This does not mean that I think we are going to experience a dramatic improvement in the economy. We are not. Many of my colleagues seem to oppose my view, so it is not without some trepidation that I take this stand. However, I see the glass half full. My view is that others are overly influenced by "group-think" and the calls of doom.
I do think that we are currently adrift in uncharted waters and we may have a faulty rudder, too. The biggest fear I have is that everyone jabbering about another deep recession may actually cause one.
The following supports why I feel, from what we know, that we are not destined for a double-dip recession:
Starting with the collapse of our largest bank, Citigoup Inc. (C), our largest insurance company American International Group (AIG), and our largest automobile company General Motors, all three have sold off assets, improved balance sheets, reorganized management and re-entered positive earnings territory. The disastrous business practices that led to the great recession are not going to topple them again soon because their business have no resemblance to the ones that collapsed, nor to the underlying reasons that paved that road to failure. In all three cases, it took mountains of federal government cash to sustain them to this point. Now it looks like the Treasury will make a profit.
Three major banks, Bank of America (BAC), JP Morgan Chase (JPM) and Wells Fargo (WFC), are going forward with the lowest interest rates and as a result highest margins they have experienced in memory. The collapse of the housing market and the continuing level of defaults was bad, and remains bad, but here is the important thing to remember: they cannot make the same types of loans that they made leading up to our economic peril. Furthermore, with each passing day they have a smaller number of bad loans and an increasing number of stronger loans.
The loan mix is not fantastic but it is greatly improved, and continues to improve. The major banks have also consolidated, while hundreds of smaller banks have closed. Employee wages and benefits are flat, cash reserves are much higher, and risk has been trimmed.
A double dip recession implies that we will suffer from another collapse somewhere. That somewhere will not be the banks. They have an ideal situation. Lower interest rates, wages, competition, and even lower energy costs, while having more cash with less overhead and a better loan mix.
If the banks are not going down, is the auto industry suspect? No, the only suspects here are when GM has its Initial Public Offering again, which is something Wall Street, Washington and even the public will be gleaming over. The auto industry has rebounded and most companies have shown a profit in recent quarters and broadcast cautious optimism. Ford Motors (F) has sustained itself and has a strong model lineup. They were able to to this without government assistance. This is another streamlined industry with stronger balance sheets, leadership, and product lines.
It has been reported that August auto sales are the lowest since 1982. Not a good sign, but it is always darkest before the dawn. A smaller streamlined industry is capable of sustaining itself on less business.
Where do the boogieman lie? That answer seems clear. It starts with housing and unemployment and slams into raging national debt. These are no small matters. But let's look at these more closely. When you compare 9.5% unemployment levels to 4.5%, of course the shift is dramatic. But 4.5% was totally unrealistic and founded on businesses and consumers piling debt upon debt.
Business has recapitalized and consumers have become savers. That is a good thing. Unemployment levels will improve, not worsen. It is discouraging that people are out of work and that improvement is moving at a snail's pace, but I have heard nobody talking about it getting worse; only a tortuously slow path to recovery. It is true folks are having are hard time. However, when consumers trim debt that puts them in a better situation going forward, and people with reduced leverage are a far larger number than that of the unemployed.
The national debt is large and growing, yet deflation is more of a threat right now. The repercussions of this debt seem a few years off. The odd thing about inflation is that when it does come, it hurts the currency and our buying power but reduces the impact of the debt. Washington loves the idea of paying back its debt with a devalued currency -- unfortunately -- but historically true.
If unemployment is stagnant, not worse and the debt crises is held in abeyance there still is housing to worry about. Well, yesterday the Case-Shiller report indicated that housing prices were up.
I think that every day the threat of a double dip recession is reduced. J. P. Morgan (1837-1913) was asked by someone what the market would do that day. "It will fluctuate, young man. It will fluctuate," Morgan reportedly replied. I could not agree more. There will be continued ambiguity in the economy, and this will feed the fires of discontent and leave the stock market rattled, but I do not see a collapse.
Here are a few more very positive signs. Companies are buying back shares, merger and acquisitions are on the rise and corporate America is flush with cash. The board rooms would not be on a buying binge if they did not think we were on the cusp of recovery and this might be their last chance to find a bargain.
The market is full of bargains if you look closely. For a few ideas check out Chasing Value: Telefonica, a Work of Art and Chasing Value: Four Great Stocks -- Gov't Fears Savings Spiraling Out of Control
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 shares or options in BAC, C, TEF and WFC.