The future has not been canceled
By: Arnie WeissmannJuly 06, 2009
Late last month, I heard a thoughtful economist say reassuring things. These days, it doesn’t get much better than that, so I’m here to spread the word.
The economist is Peter Ricchiuti, a former Kidder Peabody analyst who left that firm to manage more than $3 billion in assets as the assistant treasurer for the state of Louisiana. These days, he’s assistant dean of the A.B. Freeman School of Business at Tulane University.
First and foremost among Ricchiuti’s reassurances: When historians look back at this moment in time, they will conclude that the recession of 2008-2009 had already ended.
That’s a comforting thought, though we certainly can’t have traveled very far from the bottom if we need to be told that it’s over. But Ricchiuti swears he’s not alone in that conclusion and that about 60% of economists would agree with him.
Since World War II, he said, we’ve had 24 instances in which the stock market declined 10% or more and 13 where it declined 20% or more. Recessions happen, and recessions end. When they do, economies always reach a higher plateau.
To Ricchiuti, who takes a long view of things, one of the most important data points in the economy is corporate earnings, and since World War II, corporate profits are up 63-fold. (Stock prices, incidentally, are up 71-fold.)
Unlike other recessions, there was a lot of noise this time that we were entering another Great Depression. Not so, said Ricchiuti. In the 1930s, the government raised taxes and increased interest rates. Today, we’re doing the opposite, and we are offering the economy some serious stimulation, combined with regulations to avoid repeating mistakes of the recent past.
Our worries appear to be way out of proportion to the problem, he suggested. The 1982 recession was, at the time, the worst since the Great Depression. Unemployment was higher than it is today (11% vs. 9.4%). Inflation was running rampant (10% then vs. 2% today). The interest on the 10-year U.S. Treasury note was a whopping 14%, compared with the current 3.9%. Yet despite all this, we’ve talked ourselves into a much deeper funk: Consumer confidence right now is about 20% below the level it was then.
The stock market, he said, tends to run about six to nine months ahead of the economy in general, and it has already shown significant recovery from its low during this recession. The markets are down to about 1997 levels, and a large number of companies are selling at significant discounts to their true worth. Things are primed to rise, he said: There’s about $9 trillion in cash on the sidelines right now, ready to invest.
And the upside can be significant. In the 12 other bear markets since 1955, Ricchiuti said, the average decline was 22%. The down cycles lasted, on average, 11 months, and were followed by recoveries averaging 12 months in length and producing 35% returns, about 1.5 times the decline.
Of course, there are other factors affecting us besides the stock market, he said, and the root of our current financial woes can be found in the housing bubble. We still have about 1.5 million too many homes (though much of this problem, he noted, is regionally based). That’s about 12 months’ worth of sales. The dramatic slowdown in building and concurrent increase in housing affordability will, in time, solve the problem.
A typical recovery follows a predictable pattern. First come painful layoffs. Credit markets gradually thaw, and merger-and-acquisition activity heats up. Finally, streamlined companies, which have focused on efficiencies, begin to realize significant improvements in profits as the economy rises.
Ricchiuti pointed out that down cycles are times of great entrepreneurial creativity, and he cited a few noteworthy examples: Procter & Gamble and General Electric were both born in the Panic of 1837. IBM was founded during the Long Depression, which lasted from 1873 to 1896. General Motors came into being during the Panic of 1907, and United Technologies emerged at the beginning of the Great Depression in 1929. The oil crisis of the early 1970s wasn’t a very happy chapter in more recent U.S. history, except for those who launched Federal Express in 1973.
The future has not been canceled, Ricchiuti concluded. Our problems are not insurmountable, though patience will still be required. The turnaround will not happen overnight, but keep the faith: The human drive to succeed is very powerful, and capitalism ultimately works.
As regards travel specifically — Ricchiuti was, after all, speaking at a Travel Weekly Leadership Forum — we will be benefiting greatly from the spending of baby boomers. He cited three stock categories where he thinks investors will benefit most from this demographic: financial services, health care and leisure. The last of these would include travel categories such as hotels and cruise lines.
My only discomfort in listening to Ricchiuti speak was that he was saying just about everything I wanted to hear. In pre-recession times, we didn’t do ourselves any favors by ignoring the possibility that rosy predictions about the economy were very wrong.
But while overconfidence may be harmful in good times, there’s also risk in ignoring the signs of a recovery during the depths of a recession. The speed with which we recover may well be linked closely to our belief that we are, indeed, recovering.
Contact Arnie Weissmann at email@example.com,