John Mauldin on "The New Normal"

There is a new term being thrown about in the financial media and press almost as often as Green Shoots.

A commentator citing the existence of economic Green Shoots is usually extrapolating positive data points that would ordinarily be de minimus to make the case that they are the first signs of Spring, coming up through the cold, hard earth after a long Winter.  This is poetic and all, but in some cases, a single positive data point is simply that, singular!  Besides, the term has now been so completely ridiculed, satirized, and lampooned to the point where even the most strident optimist can’t really use it with a straight face.

The other term, The New Normal, tends to be used to denote a more sober, realistic way of recognizing stabilization.  The New Normal is a way of saying that the free-falling markets, catastrophic plunges in asset values and systemic breakdowns may now be in the rear view mirror, but certainly, we’re not anywhere near an environment of healthy GDP growth.  When someone talks about The New Normal, they are discussing what our aftermath period will be like until we can get back to a growing economy.

The New Normal can be best looked at as the period known as The Reconstruction, as the South rebuilt itself in the wake of the Civil War beginning in the late 1860’s.

John Mauldin, the erudite author of the Thoughts from the Frontline newsletter, has been one of my most trusted sources for sober commentary throughout this period and so I thought I’d pass on some snippets that describe how he sees The New Normal playing out.

  • My premise is that the recovery is going to take longer and be much less robust than any recovery since WWII. With unemployment likely to go over 10%, and with our new normal world not needing as much production of so many things, unemployment is going to stay stubbornly higher for longer than in any previous recovery.
  • This is a global problem and primarily one in the “developed” world. I think we will find that much of Europe will be in a worse state of affairs than the US. If there are bright spots in the developed world, I tend to think they will be Canada and Australia/New Zealand. The opportunities are more likely to be in emerging markets, after they adjust to the new normal.
  • Those investors who expect corporate profits to rebound in 2010 are likely to be disappointed. (For the record, if you go to the S&P web site, analysts are projecting anywhere from a 40% to a 60% rebound in earnings for 2010 for the S&P 500. I would willingly take the “under” on that bet if I could find any takers.)

This is not negativity for negativity’s sake, Mauldin doesn’t fall into the perma-bear camp by any stretch.  He does offer up some hope for the future in this piece, including the fact that comps are going to get easier and easier to beat, especially as we head into the 3rd quarter earnings season this Fall.

He also has this to say to keep you off the ledge:

I truly believe we get back to 3% GDP growth and 4% unemployment at some point in the future, but it is going to be more than a few years, especially if taxes are raised as much as is talked about in some circles. But just as in the late ’70s, when the outlook was not very bright, things will change for the better. When asked back then where the new jobs would come from, the correct answer was “I don’t know, but they will come.”

I recommend you take the time to read the whole piece on Thoughts from the Frontline.  Mauldin is as good an economic writer and dissembler as you’re going to find.


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