However, “Stimulus” is bad politics, 2010 is an election year, so don’t expect the word Stimulus to be anywhere near anyone’s lips.  Instead it’ll be subtler, nicer and happier version of Thing-That-Shall-Not-Be-Named where it’s all about the government helping citizens make good choices for the benefit of America – you know what I mean; “You really should buy that energy efficient washer/dryer, and here’s a pretty little government rebate to help you do that”, “Weatherize your home; Yes, We Can give you a rebate check for that”, “CHANGE your light bulbs to these new energy efficient LED ones, and we’ll give you some change to help with the cost!”, etc

- The FED
Hey, it was never a solvency problem, just a liquidity one…and the one thing the FED has mastered over the years is providing liquidity.  Buying $1.25trillion of mortgage securities for crazy prices using cold hard cash is no problem for the FED, which plans to complete that by March 2010.  While the FED claims most of its liquidity provision will be completed in March, Our Man expects they’ll find some exceptional circumstance or need to temporarily keep doing it either directly or indirectly (hello Fannie and Freddie). 

- China
Our Man can hear your collective “Huh”, given his often snide remarks about China and its prominence in the Fingers of Instability list.  But hey, you know what, maybe Our Man is just plain ole wrong – perhaps the Chinese have built a better mousetrap in terms of this whole running an economy thing!  And if they haven’t, well their ability to throw money at problems makes the rest of the world look impotent.  A c$575bn direct stimulus program and a 2009 quota set for bank lending (driven by the state-controlled big 4 – how nice it must be to have banks do as you tell them) of $1,300bn, equates to a 40% of direct and indirect GDP stimulus in 2009.  Now that should get your economy moving…and while 2010 won’t be as big, it’ll still be might impressive!

- Valuation
Another round of “Huhs”, as Our Man has been muttering about an expensive market.  Well, yes…the Case-Shiller PE-10 and Our Man’s forward-looking model screams expensive, with a P-E of c23x compared to the average (of c16.5x).  But the model also suggests the market’s positively cheap compared to the last 10-years (average 26.67x).  The reality is most people don’t look back beyond 5-years let alone 10-years…