Sunday, February 15, 2009

The Bright Side

Since the New Year began there has been constant improvement in the credit markets. January was one of the strongest months in history for the investment grade debt market and high yield debt improved throughout the month. These trends continue into February. Treasury bill yields came off the floor. Last week Cisco sold $ 4 billion of new debt at a modest spread over treasuries. The first IPO in three months occurred on Wednesday and traded well in the after market. Expect more of the same. Bank lending in the 4th quarter of 2008 was at record levels. Stock market volatility continued its slower pace that began in December. Home sales picked up in January and retail sales were up in January over December. Unemployment claims dropped in the most recent reporting week. (Somehow, the new Adminstration seems unaware of all of this, or simply chooses to paint as bleak a picture as possible for political reasons).

The stock market has lost nearly 1,000 points, since the New Year's dawn. The stock market is ignoring the good economic news and focusing on the Obama Administration and the Congress, where the news is pretty much all bad. As misguided as government policy is, the market is usually stronger than government (which frustrates politicians) and unless the Obama Administration clamps down harder on free markets (which it might), the economy will begin to show signs of life this summer. Other punitive legislation, such as "card check," "Buy American," or other such Democratic initiatives could torpedo the private sector's bounce back and prolong this recession. Hopefully, the new Administration will, at some point, lay aside ideology long enough to give the economy a chance to recover. Left to its own, the economy is showing some signs that things are not nearly so bad as some think.

The peak in unemployment should come this summer and housing in most parts of the US should show stabilization with prices bottoming out this summer. Things will not "bounce back" quickly, but the worst of the economic slide should be over this summer and the second half of the year should show mild economic growth. This would mean that, at worst, we are in a mild recession...not a depression as some pundits have claimed. This is still likely to prove to be one of the mildest recessions since the end of World War II, despite all the hand wringing by the politicians. Watch Asia. Asia will do much better than most prognosticators think. Asia is not highly levered like the West and China's growing internal demand will replace some of the demand lost due to problems in the Western economies.

What could damage this optimistic scenario? More bad policy from the new administration could turn this into a major long run downturn that could go on for decades and eventually lead to a repudiation of the US national debt. Based upon the current Obama game plan, this should be viewed as highly likely. But, hopefully, Paul Volcker and Larry Summers and perhaps Warren Buffett can talk common sense to the new president and get him to abandon his war on free enterprise. If so, things could get begin to look better before next Labor Day.

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