A Jupiter of a recession
Economists have seen recessions like 2008-2009 before. so they can predict the broad shape of the economic recovery, according to Kelly.
U.S. recessions are just like the solar system. There are big planets and little planets, but no medium planets, said Kelly. "This was a Jupiter among recessions," said Kelly. Even though it's the largest recession since World War II, it's not unprecedented. In fact, it's not that different in size from the recessions of 1957, 1980, and 1982. As a result, he foresees a robust recovery.
"The bigger the recession, the bigger the bounceback," said Kelly.
Keys to U.S. economic growth
The U.S. economy will rebound strongly because the following areas became so weak, they must bounce back, said Kelly.
1. Auto consumption
2. Residential construction
3. Equipment
4. Inventories
Employment outlook
Kelly made the following predictions
- Jobs will begin to grow in the first quarter of 2010, which will produce income to support economic expansion.
- Unemployment will rise as new jobs are created. This is because unemployment statistics are calculated using the number of people actively seeking jobs. People will return to the market as they see better prospects for success.
- It'll take five years to get back to full employment. Employment may rise to 9% by year-end 2010.
- Corporate profits will improve. This is because of low costs, low interest rates, and especially because of the lack of upward pressure on wages. On the wage issue, Kelly quoted the singer Beyonce, saying that employees realize that employers know "I can have another you in a minute."
- The risk of deflation is greater than the risk of inflation.
- The biggest risks to Kelly's positive scenario are conflict with Iran, which would drive up oil prices; and banks finding it difficult to lend due to regulation, taxes, and uncertainty about regulation and taxes.
- It's not too late to get back into stocks. Some people worry that maybe they "missed the train." Davis' reply? "This is a very long train on a very long platform." He noted that stocks have recovered less than half of what they lost during the bear market. Also, there's a lot of cash on the side lines that will eventually flow back into the stock market. On the flip side, bonds have become more risky, so now is a good time to overweight stocks relative to bonds, he said.
- Non-U.S. economies will continue to outperform the U.S., and international stocks are cheaper than U.S. stocks. Also, a modest fall in the dollar will amplify gains somewhat for U.S. investors.
- During Q&A, Kelly said, "I think buying a house will turn out to be a good investment, even over the next five years."
- On the topic of gold, Kelly said he wouldn't put his mother into gold, even though the gold bubble has the potential to continue. The fundamentals don't support gold's price rise in 2009 because gold is supposed to appreciate in times of rising volatility and rising inflation. Meanwhile, volatility, as measured by the VIX has fallen and so has inflation. This bubble will eventually pop, he said.
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Susan B. Weiner, CFA
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Copyright 2010 by Susan B. Weiner All rights reserved
