The Big Picture for the Week of February 13, 2011

Gregor MacDonald had a post up calling shenanigans on the idea that the US economy is recovering. I would note that if you believe the statistics as reported then the US economy has moved from a recovery on to expansion; the idea here is that GDP took back the 2007 high and is now growing past that figure.

Back to Gregor who notes that the employment situation is still a huge drag I would also note housing is also still a huge drag. What I think we are seeing is evidence of a fairly rapid evolution of the American economy. To the jobs situation, the last couple of recessions have been followed by what was comparatively poor job recoveries with the current event being the worst of the last three. The housing numbers make for a different situation as there was/is a price correction of a gross excess. While I am not devoted to reversion to the actual mean, a long drawn out working off of the excess seems logical. There is still a long way to go WRT to writedowns and foreclosures. It is possible that there will be little to no decline from here but many years before prices get bid up (so reduced price volatility) but either way a healthy housing market is a long way off.

I guess I believe in the new normal or at least some version of it. This is evident in my long running idea of the US as a less compelling investment destination.

Now comes the discussion about the Fed's desperate and extraordinary action to try to stimulate demand and other forms of risk taking. Some have tried to quantify the impact the Fed has had on the economy and the stock market and while deriving a theory about exact numbers here is beyond my analytical skill I do believe things would be much different (that is much worse) without the intervention. Lack of natural demand is very unhealthy.

Another point I have made often is that anything can go up in price at any time, even when it shouldn't. Some sort of snapback off the March 2009 low was perfectly logical in terms of being normal market behavior. At some point (eye of the beholder) the 23 month move lost its logic--like maybe last August?--but continues to move higher anyway.

I continue to believe in a longer term thesis and believe that the US' fundamentals are far inferior to many other investment destinations. If I turn out to be correct about this over the next stock market cycle or even the next decade there will still be stretches where US equities do well--even entire calendar years. We know that the last decade was a bad one for US stocks but 2003 and 2009 were great individual years for returns. As great as those years were investors were still far better off for the decade elsewhere and I continue to believe this to be the case.