Why I Am Cautiously Optimistic About 2010 $$

Some of the general statistics I follow continue to improve and that leads me to be optimistic for 2010. But, some of the potential legislation coming out of Washington could derail it. So I think it best to assume what follows assumes no dramatic governmental action that causes the wheels to come off.

Where are we now?

GDP has rebounded

Household Debt has fallen:

Personal Income has rebounded:

Continuing Unemployment Claims keep falling:

Here are the two most important ones in my opinion. The first is the consumers debt service to disposable income. This tell us what % of their income after bills are paid (food, electric etc.) is then used to pay debt service. Clearly the lower this number, the better as it means less disposable income is being redirect to debt..

Finally household wealth. This is the big one. As people see the value of their assets (homes, 401k, investments etc) rise, they feel more comfortable spending money. They also have more money to spend as an increasing brokerage accounts can be used for home remodeling, auto purchase etc. The converse is also true, falling assets values make us nervous ans we then retrench and refrain from spending until we see clarity,

Forget the “savings rate”. It is useless. It is essentially the amount of after tax income-spending=savings. It ignores capital gains, asset appreciation etc. So if I sell 40K of stock to remodel the house, the spending gets counted but not the 40K stock sale as it was a capital gain. For that reason my “savings rate” will turn negative that month when in all reality it has not changed at all.

Household wealth is simple, it tells us “what is the value of what American’s own” and takes into account ALL assets and the either their appreciation or depreciation.

I have not included housing prices here because they are included in the household wealth readings (I do expect them to fall through 2010).  Household wealth has made a nice steady recovery. The fact that is has not done a slingshot to previous levels is also good as it means we have not re-priced assets to artificially high levels given the economic conditions.

So, are we in a full recovery? No. But a recovery has started no the less, to call this anything else would not non-sensible. The questions is does this continue, does it turn down and does is just chug along at this level. Again, barring any massive tax increase, I don’t think we turn down materially from here.

One only has too look at this Holiday Season:

Remember, the bar we are walking over in Q1 and Q2 this year is a generationally low one. It ought not be very difficult to blow past last years results in either Q as the world was still ending at the same time in 2009. Even worse case scenario of activity equal to that of last year will be met with improved corporate results as inventory and costs levels are now much lower. Since we ought to see economic activity higher, results will be better, much more so.

That being said, Q3 and Q$ of this year will be harder bar to jump over next year. One might expect results equal to, not greater than this year.

There are headwinds though. Banks still are not lending and most likely will not start anytime soon and unemployment will remain stubbornly high. For those who think we return to Q1 or Q2 disaster numbers, I think they miss the point that what we saw than was a classic over-reaction to events. Those numbers no more reflected reality that the 11,000 DJIA did in 2000 (dot.com bubble).

Because of all that the “double dip” recession we keep hearing about might just mean we stagnate here or a bit lower through 2010, not plunge back to 7000 on the Dow or -4% GDP.

The fact that there is considerable caution out there also makes one optimistic. It means business is watching costs and cap ex plans making fewer of them likely to find themselves in trouble in 2010 than we saw in 2009. It also means that GDP growth in 2010 will be met with higher profit gains as costs have been cut so low.

So the stage is set for modest, not great improvement over last year.