READING ALL the economic prognostications just makes my head hurt.
Nobody strikes me as being that convincing either way, so it's really an exercise of hedging bets and gripping the arms of my chair as tightly as possible.
My fellow Americans are saving money like it's going out of style. One report showed that we have saved four times more in the first quarter as we saved in the equivalent quarter last year. That's not good for the consumer-based economy, necessarily, but it is a reflection of sanity at some level.
And there's more where that cash is going. We already have $4 trillion dollars sitting on the sidelines, and what could be better news for the 8,000 regional banks that were otherwise small enough to fail. Fortunately, the FDIC has only had to close 20 of those banks so far this year. That's only a few more than the number being closed in a normal year, so let's count this as good news.
So, what will happen next? And when? Considering a combination of the economy, the investment markets, and the labor market, we are coming to terms with a three-legged stool. Of the three legs, most of us reading this column are preoccupied with the investment market, so here are some fundamentals that could be reassuring.
First, the unemployment rates are high, no question, but when firms in the financial services industry lay off thousands of people, they suddenly become more profitable.
Goldman Sachs has laid off 4,000 employees (of their 27,000) for a 15 percent cut in workforce. Considering that the financial services industry toward the end of the recent bubble was contributing over 20 percent of all profits of the S&P 500 companies, a major cut in headcount, especially if it's in middle management, can quickly help to boost lagging profits.
I'm not surprised to hear that a number of these banks, starting with Goldman Sachs and Wells Fargo, are suddenly anxious to pay back their TARP money. Their emissaries are walking around the halls of Washington waving checks and trying to get us taxpayers to take the money back.
Why should we hesitate? Well, for one thing, it should be the last money we take back because the TARP money allows us to limit bonus payments and executive compensation.
First, we should make these major financial institutions return the money they received from AIG --- the then-secret money with no strings attached that backed up their derivative bets. Pay us back that money and then they can return the TARP money and refill the compensation feeding troughs. If Goldman Sachs is currently reported to be sitting on $600 billion in cash of which about $300 billion is borrowed, the money they received from AIG and TARP combined is just chump change.
I'm reasonably optimistic that government stimulus money will be paid back sooner than most people think for reasons like the one just cited. This would trigger a national psychological lift and set the stage for a resurging economy. Speaking of a psychological lift, we shouldn't ignore the value of our current energetic leadership. Who knows for certain if they're doing the right thing, but at least they're not sitting on their hands back there.
Meanwhile, for those still investing, it's an opportunity to be buying low and collecting relatively high dividend rates as a reward while being patient. For those looking for investment income, it's not a bad time to consider some of the high yield corporate bond funds for a portion of fixed income portfolios. Capital values have declined temporarily and rates of return are up in the 10 percent range as a result.
As a general rule, the stock market recovers first --- by about six months --- ahead of the economic upturn, and the job market recovery then lags that of the economy. For those of us preoccupied with the investment markets, there is plenty to be optimistic about, and some of it we've seen in the form of exhilarating market gains over the past few weeks. As a general rule, the more rapid and substantial the decline, the more powerful and sustained the rebound will prove to be.
As for the economy as a whole, and the job market in general, we could be in a v-shaped recession, a U-shaped recession, or just a flat-lined funk. As for the latter, I see it as the least likely when we consider $5 trillion in stimulus from governments around the world, what seems to be the bottom of the housing market, a swift recovery of the banks, a rise in exports and the overall history of resilience in the world economy.
Throughout it all, there will always be rewards for the investor who filters out the noise and stays true to a long-term strategy that history demonstrates will prevail through thick and thin.