December 1, 2008
If you listen to some really smart academics at Southern Methodist University, as I did recently, you'd have reason to feel a tiny bit better about the economic shambles we're in.
Their message: This, too, shall pass. And when it does, the American economy will emerge as strong as before and perhaps bounce back faster than expected.
The more sobering thought: The worst is yet to come.
Last week, Al Niemi, dean of the Cox School of Business, brought together some of SMU's brightest business, financial and economic minds in a roundtable discussion with area media.
I wore my "The Economy Sucks" T-shirt, which I got back in the '70s and bring out periodically as times warrant.
Not to be outdone, Dr. Niemi held up one to show the group: "Buy Despair. Sell Certainty."
Dr. Niemi got his T-shirt from a Houston investment and wealth management firm where he sits on the board.
"The greatest bargains come when no one else is buying and when everyone else is fleeing the market," he said.
Brian Bruce, director of the school's Alternative Asset Management Center, went so far as to say that there are "bargains of a lifetime."
In the last 25 years ending with June 30 of this year, the equity markets were up 12.4 percent annually, he said. But if you weren't in the market for the 40 best days – a little less than one day a year – that 12.4 percent becomes 5.4 percent.
"You might as well have not been invested in the markets," he said. "Markets recover very quickly. Returns are very concentrated."
He said that people forget that after the dot-com bubble, the market went down for 30 months and 43 percent.
"I've looked at all the crises since 1949. From the bottom of those crises, within 12 months on average, markets were up 30.6 percent and over two years from the bottom, up 53.2 percent.
"The most interesting thing is the market starts to go up before the crisis is over," Mr. Bruce said.
Everyone agreed that this crisis is far from over.
"We're in for a nasty recession," predicted economics professor Nathan Balke, who expects unemployment to hit 8.5 percent.
He also predicted that the economy will shrink 2 percent to 2.5 percent over the course of the recession, which probably will last well into next year. That would be roughly twice the loss in the gross domestic product experienced in the two most recent recessions.
His bright news: "I don't see us headed into a depression."
The bad news may be perversely good news.
"Historically, the deeper the recession, the faster the economy grows once the recession is over," Dr. Balke said. "It typically takes less than a year for real GDP to return to its pre-recession levels."
Harvey Rosenblum, executive vice president of the Federal Reserve Bank of Dallas, gave the caveat that he was offering his personal opinions as an adjunct professor at SMU and not official ones from the Fed.
"Tomorrow, I've got to look at myself in the mirror, so I'm going to tell you what I really think," he said. "I can't necessarily agree with Cheryl's T-shirt, but the economy is in a recession."
He said the Federal Reserve was doing everything in its power to get credit flowing again and currently holds 20 percent of the nation's outstanding commercial paper.
"Issuance of new junk bonds isn't happening. It's the sounds of silence," he said. "Investment-grade credits – if we go down to the Triple-B level – are paying 7 or 8 percentage points above Treasury rates – at a time when we are experiencing extremely low rates of inflation and possibly on the verge of a short deflationary period.
"It's hard to run a business with credit that expensive – if you can get it."
Results taking hold
The "inventive" measures taken by the Fed and the Treasury Department are beginning to show results, Dr. Rosenblum said.
"My metaphor with respect to the banking system would be that it came into the hospital with a temperature of 107 degrees. The temperature is now down to 103 or so. The patient is not fully stabilized. The right medicines have been administered. But it's going to take time for the patient to recover. If that patient doesn't recover, the economy can't recover."
Dr. Niemi sees another essential player to better times. "Consumers have been hammered. They've lost roughly 20 percent of their housing [values] on average across the country. Their 401(k)s become 201(k)s. They're feeling poor.
"Until the consumer comes back – and I think that's at the earliest, late next year – you don't have recovery."
One moment of levity came when Scott MacDonald, president of the Southwest Graduate School of Banking at SMU, said he's bailing his daughter, who's in medical school, out of a credit card mess for the second time.
"This one I'm calling the TARP program," he said. "It's assistance with strings attached."