As I am scribing this, the Dow is taking another header – down over 100 points at mid day East Coast time.  While uber-optimists and folks from the White House continue to crow about the recovery, my monthly talk around with bankers, equity players, small business owners and some insurance company execs tell another story.  The sentiment that bubbles up from this random survey that I do is reflected in the following chart:

Find the “You are here” dot in the lower right hand corner and it shows that the current recovery in the equities is well  below average in both duration and strength.  To wit, here are some summary comments from the folks I spoke to:

  • “Last year was just terrible for us, and with unemployment being what it is, we don’t see any improvement in 2010.  There’s so much uncertainty with what healthcare will cost and what the cap and trade legislation will do, that all our guys are just sitting tight.”  (Manager of a diversified holding company)
  • “We are seeing more not fewer foreclosures coming, people are out of gas and don’t see much hope down the pike.” (Commercial lender at a local bank.)
  • “In 2010, our focus is going to be on our existing assets.  The emphasis is on the cost side, we see no upside for income.” (Portfolio manager, large insurance company)
  • “They are telling us it’s 10% unemployment…try more like 18-20%.  There are no jobs out there, they didn’t stimulate anything but themselves.” (President, mid-sized construction company)

You get the picture.  These are man-on-the-street impressions, but provide valuable intelligence on the real state of affairs.  Turning back to the chart above, my sense is the only reason the equities are moving at all is because the cash in the mattress thing is uncomfortable.  Here’s another chart to consider:

This sort of points to what may lay ahead.  Those loans are either going to get reset or the assets behind them are going to find a new home.  The Fed is in a bind.  They have relaxed the accounting rules on the banks…from my friends at Casey Research:

Unfortunately, it has always been difficult to rely on reported financials as they are not forward looking, and a bank’s balance sheet can deteriorate quickly. To make matters worse, in the last year, changes in GAAP accounting measures make it much harder to evaluate the soundness of financial institutions. Banks are no longer required to report the value of their MBS (mortgage-backed securities) at market and can avoid write-downs that would affect their capitalization.

The Fed has also kept interest rates at historic lows for a historic length now, they don’t see that there’s much they can do – from the Wall Street Journal this morning:

Although Federal Reserve officials expect the economy to grow too slowly this year to bring the jobless rate down substantially, they are likely to conclude at their Jan 26-27 meeting that there isn’t much they can do about it.

That means sticking to their stated plans to end purchases of mortgages at the end of  March (!), roll back emergency lending programs in February and maintain interest rates exceptionally low for at least several more months.

I am reminded of the Admiral Stockdale quote in the VP debate back in 1992: “Out of ammo!”

Look, the way out of this is to reduce the fear that every producer of value, aka businessman, feels.  We have done such a poor job teaching economics, that there seems to be a plurality of people that now genuinely believe that the government creates jobs.  Ahem, the jobs that they do create are paid for by the private sector!  The government is not a “for profit” entity.  There are estimates that up to $4 Trillion worth of private capital is sitting on the sidelines.  We need to get that money into the system, circulating with that magical multiplier effect.  That money is a whole lot better than the printed kind coming out of Washington right now.  So how to do it?  Here is my humble “five points to fix the economy” strategy:

  1. Suspend the capital gains tax for the next three years or until GDP growth goes north of 5%, then bring it back in gradually.  This will facilitate the movement of assets and movement of capital to higher and better uses.
  2. Shelve the current healthcare bill and start over.  Start with a bi-partisan commission that arrives at an agreed upon list of problems that need to be addressed and pledge that any legislation will address those problems.  If Washington wants to handle problems, take on the ones they have already created: Social Security and Medicare which are both going in the red at a precipitous pace.
  3. Shelve the cap and trade legislation. Just end it, period.  There is a growing body of evidence that the earth is actually cooling, the climate debate is not “settled.”
  4. Cease government insurance for private entities.  This is a distortion of market economics and encourages irresponsible behavior.  One need look no further than Fannie Mae and Freddie Mac to see that this is true.  These two entities were at the core of the housing melt down, and need to be wound down immediately.  Let’s reinsert some personal responsibility into economic decision making.
  5. Reduce corporate income taxes to 20%.  At present, the 35% rate coupled with an average state tax burden of 10-12% puts U.S. corporations at an enormous competitive disadvantage.  Restricting profitability and growth.

These are modest proposals, but any one of them would be enough to mitigate the sense of doom that is almost palpable in the business community.


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