Current Economic Outlook
01/15/2009 - The Incredibly Difficult Environment Ahead
In order to capture the challenge of looking ahead, it is valuable to review the past. A year ago we knew about the problem of sub-prime loans and the large losses in portfolios. We obviously had no concept of the magnitude of the problems in the system. Virtually no one foresaw the carnage we would see in 2008.
Looking ahead:
- There is near unanimity about the future for 2009. Virtually everyone sees a steepening recession, more defaults and more bad news. HIstory tells us the consensus may be correct for awhile, but generally not for a longer period. So the complete absence of optimism is a positive sign.
- There is little disagreement that rates will remain low. In an environment where government deficits will grow annually at over $1Trillion, it is difficult to see how rates will continue to be low unless we accept the consensus view that no one else will be borrowing, and there is an infinite supply of capital in the world to finance US deficits. Neither appears likely for the longer term.
- Commodity prices are reflecting the view that no one will need them for a long time. We know the supply factors and this view is unlikely, though anything is certainly possible.
- The consensus view that mortgage refinances will be limited by value and credit considerations is probably overstated. A large percentage of homeowners have owned for over 5 years and while they’ve suffered paper losses, they generally will have enough equity to refinance.
The major problem we have had for the past 6 months is a crisis in confidence. Our financial system has always required confidence. Even at 10% capital positions, banks are leveraged 10-1. What we’ve seen from our “leaders” is panic, from the chairman of the Fed to the Administration. These people have been “yelling fire” in a crowded theatre and seem surprised the incredible actions they have taken have had a limited effect.
All good leaders know that a hallmark of success is optimism, even if it requires shading the truth somewhat. They know their job is often to paint a rosier picture than is evident from the facts since perception is often more important than reality.
That’s why there is some reason to hope the economic turnaround may be quicker than the majority believes, just as the decline was more pronounced. More refinances means more money in consumers’ pockets. Cheap oil means more money in consumers’ pockets. New leadership means new optimism.
This is exactly the opposite from what we saw a year ago. No one reacted then to the clear signs things were weakening. One wonders whether anyone will react to the positives now.
This entry was posted on 14. January 2009 at 15:56 and is filed under Capital Markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.