Every so often, as the investment market indicies bounce around, I find it important to reflect on the response to the financial crisis of 2008, and how the economy has responded to the measures.
First, let’s look at 3 major factors of government response:
• An almost $1 trillion stimulus program.
• A TARP program that bailed out banks and some auto makers that after it is all said and done, is projected to cost us roughly $100´s of billions.
• The Federal Reserve has virtually lowered interest rates to zero and spent over $1 Trillion in Asset Backed Securities to pump money into the economy and keep interest rates artificially low.
Next, let’s look at the economic response (or lack of) in the current fiscal/financial condition of the US economy:
• Massive Federal Deficits (not even including unfunded entitlement programs).
• Unemployment at 9.6%.
• Foreclosures still at record highs accompanied by lower home prices.
• A stock market roughly 30% lower from its peak.
• GDP growing in the latest quarter by 1.6%.
• Historically low mortgage and interest rates.
• Huge inflows to bonds and out of equities.
Now, it’s not all bad news. Recent growth in equity markets gives me reason for some optimism in 3 timed outlooks:
• Short-term: 3rd quarter earnings might actually be better than expected.
• Intermediate-term: The mid-term elections could provide investors and business with some clarity on taxes.
• Long-term: Equities are very cheap relative to bonds.
Where I see some significant risk for the domestic economy is in the value of the US dollar as compared to other currencies. With interest rates at very low levels, central banks have turned to currencies as the next lever to pull to stimulate their economies. We are in “beggar thy neighbor” world, where each country wants a cheap currency to make their country’s goods competitive in the global market place. In our current super-low interest rate environment, cur¬rency movements can overwhelm valuation and have a significant impact on asset class returns.
The bottom line is that the Fed will need to continue use all of the tools available to it to keep the economy fixed on the road to recovery.
