November 2009

It is my belief this “supply and demand” theory explains our current improving economic situation. If that is not the case, how has the DOW managed to exceed 10000 in an economy that is still struggling?  Let me explain my reasoning.

President Obama, Chairman Bernanke, Treasury Secretary Geithner and a host of others, both in Washington and on Wall Street, forecasted several months ago that in the fourth quarter of 2009 we would see an improved economy and we are seeing improvements. It was also pointed out that a huge amount of that recovery could be traced to the stimulus package. Literally tons of money, borrowed money I might add, was put into the system.

One obvious example of that stimulus money was the “cash for clunkers” program. Whether you agree with the concept or not, it would be very difficult to argue with the results. It created demand for automobiles that were sitting on car lots all over the United States. It reduced the supply and also eliminated the need for the dealers to unload these trade-ins. The government not only purchased these “clunkers,” it also paid more than the vehicles were worth. This incentive was just too tempting for the owners of these “clunkers” to pass-up.

What about the supply side? Let’s not forget that General Motors and Chrysler are bankrupt. General Motors is either selling entire brands (i.e. Hummer) or shutting them down (i.e. Pontiac and Saturn.) Chrysler on the other hand, is selling the entire company. This “cash for clunkers” program allowed the dealers to clear off large amounts of inventory and the elimination of entire brands reduced the number of vehicles that will be produced in the future.

While you might say that the current economic rally is only temporary, and more than a few people are saying exactly that, it is hard to argue that the catalyst for more optimistic thinking hasn’t been accomplished.

I believe what all of this artificial demand has accomplished is to buy the economy more time. It has been documented that there is a great deal of money waiting on the sidelines. It was placed there by folks, such as your members, who are worried; about the overall unemployment situation, and about their own jobs in particular. That fear is not going to go away; at least not as long as unemployment is close to ten percent. I have stated in earlier FYIs that I believe this economic recovery is going to look a lot more like an “L” than a “V.” Whether it takes the shape of a “W” or not depends entirely on the Administration and the Federal Reserve.

If this current “rally” were to continue and the Federal Reserve were to begin raising rates too soon, as some Fed officials are suggesting, then a double dip recession is a real possibility. I continue to put my faith in Chairman Bernanke and hope he won’t allow that to happen. 

In the meantime, I along with everyone at Mid-Atlantic Corporate, wish each and every one of you a wonderful Thanksgiving Holiday.