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NEWS - Twitter Report - Borrower, O Borrower, Where Art Thou?
February 3, 2010
The banks are sitting on a lot of cash -- about $1 trillion according to The Wall Street Journal. The problem is there’s not enough borrowers. Could that be possible? In the United States, the land of easy money, we do not have enough borrowers! But what else is wrong with the world?
First off, consider the price of fine wine. A 2005 bottle of Petrus Pomerol has gone in price from about $6,500 per bottle to about $3,250. That’s a 50% price drop from its peak. Now I wouldn’t know Petrus Pomerol if I was drowning in a vat of it and it’s wrong to draw too many conclusions from one anecdotal statistic but maybe all is not right with the new world economy if a great wine falls into the remainder rack.
As 2010 unfolds, many say the global economy is recovering, especially if one’s focused on the stock market. But the stock market is only one element of an economy. And while it’s up, it’s left a lot of other important items in its wake.
Retail sales remain weak. The housing market is in poor condition and unemployment remains troublingly high at between 10-11%. Consumers do not need economists to tell them whether or not the recession has ended. They can look at their bank balance, mortgage or credit card statements for a quick snapshot of their financial condition. Consumers, it turns out, are trying to pay down loans rather than take on new debt. They’re postponing rather than purchasing. Those who are applying for a loan face a rigorous credit check and many who would have easily gotten a loan just a few years ago are being turned away. Hence the banks face a borrower shortage and as a result the price of fine wine and many other items have fallen.
The 2010 economic forecast therefore calls for a generally slow economic growth rate. Our economy has not collapsed or crashed as much as it’s stumbled or staggered. The question then is: when will it regain its footing? When will meaningful growth resume? No one really knows.
Will 2010 be better than 2009? Possibly.
The weak housing market, unemployment and relatively weak retail activity are a concern. Inflation is subdued at a 2.7% annual rate. It is expected that the Federal Reserve will continue to keep interest rates low and postpone tax increases so as not to hurt any recovery. The high unemployment rate is preventing upward pressure on wages and we are not seeing any significant rising price pressures. The dilemma for the Fed is if it raises interest rates too soon, it may stifle a recovery. If it waits too long we could face a good possibility of increasing inflation as the Fed feeds cash into the system. Even with all of the negativity factored in, the stock market could have another positive year in 2010.
Generally speaking, most investors would probably do well with a diverse mix of quality U.S. stocks and some foreign-equity exposure. High-yield, municipal and global bonds as well as some alternative investments, such as Real Estate Investment Trusts (REITs) may also prove to be worthwhile. Nevertheless, in this environment, investors need to be prepared to reduce portfolio risk at the first signs of market weakness, reduce debt and focus on the long term. And don’t worry about the banks sitting on all that cash – that’s their problem.
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