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Confessions of a Money Manager: Is there light at the end of the tunnel?

Ray Unger  —  9/15/2008 7:28 am

"Don't fear it, cheer it."

"Why bother?"

I pondered that as I drove to the Monona Terrace Convention Center last Tuesday. It was not a good day. The Dow Jones Average had just lost 280 points, the TV and newspapers were full of depressing news, and I had just concluded a meeting with a representative of BlackRock, the global investment management firm with $1.4 trillion in assets, in which he summed up his company's appraisal of the economy as, well, not very exciting.

Nonetheless, the State of Wisconsin Investment Board had invited me to their annual reception to hear a speech by Lewis A. Sanders, chairman and CEO of AllianceBernstein, also a global investment manager, but with "only" $694 billion in assets. According to the promo letter, Sanders was going to enlighten us on AllianceBernstein's morbid outlook of the world -- at least that's what I thought. So why bother?

I was wrong. Lewis Sanders' presentation was an extraordinary exposition on how although the global economy is, indeed, slowing, we shouldn't be shrieking in horror by this turn of events. The title of his presentation was: "A Global Economic Slowdown has Arrived -- Don't Fear It, Cheer It."

Now you wouldn't expect this type of audience -- we were all business types and we were, after all, at the Monona Terrace -- to verbally abuse this guy, but I did notice a restlessness among the attendees. I was one of them. After all, how can we be cheerful about a recession? Sanders must have sensed this skepticism because he began by telling us the obvious -- that we've been through twelve months of turbulence, that financial firms have written off billions in assets, and that we're in the worst financial crisis since the 1930s. Well, OK. This Sanders guy is with the program, and this cheeriness stuff was a ruse, right?

As Sanders continued, however, we began to get his drift. Yes, the global economy is slowing, but he's not predicting a global recession. Instead, he sees worldwide growth slowing to a more manageable 5 percent from the 7 percent pace that was causing all kinds of dislocations and a lot of inflation, namely in oil, natural gas, and other resources that put pressure on prices for food and other necessities of life.

As if on cue, Lewis then launched into one of the most obvious dislocations: our domestic housing industry. Like the tech bubble that burst in 2000, the explosion of mortgage debt and new construction since 2001 was well beyond what the economy could absorb and had to be deflated. We're now obviously in the midst of that correction. The current upheaval in mortgage foreclosures and the depression in construction activity have now sucked out more than $200 billion from our gross domestic product (GDP). That's well-known. What's not well-known has been the extraordinary boom in exports: up a robust $250 billion. That's why we haven't seen our GDP fall this year.

Sanders, however, was not sanguine about the near-term. He thinks the regional banks could take center stage as the next victims of this credit crisis, and that 200 or more regional institutions could bite the dust. Ouch. Nonetheless, he thinks the vortex of this crisis is coming to a ragged close as signs of recovery are emerging. It won't be evident soon, but today's wreckage is laying the foundation for a more solid and sustainable economic base that will keep the U.S. humming for quite some time. Pollyanna talk?

Next on Sanders' PowerPoint presentation was a graphic depicting the write-offs of the major financial companies: $323 billion. Then he showed us the amount of new capital raised by these same institutions: $373 billion. Coming out of this crisis, these banks will have more capital than they had going into it.

His outlook for oil and global inflation was next on the agenda. His research indicates that the recent tightness on oil supply has lifted. The higher prices have, indeed, done their job: demand has dampened, and production capacity has increased. Unlike previous years, when China and India were bulldozing the world markets for oil, their reduced growth rates will moderate their demands and keep the supply-demand equation neutral for some time. Bottom line? He thinks oil prices could retreat to the marginal cost of production: $80 a barrel.

What about the U.S. economy? Aren't we losing our competitive edge? Not so, according to Sanders. The $250 billion jump in exports wasn't just a product of the weak dollar. Productivity has continued to rise in our domestic factories, and Sanders now thinks we're as competitive as ever with our global neighbors.

So what should we be cheerful about? Sanders thinks the current financial and economic crisis is reshaping our financial institutions and deflating the excesses, like housing, that have plagued us these past 12 months. But in 12 to 18 months -- late 2009, early 2010 -- we'll see a much stronger economy and a better stock market.

Ray Unger is chairman of Forward Investment Advisors in Madison. He can be reached at 833-9400.

Ray Unger  —  9/15/2008 7:28 am