Friday, July 31, 2009

Some Good News And Some Scary Scenarios

This post will be pretty brief. First the good news.

By some indications, the recession may be starting to ease a little. GDP (for various reasons) is down only 1% for the 2nd quarter, manufacturers are starting to add inventory and the government's "cash for clunkers" program has been a huge success. Employment is still anemic and will remain so for a long time to come, so we can't really crow about a jobless recovery, can we? Corporate profits are getting obliterated, but at least there are some profits to be had. The stock market obviously believes we've hit bottom as is reflected in a stellar performance in July. Even housing (although not commercial real estate) looks like it is picking up. So cross your fingers, hold your breath, throw salt over your shoulder in the hope that the favorable data isn't a false positive.

Better yet, Congress is finally getting serious about all this egregious pay being handed out on Wall Street. Last year, firms that didn't even earn a profit handed out $billion$, and even those that did make some money, paid more in bonuses than what they took to the bottom line. Congress, the American Public and even foreign officials are sickened by all this. Well, let's hope that the government really comes down hard on these financial parasites.

Scary Scenario #1

China decides to stop buying US Treasuries. They appear to be already balking at the recent auctions (see WSJ link below) and the Chinese have so much leverage on our economy right now that there is little we can do to mitigate their actions. Some argue that there the US and China have a symbiotic relationship and that if they hurt us, they will hurt themselves. But if we inflate things and devalue our currency, the Chinese will already be damaged. Here's the link:

Scary Scenario #2

AIG appears to be in as much trouble now as it was before. Because this is a giant company with thousands of subsidiaries, they apparently have been playing the intra-company asset/liability transfer game. The original problem with AIG, which necessitated giving them $10s of billions in bailout money, wasn't that it is too big to fail, but rather, it is too complex to unwind. I fear that this is still the issue and you can read the full story by following the NY Times link below.

Scary Scenario #3

While we may have somehow managed to muddle our way through the deep crisis we faced just months ago, there are repercussions and consequences that follow from all the actions the government took. Being at heart, a skeptic, I am fearing that the backlash will be more joblessness, rampant inflation, and all sorts of nasty things that I don't even want to think about. For now we can take the good with the bad, and hope that the worst scenarios are merely science fiction.


John A.

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