Bullish on Bouncing

We are all familiar with the saying, “What goes up must come down.” We accept this premise, based on Sir Isaac Newton’s observations about gravitational forces, but could the opposite also be true? Could it be that what comes down will bounce back up? Obviously a ball will eventually quit bouncing back up and will remain inert on the ground, so my proposed premise does not apply to physics. But could it be true for the economy? Perhaps!

The Great Depression ushered in stock-market-price calamity yet, 25 years later, the stock market had surpassed its previous high. In 1987 the stock market experienced its first single-day, Dow Jones Average loss of 500 points but, 90 days later, it surpassed its prior high point. More recently the stock market was down to less than 50 percent of its high, yet it has now gained all of it back and more.

How about interest rates? Prior to the elimination in 1980 of Regulation Q, which controlled the maximum amount that commercial banks and thrift institutions could pay for deposits, there was little fluctuation. Since then, we have seen the prime interest rate at a high of 22 percent and, more recently, a one-year certificate of deposit at one-fourth of 1 percent — quite a fluctuation. This historically short, 33-year period of interest-rate free market action is not enough to determine long-range trends.

Economists seem to be in agreement that interest rates are trending up. Other good news is that inflation is down significantly for the first half of 2013, to an annualized rate of 1.7 percent from the 2012 rate of 2.7 percent. Unemployment is at 7.2 percent, down significantly from the crisis high of about 10 percent. One stubborn factor is the ratio of those persons employed to those persons employable. Historically this ratio has hovered between 62 percent and 63 percent, but since 2009 it has held steady at about 58.5 percent. Many economists believe that this ratio will need to trend back toward historic levels before we can have a growing economy.

A troubling issue remains with federal government debt at more than $16 trillion, while in 2007 the level was at $9 trillion. In 2007, the interest expense on that $9 trillion was $239 billion. However, because of the recent low interest-rate environment, the 2012 interest expense on $16 trillion of debt came to only $245 billion — not much of an increase. An increasing interest-rate environment means that the federal government will have to do more belt-tightening in order to maintain the current taxation level and meet its interest obligations.

Each of us needs to assess this data and more to determine what our economic future holds. For me, the things that need to come down for the most part have done so, and the things that need to bounce back up have, as well. Consequently, for the first time in many years, I have shed my bear skin and become a bull!

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