There are three distinct and big questions that people need help with to get a grip on what is happening in the US today and its effect on them.
First, what further bad could happen in financial markets? Second, how long might it take for the economy to seriously turn and recover? Third, what prescription can be applied to the country to stimulate as early a recovery as possible?
There is currently a sense and hope that the stock market may be making its lows now. If that were likely, the prospects for the underlying economy could be seen in a more promising light now too, as the stock market [with the aid of hindsight] has always been a leading indicator. But hindsight is not yet available. And, one cannot rule out a further drop if and when earnings across the board are down in 2009. Sorry! But, we really do have to deal with reality.
If our national wealth contraction moves even lower, additional questions arise about how long the economy may lie fallow. There is a basic principle to bear in mind. Markets must clear before they can resume normal levels. Today we see something like 12,000,000 "endangered" houses, where the value of the mortgage exceeds the value of the property. It is unlikely that new housing starts can begin to get back to near normal levels of around 1.4 million units annually until a large proportion of the 12 million "endangered" units stabilize in value or have been absorbed by stronger owners or refinanced. And, demographics are not helping either. Even the experts today have no idea how long that could take. But, it may take, optimistically, 3-5 years?
So now we have a grim couple of thoughts to deal with -- a loss of more of our national wealth AND the prospect of an economy that may take another 3-5 years to clear and begin to recover.
Granted there is an instinct to curl into a fetal crouch and put our hands over our eyes. But, in fact this is the very moment for us all to stand tall, yell whoopee and charge!!
Our challenge and opportunity is very clear. We must push and pull hard on the string which leads to rebuilding and modernizing our whole national infrastructure. While we have been gorging on misleading free lunches of cheap loans for housing and no money down on new gas guzzling SUVs and unlimited credit card spending for exotic vacations and Gucci bags, the world around us has been crumbling down. Our bridges, tunnels, railroads, schools, hospitals, new energy sources and other outdated transportation systems have been languishing for a long time because they did not represent exciting investment opportunities.
Now, as long as we are going to have to wait for the economy and financial markets to recuperate, our opportunity is to fix up the world that will surround us when things have turned for the better. It almost seems that some divine providence may have visited our present predicament on us just to create the opportunity to address the needs of our national infrastructure. So we should not think about the plans for stimulation of the economy as some distasteful castor oil medicine we must endure. We should be yelling hallelujahs of thanks for the opportunity.
It may not be long before almost 1 in 10 people are out of work. When that happens, almost everyone will know someone who IS out of work and a lot of people will begin to think that they may be the next. So we all should welcome the biggest "public works" packages in history. President-elect Obama has already proposed a $250,000,000,000 package. We should all start rooting for even bigger packages.
This will take a lot of new plans and methods to make such a massive scale of spending work well. The purpose is not to enrich lucky contractors. The purpose is to create a lot of jobs for engineers, architects and ordinary people who roll up their sleeves and make it all happen. We may need some new entities like the Reconstruction Finance Corporation from the 1930s. We should be open minded and creative in how to do all these exciting new projects. And, the ultimate purpose is not to just create jobs for a recovery but to remake the world we will live in when the recovery arrives.
So let's feel good about tightening our belts and buckling down to creating our new future. On this flight "we will have a good time."
Frank A Weil--Chair and CEO Abacus & Associates, Private Investments, 147 E 48 Street, NY 10017, NY - fweil2@abacusny.com-- 212 230 9801