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Reports of Economy's Recovery Have Been Greatly Exaggerated


But a number of economic indicators may yet provide some hope..

This Time, It's Different

Ben Bernanke's career will be analyzed and written about for many years. But the one thing that's caused me the most pain is his bringing the term "green shoots" into the investment lexicon. These may be the 2 most overused and annoying words I've encountered in my investment career. Every possible sign of a recovery is described in this way.

Analysts have lately tended to interpret numbers or statistics that are "less bad" as signs of recovery. They glance back at previous recoveries and say, "Now looks like then. When such and such happens, it means that recovery is on the way. Therefore, we should buy stocks (or whatever)."

Being an investor means being condemned to read such things. But that doesn't mean we shouldn't take the time to look at what the writer is referring to. All too often, I find people grasping at straws or failing to understand the data.

First, I'm calling attention to the heresy "This time, it's different" represents, because the economic landscape has changed so fundamentally that comparisons with post-World War II recoveries are problematic at best and misleading at worst.

We're on a track that looks far more like the Great Depression than the recessions of our lifetimes. To expect a normal recovery cycle -- whether it's corporate profits, lending, consumer spending, capital investment, or any other -- just isn't reasonable. This is a period that's different in so many ways. And the recovery -- and there will be one!-- will also be of a different warp and woof throughout the entire world economy.

First, we're at the end of a huge cycle of increasing private debt that ended in an overleveraged society. The process of reducing debt and unwinding leverage is going to take rather a long time. It won't be the typical one or 2 years before things get back to an ever-higher normal. To use a phrase coined by my friend Mohammed El Erian at PIMCO, we're on our way to a new normal. We're hitting a massive reset button on our economic world, taking us to some new and lower level of consumer spending, leverage, and so on. No one knows what the new level will be, although admittedly we're closer to it than we were a year ago.

At this new normal, we won't need as many malls, factories, stores, new-car plants, car dealerships, or any number of other things to satisfy consumer desires. As an example, capacity utilization is now approaching 65%. Anything under 80% is anemic. (Which is why commercial real estate firms -- including General Growth Properties (GGP), Simon Property Group (SGP), and Vornado (VNO) have generated so much negative ink on the 'Ville recently.)

Does anyone really think that businesses (in general) are going to invest more money in expanding capacity, in the face of the lowest level of production relative to potential since the 1930s?
No positions in stocks mentioned.

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