New Year’s Optimism

While I’m reading and hearing a lot of pessimism in the media, I am increasingly optimistic about the buying opportunities that are currently available.   In fact when I hear the recession being called a possible financial depression, I think about buying more shares of  SPY and VTI.    In doing some research on the term depression I have seen several definitions:

  1. A prolonged, severe recession.
  2. A drop in GDP of more than 10 percent.
  3. A drop in GDP of more than 20 percent.

#2, a drop in GDP of at least 10% (absolute year-over-year), is my working definition.  (For reference the Great Depression represented a fall of about 35%)

What we’ve seen in the first 9 months of 2008 is nothing compared a depression.   There have been 2 down quarters in the 12 month period, but overall net GDP growth.  Sure Q4 is likely to be bad.  I’ll stick my neck out and guess it’ll come in at minus 18% annualized (about -4.5% absolute Q3 to Q4).

The popular press (or unpopular press) has covered this financial “crisis” with a stunning mix of balderdash, rubbish, and misapprehension.  There, that’s off my chest.   Now on to what’s making me optimistic.

  1. Reasonable, even occasionally cheap, stock valuations.  (e.g. good, even great buys)
  2. My neighborhood.  I’m seeing houses priced between $160K through $215K get snapped up within days; sometimes as soon as they are listed.  Further I’m seeing continuing, targeted investments in real estate by folks I consider savvy.   I’m seeing low mortgage rates that allow buying rental properties that immediately generate positive cash flow.
  3. A dose of reality.  Finally some borrowers are getting the message that “debt, for the lack of a better word, is BAD”.    While this insight will have a negative impact on the economy in the short term, it is likely to have an overall positive impact in the long term.
  4. Technology.  It’s baa-aack!  I’m talking about computers and the internet.  I’m also talking about materials, advanced transportation (rail, aircraft, hybrid autos).   I believe that technological innovation will propel the world economy forward over the next 5-10 years.  And, the US economy will benefit disproportionately due to it’s innovative, entrepreneurial, and dynamic heritage.

Feel free to call me Polyanna; I’m buying stocks!

2 thoughts on “New Year’s Optimism

  1. Good points! I agree for the most part, but am probably not quite as upbeat. Does the national debt and the current deficit spending concern you w.r.t. inflation? I think the government may just be buying us time before GDP takes more of a hit. Real-estate is a difficult meter since location is the strongest factor. Good neighborhoods have been weathering the storm well, but I don’t have to look too far for what I’d consider to be some continually weaking local markets and “firesales” in some cities!

  2. Yes, inflation is a primary concern of mine. As the U.S. inflates the money supply with the bailout and new spending there will be downward pressure on the U.S. dollar and a tendency towards high inflation in the years ahead.

    Interestingly, though, stocks as a whole tend to weather inflation reasonably well over the long haul. As more dollars circulate stock revenues tend to increase (as do their material costs). Salaries tend to lag so companies realize a temporary reduction in real dollar labor costs. Ultimately for the same P/E ratio, the companies earn more (inflated) dollars and their stock prices are worth more (inflated) dollars. Thus stocks have a decent built-in hedge against inflation. [NOTE: this is in the long-term of several years. Short term inflation can be another story.]

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