With all of the doom and gloom the past couple of years, the pessimists prevail these days and everyone is complaining about something.  It's hard to believe that Obama came into office just over a year ago with a clear mandate, and today he's viewed by most as a one-term President.  Having said this, it's also helpful to look on the bright side.

Just over a year ago, we all had serious doubts about the strength of our financial system.  Today, the financial services industry is bracing for further regulation and government intervention, but the financial system has been saved.  Just over a year ago, the country was also in a condundrum about Iraq and Afghanistan.  Today, we still have significant challenges in the region, but it's clear we have an exit strategy.  Just over a year ago, we were in the midst of the Great Recession with little hope of turning the economy around.  Today, we have officially exited the recession and signs of hope continue to present themselves.

So, why all of the doom and gloom?  Well, people are still unemployed and worried about the future.  Their homes are worth far less than they once were and nearly everyone's net worth has been slashed.  As business owners, we have limited access to capital, no clear path for growth and an expectation of increased taxes in the future.  We also see the ridiculous spectacle that our federal government has become and we're weary of the partisan battling in Congress.  And on top of it all, we have a President who seems oblivious to these concerns by pushing a health care plan that would only increase the size of the government we have little confidence in.

But, look on the bright side.  The stimulus from the Fed combined with the financial strength of America's companies and financial institutions will allow us to grow.  The housing market is in the bottom and now beginning to show some signs of life in many markets around the country.  Americans are also fed up with the actions of our government in Washington, and it is highly likely that the forces supporting a constrained federal government will result in throwing out the incumbents.  And finally, regardless of the health care bill's outcome, much of it will never become a reality because entitlement reform simply cannot be postponed any further.

Things have been bad and much of the discussion is negative these days, but look on the bright side...the worst is over and good news is coming.     

3/9/10 

Just one week ago, I asked the question, "Will the Recovery Have Legs?"  What I absolutely did not expect was the very real possibility that our "recovery" may be so short-lived in 2010 that we don't even notice it.  This past week was more than a little scary, and I believe we are entering an important moment.

Who would have seriously predicted just two weeks ago that the Democrats would lose their super majority with a Republican winning Ted Kennedy's Senate seat in Massachusetts?  Ironically, along with the surprise, the Democrats can no longer jam through the health care bill which was so emotionally tied to Kennedy's very own crusade.  And now, a young and inexperienced President can celebrate his first year in office with the fact he needs to change direction before he's really even begun. Clearly, this is a major challenge for an inexperienced President, but I wonder if he understands this is a tipping point on so many levels.

Not only was his push on health care and alignment with the Democrats in Congress a huge mistake, it was also a major drain of political capital.  While he has already softened his position, he has not demonstrated the awareness of how he needs to pivot to avoid rattling the markets.  In fact, he seems to believe that changing his focus from health care to punishing the banks is the answer.  Perhaps the timing was just coincidence, but can you believe he would sermonize on "never again will the American taxpayer be held hostage by a bank that is too big to fail".  Are you kidding me? We're trying to build confidence in the recovery not threaten it with saber-rattling.

In the very same week, Warren Buffet comes out and says "the tax on banks just doesn't make sense", and two additional Democrats on the Senate Banking Committee announce they plan to vote no on Bernanke's confirmation.  Really?  Is Congress so oblivious to the fact that a "no confidence vote" on Bernanke is completely irresponsible right now?  So, in spite of very solid earnings announcements from a host of companies, the equity markets sell off and will probably end the week with the Dow off by nearly 5%.  Sure the markets have gotten out ahead of themselves and were bound to experience some correction, but you'd at least expect that to happen based on some economic news.  The data looks good, but our leaders look terrible and that's the problem.

Obama had best figure out that punishing the banks and tongue lashing them in public is even more stupid than trying to push through a massive health care plan when we just went through the Great Recession.  Forget the political consequences for Obama and the Democrats, we can't afford more destabilization.  Somebody in Obama's camp better help him pivot and change direction or we're not going to like what's on the other side of this tipping point.

Let me know what you think.    

As we all know, the recession is technically over and we're expecting a much better year in 2010.  While unemployment is expected to continue to rise for the next few months, most of the experts predict the unemployment rate to peak and for the recovery to begin this year.  We're certainly hoping for a solid recovery, but you have to ask yourself, "Will the recovery have legs?"

Needless to say, the past two years have been a roller coaster with most of the ride plunging downward.  In 2008, we began to see the effects of the real estate bubble bursting, but it was clearly the tale of two stories.  During the first half of the year, the stock market tried to hold on in spite of the write-downs in financial services.  In addition, investors and consumers remained in a state of denial as the presidential election approached and the talk of a soft landing prevented the economy from tanking.  But we all know what happened in the second half of the year as we held on during what felt like financial armageddon.

Similarly in 2009, the first half of the year was devastating as the Great Recession took hold and unemployment raced towards 10%.  Somewhat surprisingly, the financial and stock markets rebounded quickly, and companies began to see the bottom as businesses across the board stabilized, albeit at levels down on average 30%.  The tremendous amount of stimulus and support from the Fed helped as well and companies came up off the carpet to exceed expectations in the second half of the year.  As a result, 2009 was much like 2008 in that the first and second halves of both years produced very different results.

So, here we are in 2010 with talk of a recovery and unemployment peaking and hopefully beginning to come down.  The financial services sector is clearly in much better shape as large bank CEOs are defending plans to pay out large bonuses once again.  The consumer was surprisingly resilient over the holidays, and the year over year comparisons should allow the stock market to hold onto it's gains and continue to rise - at least for awhile.  Companies are also getting back to work and investing again as productivity improvement positions them to perform very well when revenue growth comes back.  As a result, the first half of 2010 is set up for success, but I think the real test will be the second half of the year and the first half of 2011.

My belief is the recovery will run out of steam and the second half could be scary.  As the Fed executes it's exit strategy, companies will be conservative and unemployment is unlikely to change much.  Sure companies will stop laying people off, but jobs will not come back in any noticeable way this year.  As a result, sustainable growth is likely to be difficult to achieve and the emphasis on these risk factors will probably shake the confidence of investors leading to a correction in the stock market.  While my crystal ball may not be 100% accurate, I'd be very surprised if the second half of the year is as strong as the first half in 2010.

After four straight quarters of negative economic growth, the great recession is now over.  While we've certainly made it through one of the most difficult economic periods in our history, it doesn't seem like anyone is celebrating; at least not yet.  So what lies ahead and how should we chart the future?

Growth is good and things will surely get better, but the speed or lack thereof of the recovery makes a big difference.  When the Dow was at 6,600 and Goldman predicted it would reach 10,000 by the end of 2009, few believed it.  For those who sold and stayed on the sidelines for fear of losing even more, they're kicking themselves but justifying they really had no choice as they worried about their jobs and the value of their homes.  We all know the story, but it is important to remember that for the vast majority of people the recession really isn't over. 

To gauge the health of the recovery, it would seem to me that you only need to look at four things; unemployment, housing, US equities, and consumer spending.  Clearly the equity markets have improved and it is expected they will continue to do so in 2010.  Remember, we're still down more that 20% from the highs and the markets are essentially flat over the last ten years.  As a result, the near term downside is minimized.  Having said this, the consumer still has no real value in their homes and the piggybank of home equity loans may not come back for years.  This combined with unemployment that is expected to rise even further in 2010 means that a noticeable recovery in consumer spending may not occur for 2-3 years.  I'm not an economist, but it seems unlikely that we'll return to high rates of spending while the consumer continues to deleverage.

As a result, we're likely to see a rebound over the next few quarters followed by an extended period of flat to no growth.  The markets may spike and fall and uncertainty and risk aversion will likely dominate the corporate psyche for sometime.  As a result, leaders are likely to strategically reposition their companies while simultaneously focusing on improving productivity and profitability of core operations.  Non-core operations will be sold and discontinued, and M&A and CEO turnover will rise.  While all of this activity will be good for dealmakers and senior leaders as they reposition themselves, the positive effects of these structural changes may not be felt for several years.  As a result, the labor market at the middle management level will likely lag behind the most senior levels in the market.

So, what does all this mean?  My belief is that the recovery will stall in late 2010 and early 2011.  While this may cause some turbulence, I also believe that most managers and investors are aware of this risk and unlikely to get out in front of themselves.  As a result, we may experience a flat period in 2011 and into 2012, but I also believe that a sustained period of growth will follow.  If we see solid growth in spending, rising home prices, and much lower rates of unemployment at that time, we could be in for several years of upside.  As a result, it would appear wise to manage your expectations over the next couple of years but get positioned for sustained growth beginning in 2012.