As a financial writer, I have two objectives in my work. The first is researching the relevant information investors need to know. The second is a bit more abstract: It's the process of explaining the research to readers in the most concise, understandable, and entertaining way possible. With the second aspect of my job in mind, I recently tried to think of the best analogy for the slow economic recovery some claim we are in.
This seems like an easy task, but upon closer examination, it's a bit more nuanced. The word "recovery" immediately conjures a few scenarios. One is being sick and slowly recovering from a cold: each day one feels a little better. Slowly the symptoms start fading and every chicken soup brings one closer to feeling like oneself again. A broken leg reminds me of the same process - one counts down the days until the cast is removed. Each day sees slow but sure progress at recovery. However, neither of these analogies fit the economy - nor all medical recoveries, truth be told. A crucial element is missing: uncertainty.
With the flu, you can pretty much tell when it's winding down. Even if recovery takes a little longer than expected, you're usually on a one-way street to feeling well again. The same goes for the broken leg. Unless another accident happens, the leg will get better with time. In the stock market, there's no certainty to the recovery. Things are slowly improving, but at the same time, the slightest news of a bad Spanish bond auction sends the markets tumbling back into shock. The current economic recovery is one in which conditions are improving, but we remain near death's door at the same.
In many ways, a patient in an intensive care unit (ICU) is a fitting metaphor for the economy. The person was successfully dragged out of the car accident, his bleeding has been stopped, and the doctors have transferred him to the ICU. Though with each day and even in every hour there is improvement, he's clearly not out of the woods. He still needs close watching, as things could head south. Furthermore, despite improvements, the true extent of the damage is unknown. Will he walk again? Has there been permanent brain trauma? We don't know yet, but we can see that he is doing better so far.
This is exactly where the market is right now. We were pulled out alive from the 2008 wreck, and by 2009 the bleeding had mostly stopped. Gradually things have been getting better, but nonetheless we're still at risk of another plunge. By now, the market should have been on cruise control - only coming into the clinic for an occasional checkup - but instead we're still on life support. Furthermore, the extent of the damage is still unknown. Will the housing market ever get back on its feet again? Will inflation slowly creep into the economy as a long-term side effect? And if so, how bad will it be?
To make matters worse, the economy has been injected with so much stimulus that it's impossible to truly evaluate its condition. Once, after injuring my ankle, the doctor prescribed some painkillers. After taking them the following day, I felt great and started foolishly walking around on my bad leg. Only the next morning after the drugs wore off did I realize the additional damage done. Similarly, with trillions pumped into the system, we're numb to much of the pain. We're prematurely dancing on our broken leg, and when the medication wears off, we might find ourselves in worse shape.
Is the economy getting better? Yes. Is it out of the ICU unit and discharged from the hospital? No - far from it... the worst can still happen from here.
Source: Casey Research
