Saturday, January 8, 2011

So What About The Economy

Each year I write some thoughts on my perspective around the economy. I am not an economist - so take this with a grain of salt. It is just an Iowa farmboy's opinion as to what lies ahead. As I look at 2011 and the next few years, there are some realities that underlay the current market conditions that are a bit troubling. I am not usually a pessimist by nature – I consider myself to be an optimist but over time have migrated to more of being a realist. And the reality is that here in the US, and worldwide for that matter, the issues that caused the economic meltdown have not been truly dealt with. A significant amount of money has been spent – billions here and there thrown at the surface issues – but underneath it all remains the root causes which have not been addressed. We have been somewhat effective in putting a Band-Aid on things but definitely not effective in truly solving the core issues.

As I talk with folks in the financial industry, I hear over and over how the more obvious and simpler issues have been or are being corrected. But everyone is quick to point out that there are a significant number of big rocks left on the path that will take several years to correct at best. There are still billions of dollars of bad loans being carried by banks that have not been addressed. There are billions of dollars of bad credit card personal debt that is currently just being ignored as to not upset the apple cart during this apparent recovery. While every part of me wants to believe we truly are in recovery mode, I can’t make that step, because the fundamentals have not been fixed. There must still come a day of reckoning. The only question in my mind is – will it be in 2011?

A lot depends on the way the new Congress approaches the issue. If they take the hard line approach – we have to stop the spending and fix the problem – correction will happen sooner than later. Should they continue the path of pushing the hard decisions to some future year – it could drag on a year or two giving us short term relief. I can’t predict legislators any better than I can outguess the weather in Iowa. So I am cautiously optimistic about the economy this year because I tend to believe they will not make any short term moves in 2011 to upset things. I do think 2012 will be a different story.

One industry I am rather familiar with is the agriculture sector. We have seen record grain prices and the result has been skyrocketing land values and input costs. For those who don’t recall history – the last time we saw these dynamics was back in the late 70’s and early 80’s – you may recall it being called the “Farm Crisis”. Many farmers lost all they had because of a significant drop in value of their crop inventory and land values. I see those days coming again for agriculture in the not too distant future. The reality is that the current pricing situation is not sustainable. And throw in the reality that no politician will ever be elected for having high food prices for the general consumer and something has to give. There will be a correction – I believe a very strong one – and it will happen in the next couple years. That will spill over to the general economy rather quickly which is just another reason why I see trouble ahead.

Please don’t take this as a doom and gloom message. That is not the intent. But it is my desire to balance the excitement that is being driven by the media around a recovery that is only skin deep. Be cautious, take advantage of all the goodness you can right now, but save for a rainy day because there are clouds in the sky. Conserve cash and make sure you are ready to go through some rough days in the not too distant future. As we say on the farm “make hay while the sun shines”. There are some very positive opportunities right now we should definitely pursue. But don’t get too far away from the barn because when the rain comes you will need to get inside and have a place of safety.

No comments: