It's Not Over Till It's Over

There are so many things that I have wanted to blog about, but I haven't really had time at home to really sit down and write out my thoughts coherently. That will be coming soon, but for now, here is the most recent article I wrote for work.

Yogi Berra is attributed to having many wonderful quotes, but there a couple that fit particularly well with where I think we stand in this economy. The first is: “It ain’t over till it’s over.”

Of course by saying that the inevitable question becomes, “Well when will it be over?” It is the “million dollar question” as they say, and to tell you the truth, you don’t have to have the exact answer in order to come out on top. There are many indicators, both technical and historical, that we can watch to signify what might happen over the course of the next quarter and beyond and those are what I would like to describe a little in this commentary.

Let’s start with some of the biggest news of the day and those are the results of the so called “Stress Test” of the largest banks. The results were, of course, that of the 19 banks tested 10 need additional capital, but not nearly as much as everyone had previously thought, hence the euphoric rise in bank stock. One of the side results of the test was that each bank that needed to raise capital could do it without the government’s money. That is really what I think the market needed to hear. That being said, I am somewhat skeptical of the overall feeling of “All will be well soon with the banks” that is being passed around with these results. First, the credit markets which were knocked out cold in September of last year are back up but still a little woozy. While it will finally be possible, I don’t believe it will be easy for the banks to raise the desired capital to show and keep their strength, especially if things get worse. Second, the consumer is still not healthy and is not likely to be back to their old ways of borrowing and spending for a while. Remember it is the over-leveraging of businesses and consumers that helped cause the majority of this mess in the first place. It will be a while before banks even think about allowing that kind of leverage (if they are even allowed with the threatened regulation that is coming), and it will be a while before the consumer feels safe enough to spend like they used to.

That leads us right into another thing you have probably heard from the media lately, and that is the theory of “Green Shoots” which are sprouting that will move this economy into the black sooner than expected. Some, including Brian Wesbury of First Trust (who I admire and follow) believe our economy is in for a “super ball” bounce. I am not exactly in the same camp. While the opinion has shifted over the last few months from “Banks will need to be nationalized and we are in for a global economic meltdown” to “Where and when will these ‘green shoots’ turn into trees?”, I’d like to point out that we really need to see the economic news change from being “less bad” to showing strong signs of growth. It is also interesting to note that the bearish have a recent IMF study on their side. In the study released last month the IMF noted that after studying 122 recessions, those which were associated with either a financial crisis or a worldwide slowdown tended to be deeper and last longer (an average of 2 years)*. They also pointed out that the recoveries were weaker (not a V).

There is also a concern over government policy and how that is going to affect these “green shoots.” While I don’t believe the policies that have been implemented, or the ones that have been promised, will make this recession worse over the short run; I am concerned with the monumental spending that some gloss over. As Diane Swonk of Mesirow Financial put it: “Over time…Something has to give: the saving rate for consumers and corporations will have to rise [above and beyond what they have]; exports will have to accelerate; spending will have to be cut; and tax rates will have to be increased.*” Sometimes, while watching the administration announce yet another unnecessary and costly program I feel like they might as well just use our second Yogi quote: “We’re lost, but we’re making good time.”

In all, I would say that now is a time to be investing, especially if your dollar-cost-averaging and thereby somewhat averting the need to call the exact bottom.

*IMF Study
*Diane Swonk Article (Highly Recommended Read)