Don't Count Your Chickens . . .

There is much talk in the last week that we have reached the bottom and there is only one direction to look--up. We may have reached the bottom of this recession without it becoming an enduring depression. NBER (the semi-official U.S. judge of recessions) scholars are now saying that the country moved back out of recession in the first quarter of this year. However, there are still more cards to be laid on the table and it is not clear how quickly the "green shoots" of recovery that I read much of in the last 48 hours will turn into the green grass of a healthy economy.

Remember that the commercial real estate bubble still has not fully burst and there may simply not be enough money to pay for stimulus for the real economy, TARP, commercial mortgage (shopping center and office building) failures, credit card losses (remember, it was just a Senate vote, not a Presidential signature), etc., etc.

If the US government does not take a very conservative approach to judging when the country will actually come out of recession and take on a healthy rate of growth, it could perpetuate the recession. Alan Blinder, former Vice President of the US Federal Reserve Bank and Princeton professor, wrote a New York Times piece recalling how President Franklin Roosevelt helped to create a recession within the depression in 1936 by tightening the budget and pulling back on his stimulus package. This is the same type of budget reduction talk that is current in Congress as it assumes that the recovery will be self-sustaining and puts its attention to reducing the national debt. Blinder believes that the US Government will be able to withstand the pressure for budget reductions until the recovery is, in fact, really underway. However, skepticism at this moment would be a healthy reaction.

There is also a current, led by Nouriel Roubini, Dr. Doom, in his RGE Monitor, that holds that while we may be really at the bottom of the decline, the question is how long will we remain there. Will we initiate real recovery rapidly or will we languish at this current level without declining further? I think there is a paucity of data to show one trend or the other--recovery in 2009/2010 or in 2010/2011.

Why am I in Brazil concerned with all this? As I've said in other contexts, there are two reasons that what happens in the States has a serious effect on all of us around the world. First, the United States is still the bellweather of the world economy. What happens there affects us all. And, second, it affects us because the US is still the second largest trade partner for Brazil and all Latin countries. If demand is slow there, then exports in Brazil and elsewhere in the world will also be slow. Interestingly, one of the side effects of the current recession is that China has now become Brazil's largest trade partner ahead of the US. If the United States recovers quickly enough, that fact could be short-lived.

The Brazilian government and public opinion now believe we are recovering from the recession. I will not waste space on the comments of our government officials here. However, I will point out that the relief at having reached a recovery (if that is the case) is leading banks and institutions to forget one of the major lessons of this recession--the dangers of leverage. Last Friday, Itaú-Unibanco announced that it would restart an auto loan program that provided financing of cars over 72 months and would not involve credit scoring to determine if the borrower was capable of repayment. This is distressingly similar to the scenario that led so many American families to lose their houses and cause the economy to tank. Now, in Brazil, sub-prime car loans. Distressing.