The good vibes from the stock market’s apparent recovery earlier this week were blown away over night. We blame the gale force winds that deposited about a kilo’s worth of grit on our scalp yesterday as we walked along St. Kilda Road. But you may as well blame the two likeliest characters: Ben Bernanke and Australian stock broker Opes Prime.
“Everyone go take a cold shower and think this thing through,” Ben Bernanke told the U.S. Congress yesterday.
Okay. He didn’t really say that. What he said was even worse. Bernanke said, “It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly.”
Another name for contraction is recession. Bernanke didn’t actually use that word. He did, however, concede that a recession was possible. Investors didn’t like the sound of that concession.
But it’s clear that the patterns of consumption in the U.S. economy are shifting. Asset-poor and low on savings, Americans won’t be spending as much this year-and they certainly won’t be drawing on the equity of their houses, which are no longer rising in value. In fact, home equity lines of credit (of which there is a US$1 trillion) outstanding, may constitute a mini-crisis of their own later this year.
As U.S. patterns of consumption change, global investors will change their patterns of capital allocation. The money flows will continue to migrate away from North America and towards projects where you will get a return on (and of) your capital. But let’s keep it even simpler than making sure you don’t lose your money. What businesses are going to make more money this year than they did last year?
It all comes down to earnings. Where will they come from this year? In America, the answer to that question is not as obvious as the market action earlier this week suggested. Expectations for a recovery in financial earnings are, to be really kind, premature. This kind of down cycle in credit takes years to work through, not months.
The Daily Reckoning Australia