Halftime?October 22, 2012 Posted by: Joe Morgan, CFA
The middle of the road
Is trying to find me
I'm standing in the middle of life
With my pains behind me
- The Pretenders
Though all our "pains" are surely not behind us, it could be thatwe are standing in the middle of this life of economic collapse.
It's now been 23 months since the first sign of market destructioncame about in the form of extendible commercial paper actuallyextending. What followed was a domino effect, as investorscontinuously pulled out of all investments with any subprimeexposure, liquidity issue, downgrade potential or even alphabeticalabbreviation.
So, being in the middle of life perhaps implies we have at leastanother two years until the economy returns to normal. Nothing tocheer about.
If the stock market is the barometer of the economy, then perhapswe are doing all right. Though still down 36 percent from its highon October 9, 2007, the Dow Jones has rallied 39 percent since therecent low on March 9, 2009. In other words - and again assumingthe stock market is the correct barometer - the economy remains 36percent worse than pre-crisis levels.
However, who can remember that far back, anyway? Let's reviewwhat's changed from an economic environment perspective.
First and foremost, there are the 6.5 million (and counting) jobsthat have been lost. This equates to about one in 20 workers whohave lost their jobs on a net basis as of January 2008. Of course,this number is expected to continue to grow, but at a slower pace.
Second, we have a housing market that has not only been crushed,but remains unstable due primarily to a lack of willingness ofinvestors to put their money into mortgages. I believe one of themain reasons investors are avoiding the sector is the open issue ofFannie/Freddie and how this combined entity will fit into themarket in the future. As the 600-pound gorilla of this market, itis unlikely to garner the confidence of private investors insignificant fashion until this most important issue is resolved.
Third, the Fed has ballooned its balance sheet beyond what waspreviously believed possible, and debate is...Read More