Double Dip or a Lost Decade: Are These the Only Options?

07/19/10 — The general uneasiness of the stock market is blatantly apparent and even good earnings news can’t seem to sustain any lasting interest from buyers. Clearly, the bear market reigns.

So far, corporate earnings are holding up well, but the numbers are padded by extreme cost control. Top-line growth just isn’t happening, and this is worrisome for the next 12 months. Unless we get more robust revenue growth, the earnings picture will slowly deteriorate.

There continues to be a lot of talk about two very real scenarios for the economy — a double-dip recession or a lost decade. I’m in the camp that feels that a decade of very slow growth is more probable given the situation. We have a lot of issues to work through before we can even find a new equilibrium to start from.

For individuals, the two main issues to be dealt with are housing and employment. For governments, the two main issues are spending and debt. Really, these issues are the same for both governments and individuals. They’re just on different scales.

As we all know, the housing market doesn’t operate like the stock market. Housing booms and busts take a lot of time to work things out. And, so do debts and deficits. If governments decide that they want to be more prudent with their finances (as they should), then this will have an impact on the economy. We can’t have it both ways. In my view, the housing market has only just begun to right itself after the initial shock of the subprime mortgage meltdown. We’ve got a long way to go before inventories, foreclosures and prices find the right balance, before another upturn in the housing market develops.

Low and slow. That’s a reasonable expectation given the current state of things.

There are also a lot of potential shocks out there that could contribute to a slow growth decade. The sovereign debt issue in Europe is not over. The numbers really aren’t getting any better. The politicians have only begun thinking about the issue. It’s a great first step, but investor sentiment can still easily turn on the euro. This currency risk has enormous ramifications for you and your daily life. In addition, the world’s second largest economy (China) is in the process of deleveraging itself both in terms of monetary and fiscal policy. You can see this reflected in Chinese equity markets. In a bid to keep a lid on inflation, China’s economic growth is likely to come under pressure over the next several years. Whether we like it or not, this affects our economy.

It really doesn’t matter what the prediction is. An individual’s best strategy in these economic times is the elimination of debt if possible. After that, you can trade the market’s action, but don’t expect any major new trends to develop.