“Moody’s Investors Service, the ratings agency, said in a report last week that many states ‘are increasingly pushing down their problems to their local governments.’ The Moody’s report warned that this would be “the toughest year for local governments since the economic downturn began.” (See “States Pass Budget Pain to Cities,” http://www.nytimes.com/2011/03/24/us/24cities.html?hp.)
“The state budget squeeze is fast becoming a city budget squeeze, as struggling states around the nation plan deep cuts in aid to cities and local governments that will almost certainly result in more service cuts, layoffs and local tax increases.”
Homes, over the last fifty years, served as the piggy-bank for the middle classes and the working classes as the rising price of houses during this time served as the major source for these people to increase their wealth. We are learning more and more that the inflated values of land and commercial real estate and the growing wealth of these classes also served as a piggy-bank for other sectors of the economy, such as state and local governments.
And, this piggy-bank was the source for increasing employment, rising wages, and other benefits in the public sectors of the economy.
Now the piggy-bank is broken and state and local governments are feeling the pain as have home owners, small commercial banks and small businesses over the past three years. (See my post http://seekingalpha.com/article/259867-banking-and-real-estate-the-problems-are-still-there.)
People are learning that those that “live” by inflation, “suffer” by deflation.
Ben Bernanke and the Federal Reserve are trying as hard as they can to create inflation once again so as to preserve the banking system, the housing market, and, now, state and local governments.
The economy, however, may not be responding as the Fed might want it to.
In a real sense there are two economies. There are the better off, those that benefitted from the credit inflation of the last fifty years, the people that learned how to use inflation and who have the resources to protect themselves against changes in prices. Then there are the others, those who can’t protect themselves from changing prices.
One result of this is that the income distribution in the United States is skewed more toward the wealthy than ever before in the history of the country.
The history: in the early 1960s, there were many intellectuals and policy makers who believed that inflation was beneficial to the worker because a little inflation was not a bad trade off for higher levels of employment. This trade off was captured in something called the Phillips Curve.
Although the Phillips Curve was intellectually contested by the end of the 1960s, the myth of the Phillips Curve lived on in many official circles and some still believe in it to this day.
Yet, the credit inflation that was supposed to be a ‘boon’ to the blue-collar worker and the middle class resulted in a withering of American manufacturing capability in steel, autos, and then other industries. It resulted in substantial amounts of under-employment for working age people. It decimated the housing industry. It has made many of the smaller commercial banks in the United States insolvent. And, it has now bankrupt the American system of local government.
We have had a bailout of the steel industry. We have had two bailouts of the auto industry. Labor unions in the manufacturing industries are so week that union leaders are now training people to go into other countries and build up labor unions there. We have had a bailout of the banking industry. We are now going through a workout and possible bailout of state and local governments.
Labor unions in the public sector, teachers unions, are now acting in much the same way as did the auto unions and the steel unions before them, as the economic base for their benefits have faded away.
People and organizations can only live beyond their means for so long and credit inflation can create the “good days” for only so long. And, when the good days are over, people must return to a more controlled and disciplined life style. The pain of the ‘return’ is not easy to bear.
The efforts by Mr. Bernanke and the Federal Reserve to create another round of credit inflation is, unfortunately, producing a further bifurcation of American society.
While the middle class and the blue collar workers continue to suffer and continue to restructure their budgets and balance sheets, those who have more are taking advantage of the Federal Reserve’s actions to further strengthen their position.
Large commercial banks are bigger than they were when they were “too big to fail” in 2008. Payrolls and bonuses at financial institutions are exceeding earlier years.
Large corporations are sitting on “tons” of cash and possess immense borrowing power at miniscule interest rates. And, we see one large merger taking place here and another large merger taking place there: AT&T and T-Mobile; Deutsche Bőrse and the NYSE Euronext; Warren Buffet and Lubrizol, and Caterpillar and Bucyrus. The projection is for more of this to take place in America...and in the world.
And, the wealthy? Consumer spending is picking up but the strength is not at the lower end of the value chain. Manufacturing is picking up but for higher end goods. Overall, the pickup is just modest because it is not supported throughout the income spectrum.
I raised the question earlier, in such an environment “Will the Financial Industry Dance Alone?” (http://seekingalpha.com/article/255748-will-the-financial-industry-dance-alone) The answer to this question seems to be “No, the financial industry will not dance alone. Big corporations will dance along too as will the wealthy.” There was concern in the 2000s that the benefits of the economic growth at that time were not spread evenly throughout the economy.
My feeling is that you haven’t seen anything yet.
The efforts by the Federal Reserve to inflate the economy are not going to be spread evenly throughout the economy. State and local governments are going to have to re-structure and downsize. The people in these bodies are going to have to lower their expectations as well as the people that have been served by them.
Similar to the situation with the smaller banks, one hopes to get through this adjustment period without major disturbances. That is, government officials and regulators are working overtime to keep a lid on things so that insolvencies and bankruptcies do not overwhelm the system. The efforts to contain these problems seem to be having some success. Ever Meredith Whitney, the financial analyst who predicted massive defaults in the municipal bond area still contends that there will be a large number of defaults although not as many as she first feared.
Still, things are changing and will my guess is that in many areas of the society we will not return to the “plush” years experienced in the last half of the twentieth century.
Showing posts with label real estate. Show all posts
Showing posts with label real estate. Show all posts
Thursday, March 24, 2011
Friday, November 19, 2010
The Real Reason for Fed Easing? Debasement Inflation?
Well, one of my major arguments made it to the op-ed page of the Wall Street Journal today, but I didn’t write it: Andy Kessler, a former hedge-fund manager wrote it. I agree with most of what Mr. Kessler says in his piece, “ What’s Really Behind Bernanke’s Easing?” (See http://professional.wsj.com/article/SB10001424052748704648604575621093223928682.html?mod=WSJ_Opinion_LEFTTopOpinion&mg=reno-wsj.)
I have been arguing for more than a year that the real concern of the Federal Reserve is the solvency of the banking system. The Fed’s given arguments for pumping so much liquidity into the banking system is that the economy is weak and the level of unemployment is unacceptable. The Chairman of the Board of Governors of the Federal Reserve System cannot say just say out loud that “the banking system is at risk.” Nor can any other Federal Reserve figure say this out loud.
My concern over the past year of so has constantly been that the economic and financial situation did not warrant the injection of all the Fed was throwing at it. See my post “Bernanke’s next round of spaghetti tossing”: http://seekingalpha.com/article/233773-bernanke-s-next-round-of-spaghetti-tossing.) A recent post continues to exhibit my belief that the justification for the Fed actions has been the solvency of the banking system and not just the health of the economy: http://seekingalpha.com/article/229385-is-a-crunch-coming-for-smaller-banks.
But, the behavior of the central bank not only represents concern for the commercial banks, but also for the real estate market. Elizabeth Warren, in Congressional testimony earlier this year, indicated that 3,000 commercial banks were threatened over the next 18 months or so, especially in loans in the area of commercial real estate. Plus, we have a massive problem in the municipal bond markets concerning the solvency of our state and local governments. The pension programs of these entities loom large over the financial markets and many individuals I know that work in this sector are scarred silly.
The efforts of the Fed, therefore, are attempts at “debasement inflation”. This was uttered by William Browder, who now runs an investment fund in London. (In the morning New York Times: http://dealbook.nytimes.com/2010/11/18/from-russia-expert-a-gloomy-outlook/?ref=todayspaper.) “Emerging markets went through more than a decade ago in the Asian Financial crisis what developed markets are experiencing now.” Browder added, “you want to own hard things that can’t be printed.”
But, these efforts extend beyond the borders of the United States. Given the fluidity associated with funds flowing throughout the world, the additional liquidity extends to the situation related to many Euro-nations in terms of their sovereign debt. Writedowns are going to occur in Ireland, Portugal, Greece, and possibly Spain and Italy. Even France is feeling some of the heat. International financial markets also need liquidity.
The question here is whether this concern over sovereign debt will extend to the United States. Browder goes on to say that there are limits to how much governments are able to borrow. And, investors move from one weak market to another. Eventually, these investors work through to even the “strongest” of the fiscally challenged states. When it gets to this stage, he argues, the only thing these governments can still do is print money.
Where are the hard assets? Real estate. Commodities. Companies.
These are the areas that will attract a lot of the money going around.
The prices of commodities have already experienced a significant bounce. This will continue.
Big money will also eventually be made in real estate and the merger and acquisition business of corporations. The prelude to this is the massive buildup in the cash holdings at many of the largest companies in the world, in the largest commercial banks in the world, and in hedge funds and other private equity funds. And, really, the move has already started in a very selective way.
I continue to believe that over the next five years of so we will see a substantial acquisition of assets, across the board, of a size we can barely imagine now.
The objective of the Federal Reserve is to keep things as stable as possible so that the FDIC can continue to close banks as smoothly as it can; that mergers and acquisitions can occur in an orderly fashion so that weaker institutions can be removed from the scene; and that more and more money will move into the real estate area so as to eventually put a floor under real estate prices.
All this may be done, but it may not exactly take the path that Mr. Bernanke would like it to take. Furthermore, all of this activity may not achieve the goals that President Obama would like to achieve.
Mr. Kessler argues that, in his view, the stock market will not view these developments as favorably as they have received earlier efforts at spaghetti throwing. He claims that this attitude has been shown by the recent behavior of stock prices. In addition, bond yields have backed up (prices of bonds have fallen) not what quantitative easing was devised to do. Both of
these outcomes are “exactly the opposite of what Mr. Bernanke was trying to achieve.”
In the case of mergers and acquisitions and the acquisition of real property, the early results are indicating that the bigger organizations are getting bigger, both financial and non-financial institutions, and the wealthy are getting wealthier. These outcomes are exactly the opposite of what President Obama was trying to achieve.
Mr. Browder spoke to students at the Columbia Business School several weeks ago. He argued that “the high-inflation scene” described above “could be another lucrative opportunity” similar, although not as great, to one he made so much money in while in Russia.
In such a situation, therefore, the emphasis in investing should be on what companies or assets can be acquired that will benefit from the credit inflation. Caterpillar, for example, moved into the mining equipment field, one reason being that mining will benefit from the surge in demand coming from emerging nations like China and Brazil. So, one is looking for “targets” and not long-term value creation.
One has to be careful, however, in buying into acquiring companies. Not all companies are good acquirers. History shows that many acquirers have to “unwind” their acquisitions within five years or so because the purchases are done for the wrong reasons or the managements cannot effectively integrate the properties they have obtained. However, there may be some very good “buys” amongst the acquirers.
For example, the value of the Caterpillar stock went up after the acquisition was announced. There is the feeling that the Caterpillar management can effectively put the two companies together to the benefit of the shareholders.
The Federal Reserve is creating a lot of opportunities with its new policy stance. However, the beneficiaries of the policy may not be the people it wants to help: the unemployed and the less-well-off.
I have been arguing for more than a year that the real concern of the Federal Reserve is the solvency of the banking system. The Fed’s given arguments for pumping so much liquidity into the banking system is that the economy is weak and the level of unemployment is unacceptable. The Chairman of the Board of Governors of the Federal Reserve System cannot say just say out loud that “the banking system is at risk.” Nor can any other Federal Reserve figure say this out loud.
My concern over the past year of so has constantly been that the economic and financial situation did not warrant the injection of all the Fed was throwing at it. See my post “Bernanke’s next round of spaghetti tossing”: http://seekingalpha.com/article/233773-bernanke-s-next-round-of-spaghetti-tossing.) A recent post continues to exhibit my belief that the justification for the Fed actions has been the solvency of the banking system and not just the health of the economy: http://seekingalpha.com/article/229385-is-a-crunch-coming-for-smaller-banks.
But, the behavior of the central bank not only represents concern for the commercial banks, but also for the real estate market. Elizabeth Warren, in Congressional testimony earlier this year, indicated that 3,000 commercial banks were threatened over the next 18 months or so, especially in loans in the area of commercial real estate. Plus, we have a massive problem in the municipal bond markets concerning the solvency of our state and local governments. The pension programs of these entities loom large over the financial markets and many individuals I know that work in this sector are scarred silly.
The efforts of the Fed, therefore, are attempts at “debasement inflation”. This was uttered by William Browder, who now runs an investment fund in London. (In the morning New York Times: http://dealbook.nytimes.com/2010/11/18/from-russia-expert-a-gloomy-outlook/?ref=todayspaper.) “Emerging markets went through more than a decade ago in the Asian Financial crisis what developed markets are experiencing now.” Browder added, “you want to own hard things that can’t be printed.”
But, these efforts extend beyond the borders of the United States. Given the fluidity associated with funds flowing throughout the world, the additional liquidity extends to the situation related to many Euro-nations in terms of their sovereign debt. Writedowns are going to occur in Ireland, Portugal, Greece, and possibly Spain and Italy. Even France is feeling some of the heat. International financial markets also need liquidity.
The question here is whether this concern over sovereign debt will extend to the United States. Browder goes on to say that there are limits to how much governments are able to borrow. And, investors move from one weak market to another. Eventually, these investors work through to even the “strongest” of the fiscally challenged states. When it gets to this stage, he argues, the only thing these governments can still do is print money.
Where are the hard assets? Real estate. Commodities. Companies.
These are the areas that will attract a lot of the money going around.
The prices of commodities have already experienced a significant bounce. This will continue.
Big money will also eventually be made in real estate and the merger and acquisition business of corporations. The prelude to this is the massive buildup in the cash holdings at many of the largest companies in the world, in the largest commercial banks in the world, and in hedge funds and other private equity funds. And, really, the move has already started in a very selective way.
I continue to believe that over the next five years of so we will see a substantial acquisition of assets, across the board, of a size we can barely imagine now.
The objective of the Federal Reserve is to keep things as stable as possible so that the FDIC can continue to close banks as smoothly as it can; that mergers and acquisitions can occur in an orderly fashion so that weaker institutions can be removed from the scene; and that more and more money will move into the real estate area so as to eventually put a floor under real estate prices.
All this may be done, but it may not exactly take the path that Mr. Bernanke would like it to take. Furthermore, all of this activity may not achieve the goals that President Obama would like to achieve.
Mr. Kessler argues that, in his view, the stock market will not view these developments as favorably as they have received earlier efforts at spaghetti throwing. He claims that this attitude has been shown by the recent behavior of stock prices. In addition, bond yields have backed up (prices of bonds have fallen) not what quantitative easing was devised to do. Both of
these outcomes are “exactly the opposite of what Mr. Bernanke was trying to achieve.”
In the case of mergers and acquisitions and the acquisition of real property, the early results are indicating that the bigger organizations are getting bigger, both financial and non-financial institutions, and the wealthy are getting wealthier. These outcomes are exactly the opposite of what President Obama was trying to achieve.
Mr. Browder spoke to students at the Columbia Business School several weeks ago. He argued that “the high-inflation scene” described above “could be another lucrative opportunity” similar, although not as great, to one he made so much money in while in Russia.
In such a situation, therefore, the emphasis in investing should be on what companies or assets can be acquired that will benefit from the credit inflation. Caterpillar, for example, moved into the mining equipment field, one reason being that mining will benefit from the surge in demand coming from emerging nations like China and Brazil. So, one is looking for “targets” and not long-term value creation.
One has to be careful, however, in buying into acquiring companies. Not all companies are good acquirers. History shows that many acquirers have to “unwind” their acquisitions within five years or so because the purchases are done for the wrong reasons or the managements cannot effectively integrate the properties they have obtained. However, there may be some very good “buys” amongst the acquirers.
For example, the value of the Caterpillar stock went up after the acquisition was announced. There is the feeling that the Caterpillar management can effectively put the two companies together to the benefit of the shareholders.
The Federal Reserve is creating a lot of opportunities with its new policy stance. However, the beneficiaries of the policy may not be the people it wants to help: the unemployed and the less-well-off.
Sunday, August 2, 2009
Looking For Signs of a Recovery
Amid everything else going on, we still continue to look for signs of a recovery. This weekend I spent some time looking at the investment side of the economy to see if I could pick up any sign of life on the capital spending front. At the end of the weekend, I gave up looking for encouraging information, either in terms of business investment or investment in real estate.
Let’s look at the supply side first, the companies and businesses that supply physical capital, either in terms of real estate or in terms of business equipment. In order to summarize the information on the supply side of the market there seems to be one favorable factor that would encourage the production of investment goods and two that are not encouraging concerning the production of capital goods or real estate.
The positive factor is short term interest rates. The supply of capital goods in the past has been dependent upon the cost of short term funds and right now, of course, short term interest rates are as low as we can ever expect them. If these rates stay at these levels and other factors encouraging investment production improve, we should start to see the economy recover. The word out of the Federal Reserve is that short term interest rates are going to be kept low for an extended period of time and this weekend we heard that these rates may stay low into the year 2011.
The two negative factors relate to the internal cash flow of firms and the terms on which lenders are willing to lend. In terms of internal cash flow, potential suppliers of investment goods are still in a position in which they are trying to de-leverage and actually reduce the amount of debt they have outstanding relative to their internal sources of funds. Thus, there is not much effort to expand production from the suppliers of goods because they have not yet got their balance sheets back in order as of this time.
Lenders, of course, are not lending. If anything, most lenders are still risk adverse and continuing to tighten up on the maturities and terms of any lending they do. As a consequence, we see very little willingness on the side of lenders to encourage the supply of funds to expand.
Therefore, whereas the Federal Reserve is consciously keeping short term interest very low and intends to keep them low for a long period of time, potential suppliers of capital have not seemingly restructured their balance sheets sufficiently to begin to produce again and lenders seem far from willing to take any chance on who they lend to. We are back in the position where bankers, and others, will not lend to someone unless the potential borrower does not need the money.
In terms of the demand side of the market the factors that tend to support investment expenditures all seem to be in the negative range. Long term corporate interest rates have fallen some over the summer and this is encouraging. Moody’s AAA corporate bond rate was at a yearly high in June averaging 5.61% for the month. This rate moderately bounced downward in July but seemed to be rising into the 5.50s toward the end of the month. Moody’s BAA corporate bond rate has declined significantly from March 2009 when it averaged around 8.40% and has fallen to the 7.10% range toward the close of July.
The decline in corporate rates has been encouraging and indicates that the financial market’s taste for risk has improved at the expense of longer term Treasury issues whose yields have been rising since March. The question here is whether there will be a continued rise in Treasury bond rates over the next 12 months or so. If Treasury interest rates continue to rise, as I believe they will, this will put a floor under corporate rates, one that will tend to rise as longer term rates rise in general. And, with the spread between AAA and BAA securities around 150-160 basis points one cannot see this spread getting much narrower as long term interest rates rise over the next year or so.
Less favorable trends appear to be the lack of growth in cash flows This means that those that want to acquire capital goods or real property still face the need to continue to de-leverage their balance sheets. This concern can be combined with the fear that many economic units have about the possibility that they could face default or foreclosure in the upcoming twelve month period. There are still a lot of financial issues that must be resolved and this attitude does not produce a lot of optimism on the part of businesses or individuals to extend their own resources into risky investments in the near future.
This attitude coupled with the economic forecasts that the recovery will be tepid at best for the next 12 to 18 months does not do much to create optimism about future profit expectations. Profits have increased but the general consensus is that a large portion of these profits have been achieved either through cost cutting or through trading operations. Neither one of these can be expected to contribute to a general increase in profit expectations for the future since cost cutting can only do so much and trading profits are sporadic and cannot be counted on on a regular basis. The prospect for growing profit expectations is not strong presently. Confidence can change rapidly, but it appears that it will remain relatively low for the near term.
There are some firms and some industries that are producing solid profits and can be expected to generate profits going forward. How much they will stimulate the sectors that are not performing well and how much they will contribute to a growing optimism concerning the future performance of the economy is anybody’s guess right now. These companies continue to look for an uptick in their business in the coming months as well. It is possible that these companies could lead the economy out of the recession, but they don’t seem to be in a mood to over extend themselves or to take on too much more than they are doing at the present time. They are happy to be making profits and intend to do so in the future: but, in a controlled and conservative manner.
The needed conditions for coming out of a recession are not really present at the current time. The Federal Reserve has, of course, have kept interest rates quite low and there has been the favorable movement in longer term, non-Treasury yields which have declined in recent months as financial markets have moved back into securities that are riskier than U. S. Treasuries. In respect to the cost of money, everything is in place for the recovery. The problem of achieving a sustained increase in real investment, either in plant or equipment or in real estate, rests upon the potential borrowers and the possible lenders. Neither seems to be in any shape to begin borrowing or lending in the near term and this shows both on balance sheets and in the market place.
We have observed in the past that “animal spirits” can be revived and they can be revived relatively quickly. Question marks are always present relating to the issues of what is going to set off the animal spirits and when are they going to be set off. We can only keep looking at the major factors that are related to the psychology of economic units and attempt to determine when the direction of the economy is going to change.
At present, there are indications that a recovery is possibly starting to mount. For example, the index of leading economic indicators rose recently for the third month in a row. Still, the dark clouds fail to go away. Unemployment is, of course, still a big concern. And, with unemployment benefits increasingly running out while unemployment continues to grow and with the further prospect of additional credit difficulties in the banking system while bank failures continue to rise, care still must be exercised before one extends ones self by taking on more debt and by committing ones self to the purchase of expensive capital goods. I don’t believe that animal spirits will be on the rise anytime soon.
Let’s look at the supply side first, the companies and businesses that supply physical capital, either in terms of real estate or in terms of business equipment. In order to summarize the information on the supply side of the market there seems to be one favorable factor that would encourage the production of investment goods and two that are not encouraging concerning the production of capital goods or real estate.
The positive factor is short term interest rates. The supply of capital goods in the past has been dependent upon the cost of short term funds and right now, of course, short term interest rates are as low as we can ever expect them. If these rates stay at these levels and other factors encouraging investment production improve, we should start to see the economy recover. The word out of the Federal Reserve is that short term interest rates are going to be kept low for an extended period of time and this weekend we heard that these rates may stay low into the year 2011.
The two negative factors relate to the internal cash flow of firms and the terms on which lenders are willing to lend. In terms of internal cash flow, potential suppliers of investment goods are still in a position in which they are trying to de-leverage and actually reduce the amount of debt they have outstanding relative to their internal sources of funds. Thus, there is not much effort to expand production from the suppliers of goods because they have not yet got their balance sheets back in order as of this time.
Lenders, of course, are not lending. If anything, most lenders are still risk adverse and continuing to tighten up on the maturities and terms of any lending they do. As a consequence, we see very little willingness on the side of lenders to encourage the supply of funds to expand.
Therefore, whereas the Federal Reserve is consciously keeping short term interest very low and intends to keep them low for a long period of time, potential suppliers of capital have not seemingly restructured their balance sheets sufficiently to begin to produce again and lenders seem far from willing to take any chance on who they lend to. We are back in the position where bankers, and others, will not lend to someone unless the potential borrower does not need the money.
In terms of the demand side of the market the factors that tend to support investment expenditures all seem to be in the negative range. Long term corporate interest rates have fallen some over the summer and this is encouraging. Moody’s AAA corporate bond rate was at a yearly high in June averaging 5.61% for the month. This rate moderately bounced downward in July but seemed to be rising into the 5.50s toward the end of the month. Moody’s BAA corporate bond rate has declined significantly from March 2009 when it averaged around 8.40% and has fallen to the 7.10% range toward the close of July.
The decline in corporate rates has been encouraging and indicates that the financial market’s taste for risk has improved at the expense of longer term Treasury issues whose yields have been rising since March. The question here is whether there will be a continued rise in Treasury bond rates over the next 12 months or so. If Treasury interest rates continue to rise, as I believe they will, this will put a floor under corporate rates, one that will tend to rise as longer term rates rise in general. And, with the spread between AAA and BAA securities around 150-160 basis points one cannot see this spread getting much narrower as long term interest rates rise over the next year or so.
Less favorable trends appear to be the lack of growth in cash flows This means that those that want to acquire capital goods or real property still face the need to continue to de-leverage their balance sheets. This concern can be combined with the fear that many economic units have about the possibility that they could face default or foreclosure in the upcoming twelve month period. There are still a lot of financial issues that must be resolved and this attitude does not produce a lot of optimism on the part of businesses or individuals to extend their own resources into risky investments in the near future.
This attitude coupled with the economic forecasts that the recovery will be tepid at best for the next 12 to 18 months does not do much to create optimism about future profit expectations. Profits have increased but the general consensus is that a large portion of these profits have been achieved either through cost cutting or through trading operations. Neither one of these can be expected to contribute to a general increase in profit expectations for the future since cost cutting can only do so much and trading profits are sporadic and cannot be counted on on a regular basis. The prospect for growing profit expectations is not strong presently. Confidence can change rapidly, but it appears that it will remain relatively low for the near term.
There are some firms and some industries that are producing solid profits and can be expected to generate profits going forward. How much they will stimulate the sectors that are not performing well and how much they will contribute to a growing optimism concerning the future performance of the economy is anybody’s guess right now. These companies continue to look for an uptick in their business in the coming months as well. It is possible that these companies could lead the economy out of the recession, but they don’t seem to be in a mood to over extend themselves or to take on too much more than they are doing at the present time. They are happy to be making profits and intend to do so in the future: but, in a controlled and conservative manner.
The needed conditions for coming out of a recession are not really present at the current time. The Federal Reserve has, of course, have kept interest rates quite low and there has been the favorable movement in longer term, non-Treasury yields which have declined in recent months as financial markets have moved back into securities that are riskier than U. S. Treasuries. In respect to the cost of money, everything is in place for the recovery. The problem of achieving a sustained increase in real investment, either in plant or equipment or in real estate, rests upon the potential borrowers and the possible lenders. Neither seems to be in any shape to begin borrowing or lending in the near term and this shows both on balance sheets and in the market place.
We have observed in the past that “animal spirits” can be revived and they can be revived relatively quickly. Question marks are always present relating to the issues of what is going to set off the animal spirits and when are they going to be set off. We can only keep looking at the major factors that are related to the psychology of economic units and attempt to determine when the direction of the economy is going to change.
At present, there are indications that a recovery is possibly starting to mount. For example, the index of leading economic indicators rose recently for the third month in a row. Still, the dark clouds fail to go away. Unemployment is, of course, still a big concern. And, with unemployment benefits increasingly running out while unemployment continues to grow and with the further prospect of additional credit difficulties in the banking system while bank failures continue to rise, care still must be exercised before one extends ones self by taking on more debt and by committing ones self to the purchase of expensive capital goods. I don’t believe that animal spirits will be on the rise anytime soon.
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