C.M.O. 2.19.2009

Credit Market Overview
February 19 2009

“In some ways, what the government says or does is becoming less important, since the market wants to see proof that the stimulus is working and the economy is bottoming.”

Although this quote by James Paulsen, chief investment strategist at Wells Capital Management, was made in time to be in last Saturday’s Barron’s it’s prescience rang true this week as Tuesday’s signing of the American Recovery and Reinvestment Act and yesterday’s mortgage relief plan were met by a two day drop of 38.42 S&P points or a 4.64% reduction from last Friday’s close.

Economists too are in synch with Mr. Wells. A recent poll of 52 leading economists by the WSJ shows that a previously hoped for “second-half recovery” is now looking much less likely. In September that same poll showed a consensus estimate of 1.2% of GDP growth in the 1st quarter of 2009. A more recent update puts this statistic at a 4.6% decline. Growth estimates for the April through June period has moved from up 1.9% to down 1.5% between the two sampling periods.

Responses by these economists regarding the stimulus package included the following: “too late”, “provides too little boost”, “trivial”, “too big” and “too small”. Those last two are probably the reason Harry Truman pleaded for “a one-armed economist”.

In response to statements that everything starts to clear up in the second half of 2009 David Shapiro, an economist at Penn State, said “If you look at the magnitude of this problem, the amount of debt relative to income, the credit and asset bubbles that have now reversed and it’s only just started, why is it going to end two quarters from now? To say ‘off we go’ in the second half of the year, I think that begs incredulity, I just don’t buy it. It’s a global thing, too; trade volumes are just cratering and our exports are getting pounded. There’s no where to hide.”

Brian Fabbri, chief economist at BNP Paribas agrees saying: “We’re in trouble. We don’t have sufficient economic plans at present to resolve the banking system or the financial crisis, and the stimulus package seems loaded for 2010.” Brian also sees the global nature of the downturn, increased savings by U.S. consumers and tightened lending standards as obstacles to a quick recovery.

Enjoy the week.

Jim Delaney

Leave a Reply

Your email address will not be published. Required fields are marked *