The Coming 2008-2011 Recession
My crystal ball is in the shop for repairs, so I’m working with my Magic 8-Ball today, and she’s showing a mean spirit on the question of “Will the US economy improve over the next 3-4 years?” as shown in the picture below.
I’ve just finished reading John Mauldin’s “Investors Insight” post of June 2nd, 2008, seen here.
He had a guest columnist, Michael Lewitt, writer of the HCM Market Letter. Lewitt had some interesting thoughts, most (but not all) with which I concur. It’s a long article, but you can find it here. Although it’s a bit light on actual data, I think he brings up some good points. It is a particularly gloomy almost melodramatic picture about the economic outlook, and it’s my guess that the gloom may only last for 2-3 years, but could stretch longer, much much longer. Hopefully, Lewitt is wrong, but I fear he is not.
I’ve summarized some salient and interesting passages below for you. Any text or comments of my own within Lewitt’s quotes have been placed in [square brackets]:
• He “…harps on this leadership void because policy failures led us into our current difficulties. Inadequate financial regulation allowed unfettered securitization and leverage to push the system to the brink of collapse. A complete failure to fashion a responsible energy policy has led to skyrocketing gasoline prices. The damage inflicted on investors, consumers and businesses by these failures were avoidable. Instead, the political and financial elite placed their own short-term interests ahead of the long-term interests of everybody else, and the results are plain to see: burgeoning inflation, choked credit markets, and a deteriorating physical, moral and cultural climate.” [Like I said earlier, a bit melodramatic, but the point is made.]
• Three areas in trouble: “An array of American industries is beginning to experience deep distress. Three in particular are about to experience a wave of restructurings or defaults that will drive a stake through the heart of the American economy: airlines, automobiles and retailers.”
• “The bottom line is that airlines, which are marginal businesses in the best of times, are unsustainable businesses with oil at current levels. The industry was partially nationalized after 9-11. The current oil spike should finish the job.”
• “It is both startling and depressing to hear American automakers just now coming to the conclusion that they are still manufacturing too many gas-guzzling trucks and SUVs and too few hybrid and diesel passenger vehicles. Few industries have seen such profound failures of vision and leadership.” Not that the weeny Democrats are much better , but thank you, George Bush, Dick Cheney and a Republican-led Congress for not only a lack of vision and inaction here, but also for actually rolling back the national EPA standards, forgoing conservation strategies, and encouraging the nation’s oil lust (which undoubtedly have made some oil men very rich during your tenure, George).
• Related to retail, Lewitt notes that fewer people are going to drive to the mall to buy goods when they are fighting to keep a house over their head and can’t afford to drive their 12-16mpg vehicles at $4.00/gallon. To quote him: “Sears is what we at HCM [Lewitt’s newsletter] call a melting ice cube. It continues to consume itself through share buybacks and misbegotten marketing ploys. The unhappy truth is that Sears and Kmart are yesterday's retailers.”
• But the problems of firstly getting consumers to the market, and secondly, getting them to buy discretionary items is only one part of the problem. Lewitt explains: “Many financial institutions have been willing lenders to the retail industry over the years in view of the high rate of defaults that this industry has seen. Retailers are generally loathe to amortize debt - they would rather open additional locations… they make the worst of borrowers because they always need more money and never repay the money they borrowed in the first place. There are few barriers to entry… retail ideas are easily copied... Even more disturbing are the high prices at which recent retail LBOs [Leveraged Buy Outs] were done in an era of low cost capital [as we’ve experienced over the past 3-4 years]. These transactions were almost assured of running into trouble, as they are now beginning to do. There will be more bankruptcies to come.”
• Regarding oil: “For several years, the IEA [International Energy Agency] has predicted that supply would keep up with demand that was expected to reach 116 million barrels a day by 2030, up from around $87 million barrels today. The agency is reportedly now coming to the conclusion, which will warm the hearts of believers of the Peak Oil thesis, that it will be difficult to squeeze more than 100 million barrels per day out of the ground over the next two decades. It appears that higher oil prices are here to stay.” [This was partially the subject of my earlier “Consumption Junction” blogs, and why issues like conservation, alternate energy research & a general policy shift in the President’s Administration are so vitally important.]
• “Over time, holding currencies such as the Singapore dollar, Taiwanese dollar, Hong Kong dollar, as well as those of growing giants India and China, will handsomely reward investors.”
Lewitt also argues that the world is a much safer place over the last two decades, and because so, the rest of the world does not seek safety as readily in the U.S. dollar due to political instability. Rather, these foreign markets are increasingly investing in Euros and other non-US currencies. A lot of people do not understand this fine point and what it means to the stability of our economic future. For decades, the US dollar has been the safe haven for the world’s investors in rocky times (and in good times, no doubt). And because of this, the world’s oil producers have always chosen to price their product in the most stable of worldly currencies, the US dollar. To quote Lewitt on this subject: “The world has not yet crossed the Rubicon whereby oil will no longer be priced in dollars, but that is no longer an inconceivable concept, although its consequences for the U.S. currency are well nigh inconceivable… The growing distrust of this capitalist model is further enhanced by the very legitimate questions raised by the asymmetric compensation schemes that rewarded many of the promulgators of these financial [banking] disasters while leaving institutions representing retirees and municipalities and other "mom and pop" investors nursing enormous losses.”
That’s a very scary idea indeed, for all Americans. For when that day comes, we will definitely be on the backside of the Economic Hill of Prosperity. We are already a debtor nation, a nation that imports more than it exports, a people with a deplorable savings rate, and a country that (except for an all-too-brief time under Bill Clinton and a semi-responsible Congress) chooses to live beyond its means, spending more than it takes in, more than it budgets itself. The pain is coming. Are you ready for it?
One final point: In its April 2008 report, the International Monetary Fund (IMF) sees global recession in place through 2009. I’m betting it will last a bit longer, somewhat dependent upon how quickly the US pulls itself out of the muck. The IMF sees only a 3.7% growth (if only we’d be so lucky!), and emerging markets slacking a bit from their recent rocketing past. The full story is here but of particular interest is this quote near the beginning of that article: “World growth would achieve little pickup in 2009, and there is a 25 percent chance that the global economy will record 3 percent or less growth in 2008 and 2009, equivalent to a global recession.”
Fasten your seat belts. It’s going to be a long, bumpy 3-year flight.