Positive signals and economists - do they indicate recovery?

By DAVID MOON, Moon Capital Management, LLC
May 17, 2009

When the U.S. Treasury first announced that the largest banks in the country would have to undergo stress tests and the results would be made public, I had a vision of Wall Street CEOs engaging in a sort of World’s Strongest Man competition.

Citigroup’s CEO would strap himself to a corporate jet and pull it across an airfield.

Bank of America’s Ken Lewis would bench press an actual home on which he had foreclosed.

Mercifully, that’s not quite what Treasury Secretary Timothy Geithner had in mind. He wanted to tell the world how much capital these banks would need to raise if all hell broke loose in the financial world.

That’s a little like telling someone to put on his motorcycle helmet after the crash.

If the most talented economists in the world can do little more than tell us to put on our helmets after the accident, what useful purpose do they serve?

That’s a question Business Week magazine posed in its April 27 cover story, “What good are economists anyway?”

Economists are always nice to have at parties; they guarantee that none of your other guests are the most boring people in attendance.

Just don’t ask them how the economy is doing.

Some of the brightest economic thinkers in our country failed to forecast our current recession. Then they missed the depth of the housing problem. Unemployment forecasts have been worthless.

These failures occurred by Federal Reserve Board economists, university researchers and the economic chiefs at the large Wall Street firms.

Of course, if the Wall Street economists were all that great, we wouldn’t have conducted public stress tests of the nation’s largest banks.

Even former Federal Reserve Board Chairman Alan Greenspan is egg-fared. He once argued that it was unlikely that the U.S. could ever experience a housing bubble, because there isn’t a single national housing market.

Has anyone’s reputation diminished as quickly and significantly following their retirement as has Greenspan’s?

Within the last few days, some economists have gone on record as saying the current recession is over. Strategists for both Barclays Capital and Charles Schwab recently proclaimed that the recession likely ended in April.

I hope they are right. There are clearly some positive signals, but I’m not sure I am ready to extrapolate those positive signals into a full-fledged recovery conclusion.

The most promising signals are, in my opinion, in the housing area. Existing home sales declined three percent in March, but the rate of decline has been slowing significantly. A year ago, existing homes sales were declining as much as 25 percent a month.

There are also fewer homes for sale, as measured by the number of months it would take to sell all of the homes on the market at the current rate of sales. After peaking at 14 months in January, there are now only nine months of home inventory for sale.

The long-term average is about six months.

Hopefully we can trust this housing data. I’m not so sure we can trust the economists.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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