Posts
Today is the 20th day of the 5th month. I just came back from Las Vegas and the idea of what happens in Vegas stays in Vegas aside, it was not very busy. There were people visiting but it was not crowded. They are feeling the effects of the recession up close and personally. There is some good news! We are less than halfway through the year and we are beginning to see some small positive signs that the market is trying to bottom out and return to prosperity, pushed largely by the desire we all share to return to the “good old days” of growth. Unfortunately, the small signs also show that the bottom is tenuous. It is at risk. The Obama administration has made some aggressive moves that, if Congress approves, will see some real progress on energy. The cost will be in marked price increases in new cars and trucks by 2016. The price of gasoline is vindicating my previous predictions that we would be at $2.50 in May. We may yet see $3 per gallon by August. The good news is that it will likely retrace in the fall and winter months. How far back gasoline will retrench depends on the strength of the recovery. The stronger the recovery the less prices will fall. Worldwide consumption is rising. Available oil is fixed for the next two years at least. As always, Supply and Demand will dictate price.
Based on this we can sense how fragile any recovery may be. This says to me that the recovery will be very unsmooth. Up a little, down a little. Jobs will be VERY slow to return and the outlook for real estate value is for very slow growth once the existing inventories are absorbed.
Also of concern is the leading edge of the baby boomers who are filing for social security early, many forced into it by job losses caused by the recession. For those who were highly compensated, even recovery generated jobs won’t give the government dollar for dollar income back, as newer employees will be paid less. Simple math, 15%of less is less. Lifting the top amount of income subject to payroll taxes is the only way to recover some of the lost revenue and that is politically unpopular (those folks are where the big campaign contributions come from), as are higher payroll taxes on everyone. That means that the decline in revenue and added claims will force the government to dip into the social security trust fund. Oh, wait, the “trust fund” is IOU’s from the government who has already used that money for other things. To make cash available to the social security system it will have to generate more revenue (higher taxes), borrow more (increasing interest rates and cost) or cutting benefits to older Americans.
The rest of the western world and Japan has the same problem. We have spent and now the bill has come when we are least able to pay it. Increased taxes will restrain the recovery. Increased government spending (health care, etc.) must be funded.
So the recovery is likely to take quite a while (years) but at least early signs suggest that the recession is coming to a close and that is, indeed, good news.
