Friday, April 2, 2010

Economy Approaching Fork in the Road

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

It's been no secret that I have been a huge skeptic of the so-called economic recovery. To me, the world has been and is being held together with duct tape (may all time favorite product) and band-aids. Without the tsunami of cheap and easy money along with all the other government rescues and bailouts, there would be no "recovery".

The long-term problem is not that the government has intervened like no time before in our history, although I do not totally agree with all of it. The issues are that:

  • The only real employment growth is in government.

  • The economy cannot live without the massive stimulus.

  • Private capital is not lining up to replace the government.

  • Entrepreneurship is just about dead.

  • Taxes are set to go up, up, up at precisely the wrong time.

  • Washington is broken.

There are two ways to look at those comments. It's often darkest before dawn and the almost always resilient U.S. economy is about to surge higher. OR, we've been given an 18 month reprieve and trouble lies ahead. Until proven otherwise, and maybe the stock market is telling me I am a dummy, I have to stay on the troubled side.

The recession was not your run-of-the-mill variety with inventory correction and inflationary pressures that's easily recovered from. It was credit contraction (deflation) based and the only two modern day precedents, Japan 1989-present and the U.S. in the 1930s, didn't work out so well!

It took us until the end of WWII, some 10 years later before the economy turned for good. And Japan STILL hasn't figured out how to divorce itself from the death grip of deflation with all of their demographic issues. But opening their borders would be a start!

I came across the following piece from John Mauldin, who quoted former Merrill Lynch Chief Economist David Rosenberg (currently at Gluskin, Sheff), that I wanted to share regarding issues with the nascent recovery.

More than five million homeowners are behind on their mortgages.There are over six million Americans who have been unemployed for at least six months, a record 40% of the ranks of the jobless.
The private capital stock is growing at its slowest rate in nearly two decades.
Roughly 30% of manufacturing capacity is sitting idle.
Nearly 19 million residential housing units, or about 15% of the stock, is vacant.
One in six Americans is either unemployed or underemployed.
Commercial real estate values are down 30% over the past year.
The average American worker has seen his/her level of wealth plunge $100,000 over the last two years, even with the recovery in equity markets this past year.
Bank credit is contracting at an unprecedented 15% annual rate so far this year as lenders sit on a record $1.3 trillion of cash.
Unit labor costs are down an unprecedented 4.7% over the past year, and what has replenished household coffers has been the federal government, as transfer payments from Uncle Sam now make up a record 18% of personal income (and the Senate just passed yet another jobless benefit extension bill!)."

All things considered, I find it hard to fathom that any type of “real” historical economic recovery is close at hand. The best case continues to be a slow plodding through that lasts several years and allows our problems to heal over time with good policy, assuming we begin to control our budget deficits.

Please feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

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