The stock market is flying out of bed this morning. It seems that manufacturing is picking up in China. This coincides with our nation's economists who have said the recession is ending starting today! Good to know. Somehow in this tiny burg tucked away in the shadow of El Capitan (something really solid), things don't bear witness quite yet.
We want this economic crisis to go away in the worst sort of way too, but think it is much too early to get overly excited. So far, the stock market is running purely on fumes. Those fumes are most likely left over from another era long, long ago. We don't want to be party poopers and will certainly partake of the spoils while they last, but listen for a moment to some nagging questions.
What about California? If California was a country, it would qualify as the eighth largest economy in the world. We can't seem to fix this for anything. Largely run by a Democratic legislature for four decades, things are getting downright ugly. Arnold has announced a 5% pay cut across the board for the 235,000 state workers. He wants to close most of the states parks. And, the cuts in services for those who need it most are chilling. Expect lots of contention, law suits and posturing going forward.
How do we pacify China? They are stepping up their criticism and concerns about how the Fed is handling the economic downturn. Our Treasury Secretary is in Beijing to assuage their feelings; we just hope he doesn't reiterate his statement that China is a "currency manipulator." China wants assurance that our government bonds (they hold ¾ of a trillion dollars worth) are safe. We assured them today. They want our country to save more money. We promised that today as well. They want our word that we are going to defend our dollar. We promised that too. The problem is we haven't done any of this yet and there is no indication that we will do anything except the very opposite of what we promised and what they are demanding.
Can Japan weather the storm? Japan's stock market is frothy these days. The P/E ratio (price to earnings) is about 42 compared to ours which has been fluctuating between 15 and 20. Basically it means that if you buy a Japanese company with a P/E of 42 then it would take 42 years of earnings to get your money back. This is probably not a good long term strategy. Their manufacturing and exports are down severely in depression territory. Plus, they are an aging economy with huge pension problems. As the second largest world economy, they need to stay on everyone's radar screen.
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What will happen with interest rates and the dollar? When the crisis first struck, the world ran to the US dollar for safety. Now that other countries are getting more stable, money is leaving the dollar putting huge pressure on our economy. This is the main reason that gas prices are shooting up. When the dollar gets weak, commodities strengthen. That also means that inflation may be heating up and interest rates are starting to climb. These are not good signs. In March, the Fed tried to drive down mortgage rates and actually succeeded for a time. In April, we advised anyone who needs to refinance to jump on the opportunity for decent interest rates.
The window of opportunity is closing for now but there may still be time.
What is the status of housing and real estate? The housing market is still very rocky. Most sales are for distressed properties in foreclosure or short sales. True demand has not returned since prices are still dropping. It is still amazing that in our town, there are still people building $600,000 homes when the cost of building far exceeds the cost of buying an existing home. The commercial market may be the next shoe to drop. Over the next few years, developers will need to roll over debt. If things do not improve, this will result in significant defaults.
How is the consumer doing? The consumer accounts for 70% of our economy. They turned their back on our President last month and refused to spend as he has requested. Our President made it known several months ago that only government can save the economy and to help that happen we all needed to do our part by continuing to spend money. Last month the savings rate climbed to 5.7% which is the highest in 14 years. Spending decreased while savings increased which is the wrong direction for fixing our ailing economy. Consumers are still worried about the high unemployment which may exceed 9% this month, something we have not seen in over 25 years.
What about the stimulus plan? We got our first glimpse of the new plan at work here in Sonora. The stimulus plan is buying two trolleys for about $400,000. We are not sure how this stimulates the economy since it doesn't really create jobs but it could lead to a new play called, "A Trolley Named Desire!" Our humble apologies to Tennessee Williams for that one. If this is our government's idea of stimulating the economy, then things must not be going as well as hoped. China, on the other hand, has built 12,430 miles of rural roads, 214,000 low-rent homes, 300 miles of highway and one million square feet of airport buildings. Now that is stimulus! And, if we can believe the reports, that all took place in a few short months.
Those are a few of our questions. So far, we are hopeful but not holding our breath. Today is a sad day for America. There is the old saying that, "as GM goes, so goes the country." We think it is the other way around. Government Motors will rise from the ashes and run what is left of General Motors going forward.
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