Climbing Up A Greasy Pole

Historically, stock markets climb ahead of an economic recovery and, applying that logic, the recent climb in the various stock market indices should point towards a recovery in the US economy in the not too distant future. However, hope can trick us into seeing things that are not there – like a mirage of an oasis in the desert.

Remember, all stock markets are pretty much like casinos – calculate your odds, place your bets and hope that you will come out a winner. Investment experts and stock analysts who will tell you anything you want to hear – we get to watch them pitch their thoughts daily on CNBC or Fox Business News – take everything they say with a good pinch of salt. They are masters of using obscure language that could be interpreted to mean different things to different people at different times. If they were such ‘experts’ how did they all (with possibly a few exception) fail to forewarn investors of the near collapse of the financial industry?

Unless the authorities come up with the right solutions, an economic recovery from this downturn will be painful and long, like trying to climb up a greasy pole.

Continuing trends that hamper recovery or indicate that all is not well:

• Oil prices have crept above the $70 mark – we’re halfway back to the peak reached in July 2008, more than double the lows in the mid-$30’s that it hit in December 2008 and again in March of 2009. Consequently, average regular grade gasoline prices nationwide have climbed from under $1.60 a gallon in December 2008 to over $2.60 in June 2009 – that is a 62% increase – while the recession is still deepening. Speculative investors in oil are back and that is bad for recovery.
• Unemployment has continued to climb although the pace appears to show signs of slowing. It will take a solid few months after the trend reverses for consumers to even begin to regain confidence enough to spend on things other than necessities.
• Despite the all-time low interest rates, credit is still tight and consumer patterns are changing as they veer towards a higher rate of savings (if they still have a job) from the glory days of spending what they did not possess or have not earned.
• State, local and regional governments are scrambling to compensate for shortfall in tax revenues by cutting services or increasing tax rates, both of which will hurt the average consumers even more, driving them to spend even less on non-essentials and sometimes cutting into even the essentials.
• Dysfunctional state governments such as those in California and New York (numbers 1 and 3 in terms of the size of their GDP in relation to the overall GDP of the US) will further hamper the speed of recovery as necessary budgets and laws are not passed.
• Five months after its passage in Congress, only a small fraction of the money from the $789 billion stimulus package has hit the ground and promised spending on infrastructure will take a while yet to come on-stream to have any visible impact on the unemployment numbers. As of July 16, only $183 billion has been allocated to state agencies and, of that, only $63 billion has been spent (source: Recovery.gov) - less than 10% of the total stimulus passed.
• To make matters worse, some states will not be getting the stimulus money as Republican governors in those states have rejected the stimulus funds (source: Fox News. com).
• The TARP money that was used for bailing out the failing financial institutions and automotive giants only helped to stabilize the system but will not generate new jobs, income or consumer spending.

The administration has done well to stabilize the situation but it must quickly move towards actions that will stimulate the economy in the right way. Interestingly, a guest on CNBC on the morning of July 7 highlighted the way the Chinese government has succeeded in stimulating its economy and they way they have done it reminded me of the idea I posted on my blog back in December 2008 titled “To B or Not to B”.

The US needs to stimulate consumption but giving away money, whether directly or via tax breaks, is not going to do the trick in the current environment. A more cautious population will simply stash the money away in fear of a deeper and longer recession. Time to focus on ideas and actions that will pull us out of this hole.

When The Going Gets Tough, The Tough Goes Shopping

It is probably shocking that I should cite (read “promote”) this oft quoted, sassy saying at a time when unbridled spending leveraged on paper gains in asset values appears to be the root cause of what ails our economy. We are in the throes of a big hangover after an all night party, an orgy of booze and whatever else that had added to the fun when it all happening, but, when the clock rang in the new day, has turned out to be yet another case of misbegotten self-deception and ignorance of the consequences of our uncaring actions.

Congress has just passed a $787 billion package of economic stimulus and the President will be signing it into law later today. It is great that something is being done but the reality is that however big it appears to be on paper, it is not quite enough and, echoing the sentiments of the more pessimistic economists, will only help stave off the onset of an economic depression. Extended unemployment benefits is only a temporary relief, barely enough to cover the true cost of living of those who have lost jobs involuntarily. Those who were self-employed do not even have the benefit of unemployment insurance. What we need in addition to job creation is job preservation. We should not keep infusing more blood into the patient if we don’t take the necessary steps to stop the bleeding.

I've been passing on the same message to my friends and acquaintances who have 'recession proof'' jobs and who have been wise to avoid the many ills that led to this recession - go out and spend some money. Forget about buying gold or putting your money away in an offshore account to protect your wealth. If the US and World economies do not recover, there is nowhere truly safe for one to disappear to. What we have seen in terms of collateral damage around the world as a direct or indirect reaction to the problems facing the US demonstrates the tight integration of the world’s economies. We may be living in different countries but we are not isolated from each other’s ills.

Why do I preach the need to spend to the more fortunate ones who have planned and saved for a rainy day? The smart ones spend counter-cyclically - work and save when jobs are plentiful and the pay is good, buy when things are cheap and demand is weak (you get the best picks). If you don’t do your part to help, you may someday conclude that you are not that smart after all.

Here are some suggestions on what you might do that can help the economy recover:

- Go out to dinner. If you can, invite someone you know who have lost a job - it will cheer them up and keep the restaurants running and a long line of direct and indirect jobs going. For one thing, these jobs cannot be outsourced to a foreign country.

- Go on a vacation at a domestic resort. Ski, bathe in the sun, kayak, ride a bike, etc. These industries employ the highest ratio of workers to customers. Keeping jobs going is easier than having to 'create' new jobs. You won’t be getting a tax credit for this under the stimulus package but do it anyway.

- Go shopping. Buy the pair of running shoes you have been meaning to but have not had the time because you were busy working. Buy that tie-dyed T-shirt or hand-made costume jewelry that you’ve always wanted from the local artists. Buy from your local farmers and grocers. While you are at it, give a go at haggling over the price – you’ll be pleasantly surprised if you do ask. You’ll enjoy the whole experience and you’ll be back for more – your ego needs to know that you can do better the next time. If possible, favor the small businesses - they are generally higher in the employee to customer ratio than the big chains. Don't fret over whether the item you buy is 100% local - bringing the item to your local store employs many, many people. Think of the jobs involved in the shipping and warehousing process. Even the task of displaying them on shelves and taking your money at the checkout desk involve people. A big portion of what you pay for any item goes towards these value-added services.

- Trade in you gas guzzling SUVs for the more eco-friendly vehicles - it does not have to be a hybrid that go 50 mpg. You'll be saving the earth and keeping yet another long line of jobs going - from the people in the assembly lines to the salesmen and to the garages that service your cars. Take advantage of the tax incentives in the stimulus package. You'll be treated like gold and you'll get deals that you could not have dreamed of during the boom years. Besides, you'll be better prepared for when oil and gas prices shoots up again.

It takes someone with the right combination of brains and guts to take the right actions. Now is the time for the tough to go shopping.

When the economy is on the road to recovery, you can revert to saving and putting money aside for the next ‘rainy day’. Be smart.