After the recovery (whenever it arrives), what will be the new “normal”?
What’s the new “normal”?
That’s the big debate on Wall Street right now. And the answer is of key importance to your portfolio.
One on side, there are what I’ll call the “growth bears” who believe that once we’re recovered from the global financial and economic crisis we’re in for an extended period of slow economic growth. Bill Gross of PIMCO, Mr. Bond, is the most high profile of the growth bears. He’s calling for 2% growth in the economy (or less) and a 5% annual return in equities as the new normal.
On the other side, there are what I’ll call the “growth bulls.” They believe that once the crisis is over we’ll see a huge rebound off the bottom that continues the recent rally. This camp, composed largely of money managers running equity vehicles, is looking for earnings to climb 26% in 2010 and 22% in 2011, according to data put together by Bloomberg.
We’re in a hole–how about trying to grow our way out?
The economy is taking its first shaky steps toward recovery.
Now what should we do?
Pass a second national stimulus package scheduled to take effect in 2011, when the effects of the first stimulus have largely worn off?
Move to reduce the deficit because the biggest threat to the nation’s future is the huge amount of debt that the country has run up in the bubble and after the bubble burst?
Or something else? And if something different than either more stimulus or cutting the deficit, exactly what?
It’s better to be an investor than a worker right now
Household wealth in the United States grew by $2 trillion in the second quarter, according to the Federal Reserve.
That’s the first gain in household wealth since the third quarter of 2007 at the start of this recession and stock market slide, and brings to an end the longest wealth slump on record.
Now we’ll find out if the wealth effect is still in operation.
Steel, a leading indicator on the economy, could be turning negative
Steel goes into buildings, appliances, and cars. That makes demand for steel a leading indicator for the economy since companies order steel in antipication of rising sales of their own products.
This summer global demand moved up and so did prices. In August a metric ton of hot-rolled steel went for $600 to $620 a ton. Rising steel prices on rising demand provided a sign that the global economy was headed for recovery.
Now prices have dropped back to $570 a ton, according to World Steel Dynamics.
Does that mean that we’re headed back towards recession again?
The recovery isn’t yet a sure thing
In my 11:45 post today, “Huh? Wall Street thinks higher unemployment is good news?” I said that I was still not convinced that the economic recession was truly over. The recovery that we’ve seen signs of in the last few months could simply be inventory restocking. That’s when companies that have put off reordering for months and months because sales were so slow finally decide to restock.
But, and this is what’s critical, these companies aren’t planning on reordering in anything like normal volumes anytime soon, because their customers still aren’t buying much.
It’s tough, I mean really tough, to tell the difference between recovery and restocking. And I’ve seen signs recently of both.
But there are more signs than Wall Street wants to admit that the recovery of the last few months has been caused by inventory restocking rather than by a true upswing in end demand.
That worries me because it sets stocks up for a disappointment.
