Fed says: Recession Near End
RECENT THOUGHTS
Yesterday, I was eating at Which-Wich, a sandwich shop around the corner. As I walked in, posted against a tack board was the front cover of a local newspaper. In big, bold letters it read, “Fed says: Recession Near End.” I don’t mean to be cynical, but I had to chuckle a little. Wasn’t it this same Fed that, in November 2007, forecasted positive growth for 2008? I’m not sure how much weight that statement carries.
Even if stats come out over the next few quarters, or even a year, that we’re out of the recession, it’s an illusion. It’s only on paper. Sure, if you go borrow and begin to spend some trillion dollars, you can expect the appearance of increased economic output, but this certainly doesn’t mean it’s actual, sustainable growth. Once you strip out government stimulus, the underlying economy is continuing to deteriorate.
What about debt burdens? In our Dec 31, 2008 client letter, we equated leverage to drugs. “Whenever we suffer economic pain, we seem to think the solution is to prescribe more drugs. This may give us a temporary, artificial “high,” but it will not work forever.” The injection will wear off, and we can only do so many injections before experiencing severe withdrawal because soon, we won’t have any more injections left (unable to borrow). Eventually, we’ll need to experience a true withdrawal, go to “rehab,” and quit our addiction to debt in order to experience real growth.
Not only is earnings growth illusionary because it’s coming from borrowed money, but additionally, let’s think about a main driver of this recent rally – companies beating earnings expectations. These earnings surprises are coming off of analysts ferociously chopping forecasts and are due to cost cutting, not due to the revenue line increasing. And most cost cutting is not coming from more efficient processes, but coming from layoffs which circles back to the unemployment problem.
So, again, if data ends up showing we’re out of this recession, then I believe eventually we’ll be right back in a recession. While people have been referring to this possibility as a double-dip recession, I would call it the same recession we began with, only masked by a temporary drug high. Or perhaps, what I see coming would be best described by a string of W’s.
At these price levels, the stock market is not allowing any room for error. Recession over? For now, I’m going to have to remain a doubting Thomas – I’ll believe it when I see it.