'The Good News—The Recession is Over. The Bad News...'
"The good news is the recession is over. The bad news is that it's over for all the wrong reasons."
That was Chris Thornberg of Beacon Economics at the annual forecast dinner put on by the CFA Society of San Diego. Thornberg, who predicted doom in California's housing market for years before anyone would listen, likes to make bold statements.
History often proves him right.
I jokingly refer to him as "Mr. Happy" because he's such a downer, but he's someone who calls it as he sees it. During his speech he put up a picture of Michael Jackson and told the audience, "Why did Michael Jackson die? Because he surrounded himself with people who told him what he wanted to hear."
Thornberg believes the current signs of economic improvement are lipstick on a pig.
He says that the recession has ended (hurray!), but that's mostly due to massive government intervention. When that aid starts to dry up, "We're gonna have a double dip...but that's not gonna happen."
He says politicians and the Fed will likely continue fiddling with policy to avoid going back into recession, when, instead, "We need to take our lumps."
For one thing, Thornberg says consumers are still spending too much and not saving enough. In 1992, he says the savings rate was 6.2 percent and the spending rate was in the mid-70 percent range, with most of the remainder going to taxes. By 2008, the savings rate was 1 percent and the spending rate was 83 percent. Now, savings is up to 4.2 percent, closer to normal, but spending is even higher! At 84 percent! He says the current, higher savings rate is "an illusion" generated by lower taxes, with some tax breaks ending this year. "We have got to start saving again."
Ironically, he's bullish on California, making shocking statements like, "California doesn't have a debt problem", and, "there's plenty of water, just stupid antiquated riparian laws." Still, he said California is "a state that is overexposed to the cyclical effects of a recession (exports, tourism, real estate, etc). We are a boom and bust state." And when the boom times return, so will California. "When we come out of this mess we'll have cheaper houses."
Housing is Thornberg's chief area of research.
Home prices are already starting to bottom, or rebound, much faster than the slumps of the late 70s and early 90s. "Something is wrong," he says. What is wrong? Government policy, quantitative easing. "Mortgages at 5 percent are insane...interest can't simply stay this low." He says FHA ("the original subprime lender") is going to "blow up...this is gonna be another massive bailout."
He does say things will get better eventually. Well, they have to, right?
There were other speakers at the forecast dinner. Tom Lee of JP Morgan predicts GDP growth this year of 3.5 percent and the S&P at 1300. "Companies are sitting on record piles of cash"--technology, for example, has 30 percent more cash than it needs. Lee says we'll start to see that capital deployed this year.
Dave Goerz at HighMark Capital Management projects 3 percent GDP growth with 30 percent operating earnings growth in the S&P. He's overweight equities and cash, underweight bonds--"it's gonna be another bad year for Treasuries". He also predicts energy "is probably going to be the biggest disappointment.
Chris Thornberg was more blunt.
"Enjoy 2010 because it's going to be a good year. 2011 is not." When I asked about 2012, he answered, "It depends how bad 2011 is."
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