Nouriel Roubini just said that he expects the US recovery to slow in the second half of the year. I agree. We do lots of cycles work and have plenty of forecasting techniques at our disposal. Here’s what we expect.
A weak July and TERRIBLE August.
A prolonged decline starting in December
and running on through to February of next year.
Wicked bad.
That’s from cycles and seasonals.
Everyone asks for the reasons why when we talk cycles and here they are …
What drove GDP growth over the last year was inventory adjustments, which called for restocking and thus manufacturing output to increase. Basically, upon the 2007-2008 stock downturn and mention of recession/depression, companies cut inventories, laid of workers, and then last year they started replenishing them because they cut too much. That restocking is all done with now: inventories are replenished.
The question is, will consumers start buying again as they did in days of old, using Mr. Plastic? Doubtful. People have lost jobs, realize they have too much debt already, and as seen in the after effects of the 1929 great depression, are wary about using credit anymore. They are gun shy about using Mr. Visa and Amex.
What about the government stimulus package?
Roubini thinks the impact of the government’s stimulus on GDP growth will peak this quarter, and its contribution to growth will decline from here on in. John Mauldin did a piece awhile back showing that even if we added a ton of jobs every month, WHICH IS IMPOSSIBLE TO BEGIN WITH, it will still take us years to recover all the jobs we’ve lost since the start of the recession. The growth rate we need in GNP must be at historic highs, and that’s science fiction impossible unless we bump into some massive new economic paradigm from some invention that calls for massive Shumpeter destruction and creation, where the creation phase has to make a lot of money for everyone (or cut costs in a magnificent way).
And what jobs are you thinking of stimulating anyway when you start trumping that feel good catch phrase (“jobs stimulus”) designed to cheer the nation with rah, rah, rah? Sorry folks, the manufacturing jobs are gone, which is what you need in a nation because it’s usually only manufacturing that produces increasing margins per scale, meaning wealth. Finance does a little bit, but we killed that golden goose. Erik Reinert in How Rich Countries Got Rich surveyed the last 500 years of wealth creation and nations which became impoverished as well. How did they get rich? They went into increasing returns activities, namely manufacturing. Lose that and your wealth goes with it. The equation that mattered was:
(Increasing margins per scale) * (Inceasing demand for the goods) = Wealth
Countless English speaking jobs that don’t even require technical skills, as does manufacturing, have been outsourced to India and the Philippines, and quite a few IT jobs as well. These jobs are NOT coming back. Why would they since they are cheaper over there? Bartending and restaurant jobs will get a bump up for a short while along with other near minimum wage jobs that are service based, but “service based jobs” means their existence is dependent on good times and the use of credit. So with the expensive jobs going/gone and loss of the manufacturing base that used to pay for them, slowly wave goodbye to a premier national standing. You hate to hear that? I hate to write it. Go read Reinert.
I think it was John Bogle of Vanguard fame who warned that we’d have a long time period (a decade or more) of poor stock market returns and they have started. I didn’t believe him at the time, but it turned out to be true. Mauldin said the same thing in his last book, Bulls Eye Investing. With Europe in a frazzle ready to split at the seams, the likelihood is tilting toward more bad times ahead rather than good, so I side with ROubini and turn a deaf ear to Obama proclamations. Expect these coming periods as BAD times for the US Economy and thus stocks:
July-August 2010
Dec 2010-Feb 2011
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