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Economic Realities - Second Quarter, 2008

Dan Junkin

In late spring, after Bear Sterns, we thought we were seeing light at the end of the tunnel.  And then, the price of oil spiked.  That makes you wonder if this current episode of economic and investment troubles is more complicated and, thus, unique.
Troubled times in the recent past - at first blush - seemed to have been single issue driven – the oil crisis in the 1970's, the savings and loan debacle, the Asian Contagion, the high tech bubble and bust.  This one just seems to pile up daunting challenges. 

This time, it began with the housing decline and sub-prime borrowing.  Then it spread to the big commercial and investment banks.  From there it infected consumers - as housing values vaporized.  And finally, we have oil jumping into the melee.  It almost doesn’t seem like a fair fight.

However, if we stop and think a bit more about those earlier, single-issue problems - the truth is they, too, were broad based.  The earlier rise in energy prices led to inflation and a slowing economy.  The savings and loan debacle seriously impacted housing values.  The problems in Asia and Russia threatened our credit markets.  The high tech bust directly affected commercial real estate.

So, maybe this current spate of trouble is not all that unusual.  Furthermore, our system for dealing with crises is responding aggressively.  The Fed has dramatically lowered short term interest rates and offered life lines to traditional banks and other financial institutions.  The Congress and the President have passed and signed a stimulus package.  And there is talk of reforming the financial system to help with future issues.  Of course, not all of this is perfect and there will be over-reactions.  But still, it is not as if we are standing around doing nothing.

Context - that is what is helpful at times like these.  For example, in the case of gasoline, today Americans are spending a smaller proportion of their budgets on fuel than they did during the last significant oil spike, in 1980.  That is not to say that this is not a difficult time.  Rather, it is to remind us that - as a nation - we have confronted challenging times in the past and prevailed.  We will do so again.

In fact - as historians like to remind us - the busts which follow booms normally lead to helpful corrections. Currently, we are working off some of the excess debt we have taken on over the last decade - that is painful, but good.  The Fed and similar regulatory agencies are re-thinking their oversight roles - that is healthy.  As a nation, we are forced into a comprehensive energy policy - much of which will be stressful, but in our long term best interests.

In short, I do not believe we are on the verge of the end of Western civilization, nor are we facing another great depression.  We are in a recession/slowdown now - but a fairly mild one.  I predict the stock market will rally toward the end of the year and the credit markets will continue to stabilize.  Finally, I think the price of oil will settle below its recent highs - perhaps in the $100 range.

If we can help you with the "context" for your investments, please give us a call.

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