The Long Road Ahead

I’m sitting in Denver International Airport after yet another conference. Fortunately, it’s a whole 9 days until I have to come back here for another one.

In January of 2009 I wrote a blog on the strategic Triple Threat. The first threat was a severe recession. Second was a slow and painful recovery. Third was a changed economy where spending and consumption would settle at new, lower levels.

I attended a presentation by an economist from the Federal Reserve yesterday. His news was pretty solid evidence that we are still in phase two- the slow and painful recovery. His main points:

  • Corrective data are coming in on the 2.4% GDP growth announced 2 weeks ago for the second quarter, and they are massive. The Fed is now planning for a revised estimate of 1.1% . The markets buckled at the 2.4% (initial expectations were for 3.7%) I don’t see how their reaction could be good when this comes out in a few weeks. 
  • No internal tracking indicators are positive. He said ” I repeat. The Fed does not have a single positive tracking indicator.”  
  • Employment increases are rising slower than workforce population increases. There will be no drop in the number of unemployed people in the foreseeable future.  
  • Savings (published at 3-4%) may actually be running at 6-8%, and much higher for those with disposable income. All of the increase may be in the top quintile of household incomes. The 2nd quintile is steady. The bottom 3 quintiles of population are sinking further into debt. This portends no further recovery in retail or consumption.
  • Bond yields may be reaching the end of a 30 year cycle. The last 2 years are actually above the long term trend line. We are re-entering a bond market like 1953-1982, when bonds were investments for widows and orphans. He said that bonds are the current bubble. 
  • Only 50% of all banks are actually lending at all. Money for construction and development continues to shrink. Regular commercial real estate lending is steady. Commercial/Industrial lending is on life support. No small biz lending at all. (It appears that limited SBA guarantee funds may be going to formerly commercial-qualified deals, freezing out SBA traditional clients.)  
  • Residential mortgage delinquencies not only aren’t slowing, but the rate of increase is accelerating. Commercial mortgages are no better, but lag 2 years behind the residential curve, so that bubble hasn’t really burst yet. 
  • 80% of TARP bailout money is still in banks. It will be a long, long time before they have to give up arbitrage in favor of actual business lending.

He was not concerned about deflation. The fact that Bernanke acknowledges it and has committed the FED to any inflationary tactic necessary to counter it renders it moot. He said that the Fed “has plenty of tools left.” The current tactic is to print money and lend it to the government to cover deficit spending. I’m not sure what could be more inflationary than that, but he seemed to think they could do more.

Another source who specializes in residential real estate foreclosures cautions us to remember that Fannie and Freddie, besides being broke, are sitting on 7.5 million foreclosed homes rather than dump them on the market just before the election. Look for residential property to take another hit after November.

I know that we are all sick of the recession, but that doesn’t mean a damn thing.What should you do? To paraphrase the words of Admiral Chester Nimitz after Pearl harbor: “Keep your powder dry. Watch for opportunity. Take action as soon as you see an opening.”

If you’ve made it this far, you are already running lean and mean. Competitors are falling. Better employees are available for job openings. Bargains are available. Cash is still king, and will remain so. Negotiate hard, and spend carefully. If you thrive on adversity, the best may be yet to come.

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