This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, October 26, 2009

US Laggard in Global Recovery

Well, perhaps apologies are in order. Apparently I’ve underestimated readers’ interest in political satire. It seems that last week’s article was not read with the same enjoyment that I got in writing it.

I will be the first to admit that my article last week was a bit more political than most. However, while I chose to present my case as a political satire – not to mention fantasy – the real objective was to get readers thinking about current economic circumstances, and how the economy could be turned around – if that was really the goal.

This week we’ll stay away from politics, but keep discussion broad. So this week let’s consider the following question: Why is rest of world recovering and the US isn’t? In other words, why are we lagging rather than leading?

First, let’s be clear. I’m not talking about a stock market recovery. I’ve stated repeatedly that we believe this rally is totally unjustified in fundamental terms. What we’re talking about is REAL economic recovery – sales, jobs, revenue, PROFITS.

The example we’ve seen thrown around repeatedly in the last week is the London real estate market. According to one Bloomberg article some agents there are nearly sold out of inventory (London Agents ‘Sold Out’ as Home Asking Prices…, Svenja O’Donnell). Even though unemployment is still high, construction had slowed down so much during the downturn that now inventory is extremely low.

Of course, mortgages are much more available there than they are here, and that is spurring demand from foreign buyers. That includes demand from several big banks, including at least one that was the recipient of a hefty taxpayer bailout. Goldman Sachs employees have reportedly been major buyers in UK real estate (The barefaced greed of bankers and their bonuses…, Boris Johnson).

All this demand on the far side of the pond has sparked recent increases in asking prices, which are now topping previous highs set in late 2007 (London Agents ‘Sold Out’…). All this while US housing prices remain at their lowest levels since the start of this recession, amid growing foreclosure figures, even among modified mortgages (the so-called “refault rate”).

What’s more, things aren’t expected to improve in the near future as another wave of trouble is expected, this time in commercial real estate and Alt-A mortgages, which could very well lead to even more bank failures (Commercial real estate to drive U.S. bank failures, Elinor Comlay).

And London is hardly the exception to the global recovery. Australia has rebounded so fast that the central bank there recently began raising rates in order to ensure the economy doesn’t overheat and inflation doesn’t take off (RBA Says Low Australian Rates Imprudent…, Jacob Greber).

The million dollar question, it seems, is this: What’s makes the United States so much different from most other developed nations? Why does credit continue to contract here as consumers pay off debt rather than take out loans – not that banks want to lend anyway?

We’ve been saying for some time now – especially since government bailouts started – that inflation would be a problem down the road. But we’ll readily admit that isn’t the case right now. In fact, deflation is a much more serious threat as credit continues to shrink.

In fact, right now the US dollar buys more than it did a year ago, according to CPI figures from the Bureau of Labor Statistics (Consumer Price Index – All Urban Consumers, Department of Labor).

To add to this history lesson, let’s take a quick look at the Dow. At just over 10,000, the first time the Dow was at these levels was in 1999, and most recently crossed these levels (while in an upward trend) was in April of 2005.

Thinking back to 1999 and 2005, I certainly can’t speak for readers, but I can say that personally today feels absolutely nothing like 1999, much less 2005. Not in economic terms like sales or unemployment.

It’s historical comparisons like this that have led us to believe that this recent run in stocks, while beneficial for helping to rebuild portfolios, is not supported by economics. Even though some big business have started loosening their purse strings (Business Spending Looks Up, Timothy Aeppel), the US still has a long way to go before we see a true economic recovery, one that would justify the kind of rally we’ve seen in stocks.


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