Weed-Whacker for Green Shoots: Why the Economy May Not Be Out of the Woods
In 1987, my financial Yoda gave me excellent advice as I started my career as an options trader: "It's great to develop an opinion about the markets and the economy, but to counter that position, find the smartest people you know who hold the opposite opinion and read/listen to what they have to say."
Since this crisis started, I've thought that it was going to take a long time to get out of this mess. But it's clear that the improvement in financial conditions and a bunch of less bad economic reports mean that I need to rethink my original thesis.
So far, the most compelling argument is that when the government throws trillions of dollars at a problem, there is bound to be a significant response in the markets and the economy. The fruits of the big spending spree are most easily seen in:
- The easing of credit conditions to pre-Lehman levels (note the smart declines in LIBOR, LIBOR-OIS and TED);
- A bounceback among consumers, who've come back a bit from their full retrenchment in spending;
- Slowing losses in employment.
Just call me a Weed Whacker for your green shoots, but I'm proceeding cautiously. Here's why:
- Credit conditions are not even close to normal. Better is better, but in essence, this is like a doctor telling you that you don't need a heart transplant, you "only" need a quadruple bypass.
- Housing is still a mess -- we need to see more pain before moving forward on that front.
- Banks are way ahead of consumers on the deleveraging front. Despite the cheery talk that "the worst is over," people will still be forced to save more to replenish depleted balance sheets.