There's really just> one question that matters this new year. When will the recession end?
OK, I lied. There's another question that matters even more. Will the recession ever> end?
I have a lot of institutional clients who take very seriously the idea that this recession could be permanent. In their minds, it could turn out to be more like a depression. Even when we pull out of the worst of it, we'll be stuck with year after year of slow growth.
Pretty much no one thinks this recession could possibly already be over. And only a few brave souls dare to consider that it might only take another quarter or so to hit bottom. So it's just a matter of, how bad is it really?
Call me crazy, but I actually think we could all end up being pretty pleasantly surprised. I admit I was one of the last people on earth to agree we were in recession in the first place. So let me make up for that mistake: I'll be the first person to say it's over.
I don't mean to get carried away on wings of optimism here. But there really are some hopeful signs. Some of the same symptoms that, earlier this year, gave us an early warning that recession was lurking are now pointing in a more hopeful direction.
Let's remember what caused this recession in the first place. It started out as just a slowdown. But then over the summer, one by one, giant financial firms blew up -- not without a little help from some particularly incompetent government interventions. By the end of September, with Bear Stearns, Fannie Mae (FNM),
It's been three months now since all that happened. In case you haven't noticed, giant financial firms have stopped blowing up. Or at least when they threaten to now, the feds step in and kiss their boo-boos and makes everything good again. In late November, Citigroup (C)
So suddenly markets have stopped going down. In fact they've started going up. Oh sure, after a catastrophe like we had during most of 2008, the rally in stocks off the November bottom doesn't mean all is forgiven. But emotions aside, the reality is that from the November nadir stocks, on average, are up something like 20% now. By most reckonings that's a whole bull market. But I can understand why nobody is particularly thrilled about it.
At the same time, the volatility of stock prices has started to come down. We haven't had one of those awful stomach-churning days where stocks swing as much as 10% in a single trading session for quite a while now. There are still too many moves bigger than 1% in a single day, but at this point that feels like nothing. And it is an improvement.
There are some important signals along the same lines coming from bond markets. The extremely high yields on corporate bonds have started to come down, indicating that investors no longer think they need extraordinary interest rates to compensate for lots of expected defaults.
And in credit markets, closely watched indicators of default risk such as the TED-spread, the swap spread and the price of credit default swaps have all relaxed considerably over the last few weeks.
None of that means we're out of recession. I'm not saying that bedrock indicators of economic vitality, such as payroll jobs growth, are going to instantly turn away from the Dark Side of the Force. But it means that the thing that caused the recession -- the collapse of the world banking system -- is no longer causing the recession. As an issue, it's now on the sidelines, which means the economy can begin to heal the way it always does.
Don't worry that we're now in a vicious cycle in which consumers will stop spending and borrowing, and will become "scrimp and save" misers -- which would lead to slower growth, few jobs, more scrimping and more saving, and so on until the economy utterly grinds to a halt and we all starve. That's not going to happen.
Remember, as soon as one person decides to stop consuming and start saving, that person's money needs to be invested somehow. And ultimately it's investment that leads to long-term growth.
How often over the last 10 years have you heard that Americans don't save enough? That we're going to starve investment and growth because all we do is consume?
Now the same people who've been saying that all this time are saying that we face a permanent recession because consumers will> save. Huh? How can the economy be doomed when consumers don't save, and also when they do save?
That's the kind of silly thing that people are taking seriously now. And why not? We've all been through hell the last year. Show me someone who didn't lose money last year and I'll show you a liar.
So everyone is willing to believe the worst, even if it doesn't make sense. I could make a contrarian argument that all this negative sentiment is, in itself, enough to make a credible case that we've seen the worst. Maybe that's true, but it can still take a while for a big, complex machine like our economy to recover once it's been as damaged as it was last year.
But markets are another matter. When stocks have gone down enough to cover the worst-case scenario, then even if the recession drags on longer than I expect you can still make money. Suppose you bought stocks in 1932. The Great Depression went on for many years after that. But you made money on stocks from the get-go.
So let's approach this new year with at least an open mind. Stocks are cheap, that's for sure. And there are signs of healing in the credit markets, and that's the key prerequisite for economic recovery. So don't blind yourself to the opportunities that may be out there.