My view is that it will continue to be different this time as the typical self-sustaining economic recovery of the past will not be repeated for 10 important reasons.
- Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.
- Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.
- The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.
- The credit aftershock will continue to haunt the economy.
- The effect of the Fed's monetarist experiment and its impact on investing and spending still remain uncertain.
- While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.
- Commercial real estate has only begun to enter a cyclical downturn.
- While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.
- Municipalities have historically provided economic stability -- no more.
- Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.
"The balance of financial terror ... is a situation where we [in the U.S.] rely on the cost to others of not financing our current account deficit as assurance that financing will continue."
-- Lawrence Summers
Among the non-traditional headwinds listed above, a burgeoning fiscal deficit and the financial instability of our state and local municipalities are among two of the most significant challenges that face consumers, corporations and investors. Though the bulls generally agree with the presence of these intermediate-term challenges (especially the spiraling deficit and a nervous U.S. dollar stalemate), they generally dismiss them both over the short term, favoring the belief that the current upside surprises in earnings will dominate the market landscape in influence. I would argue that the aforementioned challenges are ever more predictable in consequence and will serve as a governor to further gains in market valuations.
An avalanche of spending by the public sector is now following an avalanche of spending by the private sector. In essence, we are (perhaps necessarily) fighting the slowdown with the same sort of incendiary kerosene that put us into the mess.
Profligate spending comes at a cost, a cost that we will experience sooner than later. It is only a matter of time before policy makers address the financing of this accumulated debt and the great reflation experiment of 2009 by raising taxes significantly. We have already witnessed the start of what is likely to become an avalanche of changing tax policy. New York City imposed its first sales tax increase in 35 years (rising from 8.375% to 8.875%), and, on the same day, the state of New Jersey imposed an additional tax hike on wholesale liquor distributors' sales of liquor and wine, which is sure to be passed on to the consumer. In Oakland, Calif., even the "high life" is being taxed as the city has recently passed a tax on marijuana sales and the state of California appears to be close in following Oakland's example.