I am well aware that the record deficit spending in the United States is even more staggering. Everyone knows about the high unemployment rate, foreclosure rate, bank failure rate, and tepid consumer confidence. So why am I so optimistic about the economic recovery? Here's why, as simply as I can state the case:
- Every person, family, business, institution, and government entity is working to make things better, and many of the vehicles that drove us to the brink of ruin are no longer functioning or are under great scrutiny.
If the excesses, greed and stupidity that got us into this mess are reduced, then things will improve. As an example, consider the bad loans that bankrupted many financial institutions and crippled many more. The percentage of bad loans to good loans has been improving for a at least a year, and that trend will continue. The large majority of bad loans have been written off and the losses declared. Try and get a home loan today with no money down and no collateral and you are likely to cause a laughing frenzy.
Examine the product lines of most large companies and you will find they have been reduced. They have also cut costs, streamlined business practices, reduced inventory and become much more focused. In many cases, company management has also been overhauled.
Last year the government was bailing out major corporations at a cost of hundreds of billions of dollars. This year the government is likely to see billions in profit from the sale of its 34% stake in Citigroup Inc. (C). There are throngs of investors talking about an IPO for the new General Motors and the government would see a return of billions from that. This does not mean that the government will not squander these resources but it is a step in the right direction.
JP Morgan chase (JPM) has grown stronger and will profit from its acquisition of Washington Mutual. The same holds true for Wells Fargo (WFC) as it integrates Wachovia, and Bank of America (BAC) as it does the same with Merrill Lynch.
There are a multitude of companies with mountains of cash and little or no debt. Apple (AAPL) has over $25 billion, Berkshire Hathaway (BRK.A) $31 billion, Cisco (CSCO) more than $35 billion, Google (GOOG) has piled up over $24 billion, Johnson and Johnson (JNJ) has a $20 billion war chest and Microsoft Inc (MSFT), not to be left behind, has $32 billion at the ready.
These resources present opportunities for expansion, mergers and acquisitions, research and development, stock buybacks, and dividend increases. And this is just an abbreviated list. Beyond the cash, there are some very basic things favoring business expansion and the stock market right now.
Business and the stock market in turn is thriving because the ingredients to success are in place; low interest rates, low energy prices, low labor rates, low inventories, less competition, and years of pent-up consumer demand.
Last year, I called the bottom of the market to the day (lucky) (Nostradamus was a punk! Have we reached bottom?) and the jump in the Dow Jones Industrial Average two days later (more luck) (Is the stock market spring loaded? Could it move 3,000 points higher now?).
There are no sure things, of course, but in the absence of some unforeseen calamity, the next 24 months should be much improved.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He owns stock or options in C, BAC, BRK.B and WFC.