The good news about economic cycles is that there is always a bottom. ALWAYS. In most down cycles it’s hard to feel the bottom until a month or more after it has passed. That’s because the down slope is gentle and the effects subtle enough to cause even the most seasoned experts to have trouble identifying the definitive bottom period. Once you have hit THE bottom though, the economic growth curve turns positive and economies begin to experience positive effects.
There has been nothing subtle about this economic downturn. It has been hard, fast, complex, global, and deep. It may have been hard for some economists to pick the end of the growth cycle at the time it peaked in late 2006 until we were well into 2007, but it won’t be hard to find the bottom in this downturn. Why? Because the bottom will be very obvious. It will hit stock markets around the world and the banking industry of the U.S. over the head with a baseball bat. We will know when we have hit the bottom. While no one has a crystal ball, I predict that we still have some serious pain to experience in the U.S. before we start to recover. I agree with a number of economists who are predicting that the bottom will occur sometime during the summer and that there will be some lackluster growth in the last quarter of 2009, followed by moderate recovery in 2010.
What kinds of events will cause us more pain and accelerate our way to the bottom? My best guess is there will be several cathartic events in the banking and financial industries. These events will involve the top 25 global banks. By my way of thinking, executives in those banks don’t have a clue what is about to happen to them. They are like supertankers trying to weave their way through a very narrow, shallow channel in a strong crosswind. They are in uncharted waters, and they can’t turn around their ships without running aground. Their shareholders have hundreds of billions of dollars and their losses have yet to be fully counted. Many of these top banks will have to hit the shoals and break into two to twenty pieces. They simply aren’t lightening their load fast enough. Governments will protect depositors and have to clean up the unprecedented spill of bad loans, many which will have to be written off. I think the break-up of many of these banks will signal the bottom.
Between the mid 1990s and 2006, we had the largest period of expansion since the end of World War II. While the severity of this downturn was exacerbated by greedy sub-prime lenders and over-leveraged banks trying to squeeze every dollar out of their markets, the fact is that even without these crises we still would have experienced a period of economic contraction.
How will our global recovery occur? Based on improvements in the Chinese economy during the last several months, I predict that global capital markets will feel the bottom and loosen their purse-strings, in anticipation of growth. Smart equity is sitting on the sidelines right now and will know when it is safe to jump in. I think the recovery will be slow to gain momentum based on available credit. Banks will have start “feeling the love” that the rest of our economy will hopefully feel. We will start seeing employers begin to hire again in significant numbers and than suddenly we will wake up and hear more positive economic news than negative news, which will help improve consumer confidence.