The flip side is that I think you will probably have a recovery, perhaps even one with a little bit of a V- shape in business investment and/or inventories, but that it will be restrained because corporate America has checked itself into the Betty Ford Center for balance sheet repair. Risk capital is more expensive and more difficult to get your fingers on. So I think we'll have a ho-hum recovery. The whole risk of double dip that everyone talks about is really about the risk that the consumer sector goes down.
There's clearly room for consumers to go down, given the fact they didn't go down over the last 18 months. The question is, is there any reason for them to go down? Put differently, is there any reason for the home sector and the motor vehicle sector to fall out of bed?
My answer is no, as long as you have the appropriate accommodative monetary and fiscal policy, and particularly with respect to the home sector have the conduit of Fannie and Freddie to pass along, as it were, the accommodative money and credit availability. So actually, I don't think the risk of a double dip is very high because it would require a colossal policy mistake either by the Fed or fiscal authorities in pulling back from their accommodative stance.
Earlier this year, the Fed wanted to pull back from its accommodative stance. But clearly, the Fed has gotten religion, that being accommodative is not an emergency condition but a condition that needs to have a serious half-life on it as the economy heals itself from the heavy duty case of post-bubble disorder in the business sector.
Simonoff: Is this recovery going to look a lot like the early '90s, that is, a statistical recovery but it won't feel like one?
McCulley: It could be. But it will be different than the early '90s. The phrase that was used back then was jobless recovery. The unemployment rate held up, notwithstanding the fact that we were in statistical recovery.
We could see a fair amount of similar characteristics in this one. Back then, the post-bubble disorder was in the property market, notably the commercial property market. You had a bubble there led by thrifts and banks and then you blew it up, and then you had the banking system check into the Betty Ford Center for balance sheet repair. The banking system is not in dire straits now at all. It's the corporate sector, notably the triple B sector, with particular areas under acute stress, whether it's energy or the telecom sector or the airline sector. Detroit's not under acute stress, but it's certainly not in a feel-good mode either. You will see corporate America working on de-levering, improving profit margins via cost cutting, and we will not see a return to robust job creation for a long period of time.
Simonoff: What do you think are the implications for financial assets? Until three months ago, people thought stocks could be flatline for five years. It turned out what everybody was predicting seemed to get compressed into the three months.
McCulley: I think that both stocks and bonds are going to be delivering on a secular basis, low to mid-single digits. I mean, double-digit returns on either asset class on a normalized basis is somebody smoking pot. It just ain't going to happen.
On the bond side, it's arithmetically impossible, given the current level of yields. On the equity side, I would say that you have a similar arithmetic challenge otherwise known as valuation. We never got cheap in the stock market on valuation, call it P/Es, if you will, or dividend yields, notwithstanding the fact that we had a pretty nasty bear market the last two years.