As I’m sure you all know the Dow closed on Wednesday above the 10,000 mark, the first time it has done so since October of 2008. The boost was largely the result of good earnings reports from Intel and JP Morgan/Chase. Certainly all of these things are good and I am not going to try and dismiss them as otherwise. I firmly believe that good news is good news no matter what.
However at the same time I am a bit concerned about the overreaction we are getting from some people. Good news is good news but it is not the end of the line. I would make an analogy to this being like someone recovering from a terrible accident. They’ve been in intensive care for some time, there was doubt as to whether they would survive. But now their blood pressure is better.
That is obviously good news and I would not blame the family for being very happy. But the patient still has many problems and his kidneys are slowing down and he still has a high fever. In addition while improved blood pressure is good it can also place a strain on other parts of the body which could lead to problems down the road.
In looking at the economy there are still several things that concern me. The stock market is growing but we need to be careful not to fall again into the trap of an overcapitalized market. That wasn’t a good idea in the 80’s, it wasn’t a good idea in the 90’s, and it isn’t a good idea now.
In addition there are still many weak areas of the economy that we need to keep an eye on. While the market has grown the dollar has been on a long term slide thanks largely to the growing worries about our debt (which is approaching more than $ 50,000,000,000,000). Indeed it would be interesting to factor the real value of the dollar to see if the market is really higher now than it was a year ago (yeah, economics loves statistics)
The true unemployment rate is in the range of 16% (if you count both active looking and discouraged unemployed).
I also am concerned about the pending slump in the commercial real estate market, which could make the housing market slump look like nothing. Also we still have the fed spending billions to force down interest rates and that cannot last forever. Once interest rates climb we could see another slump in real estate. This is not to mention the growing threat of inflation.
This is not to say that improvement is not good, in fact I think we may see some more in the coming months. I am hardly an expert on the economy (though I am not sure anyone is). I would guess that in the 3rd and 4th quarters we will see vendors start to replenish their stocks in preparation for the holiday season. This will cause suppliers to restock their inventories which will boost sales from their suppliers, and so on.
But if the holidays are a repeat of 2008 then we could see the same problems of overstocking lead to another downturn in 2010, which could be exacerbated by other problems with commercial and residential real estate, inflation, etc.
Again, I am not dismissing the positives of some improvement but we need to be aware that if we are at the bottom of this economic slump that it is much more likely to be a U style recovery followed by a V than a traditional V. In other words instead of reaching bottom and then heading up I think we will stay at the bottom for quite a while (admittedly there really isn’t a letter to describe it but you get my point I think).