Advice: Portfolio strategy update

Slow recovery at best?

David Gottstein

Editor’s note: The following column was compiled in early December. David Gottstein is with Dynamic Research Group in Anchorage.

We are not in the camp of those who believe the U.S. economy is going to bounce back anytime soon. At best we believe the economy is hitting a bottom, and could very well take another leg down, but that any significant recovery will not take place in the year 2002.

By a significant recovery we mean a sustained period of increasing employment.

The American economy has been on a high for a very long time. The longest in recorded history. With all the excesses that have been built into the economy, it will be difficult for our current state of affairs to act as a launching pad for more success.

Excessive prosperity will more likely be followed by a downturn as opposed to another immediate upturn. Eventually, there will be a recovery because of the inherent power of our fundamental approach to capitalism and market mechanisms; however it isn’t likely to happen anytime soon.

It is true that the Federal Reserve has lowered interest rates dramatically and that Congress is preparing to pass a so-called stimulus package, but these actions won’t be enough.

Japan has had almost zero interest rates for some time, and that hasn’t helped, and the likely stimulus package will not take hold.

And remember, lower interest rates lowers income for those investing in fixed income investments.

Tax cuts that put money in the hands of people who will spend it will help, but most of the envisioned cuts are not of that bent.

We can’t increase demand by simply increasing capacity. Only after demand starts to outstrip capacity will manufacturers begin to build again.

Problems are worldwide

Japan is still in trouble, and things may even be getting worse. Germany is heading into a recession. China’s growth has been almost eliminated due to lack of increased global demand for its products.

It is true our military spending will help, but it won’t do it all, at best adding one to two hundred thousand workers in defense related fields. However we have already lost multiples of that so far, with unemployment levels having not even peaked.

We think we are headed at least to 7 percent from the recently reported 5.4 percent level.

Falling oil prices will help, but again won’t do it all.

We are not suggesting a depression, or even a severe recession. We are just suggesting that the economy will take longer to recover than most expect, and that the improvement won’t be as strong.

At least for the foreseeable future.

We will at least need to see an end to layoffs before a recovery can commence.