Time to Hunker Down?!

I consider myself an optimistic realist. The glass is always half full but if it is draining out of a hole in the bottom then it is damn well time to do something. So I guess I am a pragmatic optimist. If you read my blog you probably consider me a doom-and-gloomer, a chicken-little. And you would probably be right. That characterization, however, is not about outlook on life, in my opinion, it is about reality. And reality right now, by more and more folks input, seems to be in keeping with where I see it.

I posted on the new reality well over a year ago. The folks at PIMCO are now calling it the new Normal. Whatever you call it, it is the realization of a few facts of life that the government officials are now having to face as they are not going away with the stimulus for financial institutions. I will miss some, but here are the key points to keep in mind:

1. Let's start with the savings rate in the U.S. It has recovered nicely from negative rates a few years ago but still needs to get up several percentage points to resemble historic norms. Moreover, while private debt is slowly being paid off, it still has a long way to go to get back to historic norms in relation to national GDP. While a fair amount of progress has been made in this category the past couple of years, it can probably be mostly attributed to government stimulus, which is fading fast. I would not look for personal debt levels in the U.S. to get back to norms for several years to come, and some of this is due to my next point.
2. Unemployment is persistent and stats out today on it are not promising. I am not focused on week-to-week or even month-to-month stats but overall unemployment has been rather stagnant all year around the same levels. I do not see this changing in either direction significantly though there are folks forecasting it to get better and those, including Geitner, who expect it to get worse in the short term. Obviously, unemployment directly affects point 1 above.
3. The GDP growth in the first quarter fell drastically in the second and there is a good recognition that a lot of the GDP was due to inventory build-up, which is largely done at this point.

There are a lot more than these three points - like commercial real estate at historic lows, carry trade currency issues that are really disturbing:

http://www.nakedcapitalism.com/2010/08/summer-rerun-carry-trade-threatens-a-deflationary-global-collapsse.html

And foreclosure activity mounting in a serious way. Invest in this market at your own risk:

http://www.calculatedriskblog.com/2010/08/fannie-mae-reo-inventory-doubles.html

Disclosures: None.