NOVEMBER 11, 2008
NOVEMBER 2008 COMMENTS - HERE COMES OBAMANOMICS
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“Economic hesitation” are the words to describe the month of October. Led by huge liquidation by hedge funds, mutual funds and individual investors, the stock market slumped in October and was quickly followed by a significant retrenchment in consumer and business spending. The financial rescue package known as TARP notwithstanding, the realization that the recent financial upheaval has put us in the crosshairs of a significant recession quickly moved equity participants to sell. In addition, the turmoil had a significant collateral effect by taking what appeared to be a close election only two months ago, and turning it into a landslide. This is going to result in a leftward shift in the management of the government and the economy. The leftward movement however will be limited by the large projected deficit that is upon us as the government attempts to subsidize the recovery of the financial meltdown. Fiscal stimulus, perhaps as early as next month, is coming again.
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Evidence seems to point to the fact that not only are we in a recession, but more than likely the recession began earlier in the year. The duration and depth of this recession is likely to be longer than we have seen in recent cycles. The good news is that the average length of recessions over the past 50 years is around 11 months. Given that the current cycle of negative growth began earlier in the year, we have already endured part of the negative growth phase. We cannot diminish the fact that the current quarter and the first quarter of 2009 are likely to show poor GDP comparisons. Those negative comparisons get easier as the year moves on. We are confident that the TARP financial rescue and the coming stimulus package(s) will be enough to right the economic ship and set a course for future growth.
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The equity markets' volatility is something not seen in some time. October capped a swoon in the markets that rivaled the 1973-1974 40%+ decline in equity prices. That decline began in January 1973 and lasted into the latter part of 1974 before ending. In the current decline, that magnitude of the 1973-74 drop was compressed into one year, in part caused by the large liquidation by hedge funds and mutual funds.
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The current economic weakness will give way to muted growth in the latter part of 2009. Our expectation of a delay in the recovery until that time was enhanced by the decline in the underlying asset value supporting financial institutional-held paper, namely housing. We expect that we are well into mending the financial meltdown through the huge government rescue package and that this realization will be followed by economic renewal later in 2009. If history repeats, the market will begin to recognize this scenario well ahead of the actual event.
THIS MONTH'S FOCUS -LARGER NUMBERS, EMPLOYMENT AND EXPIRATION DATES
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Larger Numbers
Although the Treasury's $700 billion Troubled Asset Relief Program (TARP) may have the most name recognition, both the Treasury and the Federal Reserve have established a variety of other initiatives to provide liquidity to the global financial system. Lou Crandall, editor of The Money Market Observer , estimated recently that the total liquidity supplied to the market by the Treasury and Federal Reserve combined is now approaching $3 trillion.
In addition to the liquidity provisions discussed above, the $152 billion Economic Stimulus Act of 2008 became law on February 13 th . Current press reports indicate that a "second" Economic Stimulus Act on the order of $500 billion is under active consideration for later this year or early in 2009. Thus, the total of "liquidity provisions" and "stimulus packages" is nearing $4 trillion. To finance these programs, the Treasury's marketable securities borrowing for FY 2009 is estimated by some to be in the magnitude of $2 trillion, up from approximately $500 billion as recently as FY 2007.
- Employment
Job losses in the current economic downturn now total 1,179,000 over the past 10 months. Unfortunately, history would suggest that, based on prior economic cycles, significant additional job losses should be anticipated. For example, in the 2001 slowdown, a total of 2,708,000 jobs were lost over a period of 30 months.
- Expiration Dates
The Treasury's "Temporary Guarantee Program for Money Market Funds" is currently scheduled to terminate not later than September 18, 2009. The FDIC's temporary increase in deposit insurance to $250,000 from $100,000 will return to the $100,000 level for all deposit categories except IRAs and Certain Retirement Accounts on January 1, 2010.
We always welcome your thoughts and opinions on this Monthly Commentary, as well as any questions or comments you may have. Please do not hesitate to contact your Portfolio Manager or e-mail info@beacontrust.com.