Optimism and the Economy

For those who are looking for some good news, this is a great little opinion piece on the bright side of the economy by Justin Fox of Time Magazine. It's called "Call Me Mr. Sunshine." Since the magazine has sliced up the article to force you to look at 6 pages of ads, here's a little summary below (with some of my thoughts)

1. The stock market is no longer overpriced.
Justin says that because stocks are way down, they have essentially priced in the ugliest economic scenario. Stocks are fairly priced or "downright cheap." He's right there are stocks like Cisco with a P/E ratio of 10 or GE at 4.8. They may fall, but the prospect for a turnaround is great now than ever. Having the falling knives dulled? You might want to play with modest amounts priced in over time, or wait. I like the idea of wedging in.

2. The government is on the case.
"Don't laugh." Compared to the Great Depression or Japan's Lost Decade, the US authorities are taking action. Depending on how you look at it, there's over $2 trillion on stimulus from the US alone. That does not include lower gas prices and the diplomacy dividend from being friendly to rogue governments.

3. Consumers are adjusting to the new economic reality - and fast.
Americans are adjusting quickly. Savings rates have gone from negative to 5% in January. Eventually, people will buy things. When you go from buying 16 million cars a year to 10 million, eventually your car will break and you'll have to buy a new one. The bottom line is when a contraction is rapid, there's a greater chance of a bounceback. Having a savings rate is actually a good thing in the long term as is staying within your means. Now, I've heard many arguments about how because of the credit and foreclosure crises, that somehow this one is different. I also remember hearing in 2000 how the internet was the end of the business cycle.

4. Reinvention and change are what the US is all about.
This is a distinctly American strength - the flexibility of people and the economy. Americans are willing to be retrained, to relocate, to try something new. We have moved from manufacturing to services. While real estate and financial services were prominent before, it does not mean success comes only through those fields. Something new always springs forth. Fox points out that the unfair advantage of the US is the strength of the dollar as a reserve currency.

5. OK, so I couldn't think of a fifth reason. Maybe you have one to spare?
Fox doesn't have a fifth, other than to say he was a pessimist in 2007 and 2008. I would say there are some other encouraging signs - the reemergence of commercial paper, GE's ability to issue bonds, WalMart same store sales going up, and the support of the new administration. For the latter, it shows that Americans are optimistic about their new leader. The value of one party in power is that the rules tend to be known. From a policy and regulatory standpoint, there is less of the normal back-and-forth. When there's certainty, businesses will find a way to make money.

And optimism is what gets money flowing again....