Thursday, October 08, 2009

The Obama boom has begun; Part I: the economic ramifications.

This is a 2-part post. This post is Part I, in which I will discuss the ECONOMIC ramifications of the coming Obama boom. The coming boom is a monster, and thus the ramifications are highly significant! Even just my basic predictions have huge, HUGE ramifications. The Dow will, conservatively, I think be at about 17,000 in 2012, up almost 45% from where it is now. Even the highly likely economic ramifications from my predictions make this post well worth reading. In Part II, the companion post, I'll discuss the likely POLITICAL ramifications. If I'm even close to being right the political ramifications have the potential to be sweeping, reshaping American politics for a generation, as the depression did, in a coalition favoring the democrats in a very big way. Unfortunately, at least in the short run, this won't have much practical effect. As the health care debate has shown all too clearly, Obama is a compromiser, unwilling to go to the mat for most anything, and the barons in Congress are a heck of a lot more concerned about their pet projects then about solving America's problems.

In my post on July 9, I predicted a strong recovery. The shape of that recovery is becoming crystal clear to me, and it will blow your mind. Yes, it will be V shaped, for those who have followed discussion about the shape of the recovery in terms of a letter of the alphabet. Like the letter V, the economy went down sharply, and its going to go up sharply. In fact, it has already not merely hit bottom, but began growing fairly strongly. The initial estimate for 3rd quarter (July-September) GDP comes out at the end of October, and I'm looking for a number north of 3%, and possibly around 4. The 4th quarter will be over 2.5% as well. Not yet a boom, but definitely growth. 2010 will be the BIG year, the year the economy really takes off.

Jobs are what everyone is (rightly) worrying about. Job loss will stop quickly, before the end of the year. Job growth will start out slow and then, as I discuss later, shoot up very suddenly and very very sharply, in the early to middle part of next year.

I'm not prone to excessive optimism, I'm really not. But the American economy is about to roar back to life, haul Europe's along with it, and shock the world. Put on your party hats, peoples, the good times are about to ROLL!

In my July 9th post I explained a bit about why I think economic growth will be so strong over the next few years. Let's try some hard number predictions (guesses, really).

A) The short term:

For the second half of this year, which has begun, growth will be fairly strong. I'm thinking 3% or so for the 3rd quarter, and about the same, to perhaps as high as 4% for the final quarter. This Christmas will be a strong holiday season, with sales up more than 10% from last year's poor levels. Even though these are strong predictions, they aren't the stuff of legend, given the economic free fall of late 2008/early 2009. In fact, jobs will most likely continue to be shed, and unemployment will tick up to 10.3% give or take a few tenths. But 10.3% should be the high water mark for unemployment for this cycle. From there the unemployment rate will decrease, very slowly (if at all) for a few months, then pretty rapidly for a long time thereafter.

In short, the $64,000 question is the job market. When will the economy begin creating jobs, and lowering the monster 9.8% unemployment rate? The very short term news on this front is awful. The average number of hours each working American works each week is the lowest on record. This means that as company order books begin to increase (this has already begun) companies can easily work current employees a little harder before even thinking of hiring new employees. And companies will be VERY cautious in hiring new people.

To explain what will happen next, a brief look back is required. Between September 2008 (Lehman) and about March 2009, businesses in America were in full out panic mode! The financial system teetered on the edge of collapse, a collapse which would very likely have resulted in unemployment over 15% nationally, bread lines reminiscent of the 1930s, and all sorts of other awful outcomes. In this environment, with sales of things like refrigerators, tvs, CARS, and other consumer durables falling faster (by far in some cases) than at any time since 1945, business understandably lost its nerve, panicked, and laid off, en masse, millions of workers. What's weird about the Great Recession of 2008-2009 (I like the name Great Recession, it really captures the moment -- I didn't make it up) was that FAR more jobs were shed than should have been based on the GDP numbers, as I said earlier. Given the sharp decline in GDP, unemployment should be around 8.3-8.5% now. Instead, its 9.8. A 1% + difference in unemployment is a big deal, its about 1.5 million job. So we're basically short about 1.5 million jobs from where we "should" be based only on the GDP decline. In broad brush, those 1.5 million jobs are "panic" jobs. Jobs that were destroyed not because they couldn't be supported by the companies that had them, but because companies were hugely fearful. Now this was perfectly rational, don't misunderstand my point. But now that the financial crisis is over (yes, its OVER), American business has fewer workers than it needs RIGHT NOW by at least 1.5 million. As GDP picks up, that shortage is going to grow, fast. Real fast. So does this mean businesses are a few months from a hiring boom that will will take the job market in 3 big steps from godawful to weak to mediocre to good? Nope. Businesses will project the recent past into the near future (perhaps the most common human mistake-- if on my epitaph it is said that I cautioned against making the mistake of projecting the recent past into the near future, I will have accomplished something, as it is one of my two basic motifs in life) and businesses will be very cautious in expanding payroll, particularly with the crushing costs of health care added onto the cost of hiring most workers. Thank you GOP and weak-kneed democrats. More on health care coming to a post near you.

In any event, sometime late this year or early next year, probably in January or February 2010, a funny thing is going to happen to American business, in a fairly short time frame, circa 2 weeks. Businesses from the redwood forest, to the gulf stream waters, from California (yes, even California) to the New York islands, are going to be caught short. Their order books, down so sharply, will begin to revive. Nothing too dramatic, but instead of having orders for 100 units as we projected, we've got orders for 108. Now we can get out 108 with current payroll, but its a strain. And our customers are telling us they might want 115 over the next period. Wow, we need to hire new workers! Well, let's DO IT. This will happen, literally in a few weeks, all over the country. And so begins robust job growth.

Beginning early next year, Bernanke and the fed will see that my predicted Boom is really here, and begin draining money out of the system, and raising interest rates, in short undoing the huge stimulus efforts undertaken in recent years.

I predict that job growth is on the verge of turning positive, and that for September-December job loss will be very small, less than 100k/month on average, and that by February there will be net new jobs. Even manufacturing employment, which has been just decimated, is going to increase. In the most recent national report on manufacturing, for August, the purchasing managers' index registered 52.9, indicating slight growth in the manufacturing sector overall. This is the first month of growth in 18 months, and surprised me somewhat. Its not a strong report per se, but for manufacturing of late it is strong indeed.

This report implies, based on past correlation, that the economy is already growing at an ok clip, 2-3%. Given that the recession has just ended, this isn't bad. Given that businesses inventories are way down, there is thus an immediate need for more manufactured items. Now of course some of this will come from overseas, but a fair bit will come from the good old US of A. So the manufacturing recovery has already begun! This will alas come as news to Ohio, Michigan, etc, which have been so hard hit in recent years, but if order books are growing employment will grow too. In the short term at least.

Since inventories are low, and there is pent up consumer demand for cars (some of which was satisfied by cash for clunkers) electronics, and other items, economic growth should be fairly strong in the coming months, as it usually is after a recession. Recovery from the last 2 recessions (2001-03, 1991-2) was painfully slow. Most commentators are predicting a similarly slow recovery this time, in particular because of the huge problems in the financial sector. These predictions are reasonable and understandable. And dead wrong!

These predictions by others ignore the huge actions by the fed, treasury, and the congress, as outlined in my July 9th post, which I take so very seriously. In short, there is a totally unprecedented amount of stimulus in the pipeline, and now that the financial system isn't a total mess, that stimulus will work its magic.

To conclude predictions for the near term:

2nd half 2009: 3.5%.

1st half 2010: 5% (that's not as shocking as it sounds after such a steep recession).

2nd half 2010: 3.5%

Not bad at all, I'd say!

B) The next few years:

As I've said, starting late this year or early next year the economy will take off like a rocket, and one of the great booms in American history will begin. Figure on better than 4% growth for 2010 and at least 3% for 2011.

Because the economy is so weak now, and has been for a while, it can grow for quite some time without increasing the types of inflationary pressures that come from a strong economy, namely a wage-price cycle where emboldened workers demand and receive higher and higher salaries and other forms of compensation, and then spend that money chasing a relative shortage of goods and services.

Will inflation kick up and become a serious problem, as many suggest? No. Why? Because I have nearly unlimited faith in Bernanke's ability to manage the money supply and other factors within the control of the fed. The recovery will be faltering at first, and Bernanke will be cautious in undoing the massive amount of stimulus that he has injected. But the GDP growth that I have predicted is so strong that he will by the middle of next year begin fairly aggressively raising interest rates, selling back treasury bonds that the fed has bought, thereby reducing the money supply, and slowly begin eliminating the other extraordinary stimulus measures which took place in 2008 and early 2009. This will have the desired effect of clamping down on inflationary pressures caused by very very easy money, and, I predict, cause the dollar to soar. These two things in conjunction will be enough to prevent inflation from increasing more than modestly.

Once the markets become convinced that I am correct, and that a strong noninflationary recovery/boom is underway, the markets will take off like a rocket! My advice on buying stocks? If it isn't nailed down, buy it. If it is nailed down, get the nail off the damn stock and then buy it! The conditions I outline are ideal for a long sustained stock market boom (which will, by 2012, be creating its own problems, but more on that in a few months). My 17,000 prediction on the Dow Jones by 2012 could prove conservative.

C) The ramifications:

Much has been written about how American consumer behavior has really changed this time. And it has, for a while. There is MUCH less conspicuous consumption. Frugality is in. Had the hard times lingered, this change may have lingered. But since a boom, and prosperity is really right around the corner this time, old habits will reassert themselves. Debt will again be in. Even a housing boom wouldn't surprise me, but that's several years away at least.

The federal budget deficit will close much more rapidly than the CBO or congress is predicting. It won't be balanced anytime soon, that's just not in the cards, but it will shrink and shrink dramatically. In fact, if reelected, it wouldn't surprise me that much if Obama duplicates Clinton's feat of the federal budget balance moving in the correct direction for 8 years in a row! In any event, the Boom will be strong enough to fundamentally rewrite the budget picture for the next several years, but not anything like strong enough to solve the long term budgetary problems, of course. These require a significant cut in the rate of growth of Medicare, AND significant tax increases, as well as modest cuts elsewhere in the federal budget.