The marginal utility of the Fed's tools is decreasing. And relying on that one agency to turn activity from the greatest recession on record does not seem logical. The rest of Washington needs to notice the economic malaise and work together to resolve some of the economic challenges we face.
Recent economic reports have presented relatively good news, but investors seem unwilling to buy in to optimism. Although recent price declines have pushed stocks into bear market territory, stocks remain a good choice vs. cash for long-term investors. In 10 years, stock earnings and valuations are likely to be higher than today.
While high yield spreads are likely to remain volatile until Europe's problems are resolved, the purge of high leveraged credits during 2008 and 2009, coupled with a lack of aggressive re-leveraging of balance sheets thereafter, should limit the severity of the next default wave absent a severe recession or systemic bank failure in Europe.
The lack of emphasis on jobs has caused unemployment to remain high and become increasingly structural. Structural unemployment typically lasts longer and, as workers lose basic skills, becomes less susceptible to monetary and fiscal measures. That, unfortunately, is where the nation finds itself.
While things may very well turn out well for risky assets in the coming months, the possibility of a messy European outcome or for further political and economic turmoil in the U.S. is significant and cannot be ignored. Emerging economies, while not immune to the travails of Europe, Japan and the U.S., remain resilient and their stock markets offer good value and growth prospects.
European Union leaders announced a "solution" to the Greek sovereign debt crisis during their July 21 meetings. The market reaction, as it was after earlier "solutions", was positive. Yet, many specifics are unresolved, and it is highly unlikely that these actions will resolve the solvency issue once and for all.
The authors believe the U.S. economy is likely to continue to grow, albeit slowly; the European Union is not likely to fracture; and the emerging economies, including China and India, are likely to continue to grow fast enough to help the global economy grow at a near normal pace.
The state of corporate profits, balance sheets and valuations make the author confident that 2011 is a much healthier environment for U.S. equities than 2008. Despite the emotional trauma investors experience in these types of markets, the silver lining is that the capital markets are forcing policymakers to confront the core issues.
While some people are crying out that the U.S. economy is dead or dying, the economy itself seems to be protesting otherwise. Look for continued slow but steady growth in the United States and globally, with commodity prices stabilizing and Japanese supply chain worries easing. But policy and market action are needed to restore investors' confidence.
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