This blog post originally appeared on RealMoney Silver on June 29 at 8:02 a.m. EDT.
There is now an almost universal acceptance that last fall we were on the eve of financial destruction, and both the
Bank of America
CEO confirmed as much in last week's Congressional testimony.
By virtue of massive monetary and fiscal stimulus, Armageddon was avoided and the world's stock markets have launched a spirited
that has contributed to a collective sigh of relief.
The surfeit of consumption and the overindulgence in the credit and debt markets, however, are residues that argue in favor of a long-lived transformation in consumer behavior, much like our parents and grandparents endured after The Great Depression.
This time it is truly different:
- Most notably, the personal savings rate will remain elevated, and personal consumption expenditures will be deflated for an extended period of problem.
- For the first time in over 50 years, wage deflation is spreading, which will further inhibit retail spending as individuals continue to unwind balance sheet leverage.
- Business fixed investment will be constrained in an environment of low capacity utilization rates.
- Corporate pricing power will be limited, and a mean regression of profit margins will follow in the years ahead.
- The construction industry (residential and nonresidential), which provided as much as 40% of the job growth in the early 2000s, will not provide the historic role in expansion of employment, and there is little to replace real estate as a catalyst to growth.
- The securitization market, which was the straw that fueled growth over the last decade, will be limited in its capacity and ongoing role as an engine to growth.
- Besides the consumer, the banking industry will adopt a more conservative approach to lending as the pendulum of credit moves in the opposite direction of 2000-2006.
- An intrusive public sector means more pervasive (and more costly) regulatory burdens.
- Corporate and individual tax rates will rise and provide a further headwind to growth.
- Despite substandard economic growth, costs may remain elevated (especially of a materials kind), reflecting population growth and the emergence and growth of the middle class in emerging markets.
That is not to say the equity markets around the world can't rally; they can, and over time, they will. As well, the domestic economy will, in the fullness of time, rebound, but the above traditional and nontraditional headwinds do not favor an expansion in P/E multiples.
My variant view is that I am not convinced that the consensus outlook of a sustainable recovery/steady state in the economy (or in corporate profits) will occur after the restocking of inventory and the
associated with that replenishment.
Rather, I see an inconsistent and uneven period of growth (not just subpar growth and a shallow recovery) that will be difficult for investment managers and corporate managers to navigate. The odds of economic/profit disappointments and an eventual double-dip in 2010 will be magnified as it's very different this time, owing to the prevalence of so many unconventional headwinds. And the very size of the policy efforts needed to address the complexity of the world's problems is testimony to the upcoming challenges to growth.
Things are still bad and will remain that way.
At the time of publication, Kass and/or his funds were long Bank of America, although holdings can change at any time.
Doug Kass writes daily for
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Know what you own: Other money center bank stocks include JPMorgan Chase (JPM) - Get Report, Wells Fargo (WFC) - Get Report, Royal Bank of Canada (RY) - Get Report, Toronto-Dominion (TD) - Get Report, Bank of Nova Scotia (BNS) - Get Report and Bank of New York Mellon (BK) - Get Report.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.