I've been back in the US for several weeks now and watching the financial crisis and response unfold. We'll see where the markets open up tomorrow, but what really concerns me is not so much the short term - frankly I think that the US economy is going to be in for a long recession. And as much as I feel pain for people (and my own investments) this is a cycle, albeit a difficult one. It will be a long trough and I guesstimate 3-4 years before we dig out.
Europe will probably take longer to rebound given the lack of coordinated response capability and it is still unclear the impact in other parts of the world. I think China will hurt for a while, as companies seem already to be having problems with credit terms and solvency. The export focused groups are going to get killed, but this continues a trend that has occurred over the last year. Since the RMB began to appreciate I have heard talk that 10+% of manufacturers (many with razor-thin margins) have been forced out of business. Now that orders from overseas are being cancelled or postponed, it can only get worse. For the domestic focused companies, the market is relatively better, but given the huge drop in the stock market this year and the reduction in home values, the consumer and corporate spending free seems to have been reined in. Look for China's GDP growth to come in at 8% this year and lower next year. Upshot: fewer jobs being created, which will cause major headaches for the mandarins in Beijing.
The biggest concern I have for the US though, is not the pain of middle America or the level of the Dow. Mind you, I feel terrible for people that are getting kicked out of their homes and small business owners that are being squeezed because they can no longer get enough credit. The biggest concern I have is the medium-term threat to the United States' position in the world. For the time being, although the Treasury and Fed have been somewhat piecemeal in their actions, there has been no concern over the Fed's dwindling balance sheet or Treasury spending. (Remember, Treasury spending is in the budget, but they are the ones printing money). However, if the government fails to stabilize the markets and global investors start to doubt solvency, then we could be looking at a situation where the US dollar loses its luster.
Far fetched? Maybe and I hope so. The Euro is certainly not a safe haven and thankfully there is no other currency that can act as a global unit (thank goodness an Asian currency unit has never really made it beyond the research pages). But if oil is suddenly not priced exclusively in dollars or one or another government begins to buy fewer treasury bills, then a depreciation of the dollar by 20, 30 or 40% is within the realm of possibility. For now, although the government has not been sufficiently clear with Main Street on the why of the bailout and bank buy-in and President Bush is clearly out of his depth yet again, other parts of the world have been more futile in their responses (perhaps save the UK). What is critical is that the next president, whether Obama or McCain (full disclosure I am working for the Obama campaign right now and will be clinically depressed if McCain somehow wins), has to reassure the domestic and international community that the US is strong, solvent and ready to reclaim its leadership role.
