Running with the Bulls in San Diego

Bernanke says the economy is kind'a recovering. Compare those remarks to the outright bullish statements of Liz Ann Sonders, the chief investment strategist of Charles Schwab & Co who earned a reputation for being Madam Gloom at past Schwab IMPACT conferences.

Federal Reserve Chairman Ben Bernanke proclaimed the 21-month recession over on Tuesday, but he added an asterisk and two hedging modifiers to his assertion.

“From a technical perspective, the recession is very likely over at this point,” he said.

The use of “technical”, “very likely” and “at this point” would seem to suggest a certain lack of assurance by the highest ranking economic figure in the U.S. government. Of course, then he hedged more overtly, “It’s still going to feel like a very weak economy for some times because many people will still find that their job security and their employment status is not what they wish it was.”

Well, there you have it. Things are getting better, well, for those who have jobs. “Unfortunately, unemployment will be slow to come down,” the central banker said.

Compare those remarks to the outright bullish statements of Liz Ann Sonders, the chief investment strategist of Charles Schwab & Co who earned a reputation for being Madam Gloom at past Schwab IMPACT conferences. In the past, Sonders tended to see dark clouds where others saw sunshine and it didn’t endear her to the bulls. And now she gets no love from the bears. Sonders said in her speech yesterday morning at the Schwab IMPACT conference in San Diego: “I’m surprised at the anger I’m finding with people who don’t want to hear my optimistic views,” she said

To counter her emotional detractors, Sonders has begun to carry a chart with her everywhere – even to cocktail parties, she says. The chart shows that never in the history of economic recoveries has unemployment begun to rebound until well after economic recovery is under way. Maybe she should show that chart to Ben Bernanke over a gin and tonic.

And so, in her remarks, Sonders made a rousing case for economic optimism to a packed conference hall at Schwab’s annual advisor conference.

“I am quite a bit more optimistic than the consensus,” she said. “The sharper the contraction, the bigger the recovery.”

Four important areas of the economy that she examines most closely in developing her market forecasts are: manufacturing and trade, industrial production, personal income and payrolls.
All of them are moving in a positive direction with the exception of payrolls, which continue to slump. True, unemployment will top 10 percent this year, and there have been 6.9 million job losses since December of 2007, according to the Fed. But Sonders believes that rising unemployment and weak salaries are very much a lagging factor of gauging economic health. (She is not the only one.) Sonders also said that there are ample leading indicators in place to suggest that new jobs should be created soon.

In the last downturn of 2002, businesses reacted by becoming super-conservative to the point where they now tend to reduce inventories at the drop of a hat. This tendency has put the economy in a state of being undersupplied with inventory, she says. This mounting need to restore inventory should create ample demand of goods and for the people who produce those goods, she said.

“Regardless of demand, you have to replace those inventories at some point,” she said.

Lehman Era Erased
In the course of her speech, Sonders also downplayed concerns about inflation, deflation and the availability of credit. “We’ve effectively erased the Lehman era,” she said as she pointed to a chart showing that the availability of credit is now higher than it was before the demise of Lehman Brothers.

The one financial dark cloud whose presence Sonders did not dismiss is the debt burden that Americans carry. But, the debt burden is significantly less onerous under the current, low-interest rate environment; that’s because debt-service costs are much lower, she said.

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