Doug Kass, my old debate partner for the seven years I was writing for thestreet.com, listed on TheStreet.com his 10 headwinds that the economy and the stock market faces. I respond to each one of them:
"1. Deep cost cuts have been mainstay of corporations over the last few years. Cost cuts are a corporate lifeline (like fiscal stimulus), but both have a defined and limited life. Ultimately, top-line growth is needed"
True and true. Companies finally did what they should do in a recession: they quickly cut costs, slashed inventories, and fired people.
But did they go too far? As now know, GDP growth will be flat to slightly higher next year and towards the last half of this year. Look at the picture below: companies slashed inventory as if, literally, there was no tomorrow. With flat GDP growth, companies simply have to regrow inventories. In order to regrow inventories they have to spend on input costs and they have to rehire at least some of their employees. Business spending will drive topline growth in the beginning of this economic cycle.
"2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the labor force. The consumer remains the most significant contributor to domestic growth. Unemployment should remain high, exacerbated by many retiring later in life because their nest eggs have been reduced."