Forget Tomorrow, It’s A Hard Knock Life
The following headlines appear on a financial news website this afternoon:
• “As Stocks Rally, What Should You Buy?”
• “A Dollar Rebound? Assume A Best-Scenario”
• “It’s a Good Time to Buy Your First Home”
• “Is the Financial Crisis Over? Some Believe It May Be”
Spring is in the air, and with it, a renewed sense of optimism for the U.S. economy despite the fundamental problems which plague it. Reflecting this upbeat mood, CNN Money reported last Friday that a national CNN/Opinion Research Corp. poll found that 60% of respondents think economic conditions in the United States will be “good” in 2009. Of the more than 1,000 American adults surveyed from March 14-16:
• 83% are “confident” they will maintain their standards of living in 2009.
• 85% are “confident” they will keep their jobs over the next 6 months.
• 90% are “confident” they will be able to meet their monthly mortgage payments for the length of the loan.
Wachovia economist Sam Bullard told CNN Money’s David Goldman:
Most people realize that the economy has cycles of ups and downs. Fortunately, the last two recessions were some of the shortest on record, so in 2009 we should be pulling up out of this… The Fed’s rate cuts will start to take their toll later this year, and the economy should bounce back by the end of 2008.
…so the optimists say.
The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.
-William Arthur Ward (American writer. 1921-1994)
Personally, I prefer pessimists over optimists. You can’t win with pessimists, but at least they sometimes have a “Plan B” ready to go in case of emergency. Optimists, on the other hand, are usually lax in their planning and are more often than not helpless during and after a crisis. Think “bailout.” They sing “Tomorrow” when the situation really calls for “It’s A Hard Knock Life.”
YouTube Video Link
As a realist, my conclusions are based on evidence rather than hopes and fears. The fact is, my research does not show any halt in the deterioration of the U.S. economy. Yet, that’s not to say economic stimulus efforts won’t pay off— at least in the short-term. By then, the risk may be that Washington runs out of “magic bullets.” I’m not the only one who thinks this. Referring to last week’s action by the Federal Reserve to decrease the federal funds rate to 2.25% amidst a 19.7% drop in the S&P 500 Index since its October high, legendary investor Jim Rogers told Bloomberg last week:
What are they going to do when it’s down 30 percent or 40 percent or 50 percent? They’re not going to have any bullets left. They’re not going to be able to solve the problems at that point.
David Gaffen from the Wall Street Journal’s MarketBeat Blog wrote last week:
In fact, some believe the Fed’s move Tuesday was a compromise — a 0.75 percentage point cut instead of a full point in order to “save some bullets in its arsenal in case the market and macro backdrop deteriorate further,” writes David Rosenberg, chief North American economist at Merrill Lynch.
And what will happen should the Fed run out of ammo, or if it proves ineffective? Possibly a double-dip recession like in the early 1980s, according to Lehman Brothers analysts. Reuters’ Richard Leong wrote last Thursday:
The persistent slump in housing will continue to drag on consumers and growth while tight credit conditions, a weakening job market and record energy costs are also taking a toll on the economy, according to economists at the bank…
Lehman economists predicted the U.S. economy will contract 0.5 percent in the first quarter and 1.0 percent in the second quarter, followed by a rebound in the second half. “We expect a feeble recovery in 2009, with the economy threatening to fall back into recession,” Lehman economists Michelle Meyer and Ethan Harris wrote in a research report.
Sources:
“Americans confident in 2009 turnaround”
David Goldman
CNN Money, March 21, 2008
“‘Big Rally’ for Stocks to Continue, Jim Rogers Says (Update2)”
Carol Massar, Eric Martin
Bloomberg, March 19, 2008
“Is the Fed Running Out of Ammo?”
David Gaffen
Wall Street Journal (MarketBeat Blog), March 19, 2008
“Lehman sees risk of double-dip U.S. recession”
Richard Leong
Reuters, March 20, 2008
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