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Wednesday, April 30, 2008



Mohamed El-Erian says it much better than I could.

Pity the US consumers. Their ability to sustain spending is already challenged by the declining availability of credit, a negative wealth effect triggered by declining house values, and a lower standard of living as the result of higher energy and food prices and a depreciating dollar. Job losses will accentuate the pressures on consumers, leading to income declines and a further loss of confidence.

It is a simple formula. If 70% of our economy is driven by consumer spending and that falls 3%, then the other 30% needs to increase 7% for GDP to breakeven.

Unfortunately, I don’t see a 7% increase coming nor is consumer spending going to rise anytime soon. Only a significant amount of government stimulus could quickly turn this around, since the banks are not going to lend money to people with negative or little net worth even with improved balance sheets of their own. (Although I do have a more pessimist view of the financial health of our banking system than El-Erian. If their financial position was getting significantly better, the TED spread would be at or below one.) We are likely looking at low growth with moderate-to-high inflation over the next six to eight quarters.

With that being said, the up tick in the market is only temporary. Q2 earnings are going to fall off from Q1 as the credit crunch moves across the pond, plus China and India are trying to fight inflation. The largest multinationals are not going to have the same rate of international growth this quarter. We are going to continue to see bank write-offs due to the historically weak housing market, which limits the private sectors ability to spur economic activity. These are going to be early 1990's economic times - a.k.a. bad times.


Hopefully, this is the start of something for Lester. If he has command, Lester's stuff looks a lot like Andy Pettitte - low-mid 90's heat, curveball and a cutter. Of course, Pettitte's cutter is much better.


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