Consequently, I would say this recovery is the equivalent of a "dead-cat bounce," an "L" shape with the horizontal part of the "L" shaped more like a hump, dropping down and picking up ever so slowly. This is not a sustained recovery; it's merely a spurt in capital spending and a snapback in inventories. Companies have become comfortable with occasional stock-outs and telling customers it will take a while to deliver. They don't want to tie up cash, and the same is true with capital investments.

There are other nagging problems like housing, which is not recovering. We may have gotten past the mortgage derivatives crisis, but the foreclosures and home deflation it spawned are still with us. We're also experiencing a disinflation in compensation rates and an increasing portion of the workforce experiencing actual cuts in compensation.

Household debt is another mess. In 2001 the household debt-to-income ratio hit 100% — a record level, according to the Federal Reserve. We got out of that mess not by lowering the debt, but by dropping rates and keeping credit cards extremely liberal, which made things worse. By 2008 the debt-to-income ratio hit an insane 133%. Today, it's around 130%.

This is not the typical recovery following a severe recession like 1957, 1974–75, and 1982, where we had sharper upturns. Then, the financial system was intact and we had the wherewithal for a great deal of debt expansion and increasing profitability. We do not have that now. I'd be very cautious, preserving capital, cash, and access to credit as much as possible. This is not the time to be thinking long-term expansion, not just yet.

The Case for a "W"
Just because we're recovering doesn't mean we've recovered. A couple quarters of positive growth is formally defined as a recovery, but you can have illusory recoveries like what happened during the Great Depression, which had two "recoveries" through the 1930s that vanished as quickly as they arrived.

We can have another recession tomorrow, equating to more of a double-dip "W" shape. We still have 15 million people unemployed and a 10% unemployment rate, compounded by financial and economic anxiety. We have spent more on fighting this financial collapse than we spent on World War II, and still have no idea of the real problems at AIG, which the public essentially owns. I'm told that before the dust settles we will have seen more than a trillion dollars in write-downs among banks.

The public no longer trusts the financial industry. FDR said we needed to put an end to Wall Street gambling with other people's money, and that is no less true today. The fact that Bear Stearns's stock plummeted from $57 a share to $2 in a week means the executives running the place had no idea what they were doing. We're sitting with a financial system in worse shape than before the crash. The monetary base has roughly tripled since the beginning of the crisis, so we have the basis for hyperinflation. The Federal Reserve keeps buying assets with newly printed dollars, and we have no idea of the quality of those assets.

We need radical surgery, and that means a new economic team in Washington to restore trust in the financial system. We need a health-care fix laid out on a postcard by economic engineers and not members of Congress brokering votes.

I'd be very cautious about the future. You cannot rely on this economy when the government is running the financial system, writing 9 out of 10 mortgages, and running the biggest insurance company in the world. The silver lining is that it is a good time to borrow and refinance. If a CFO can borrow long-term and lock in low nominal rates, now is the time.

A Bull Market in Uncertainty
The recovery is under way — there is no doubt about that, even though the National Bureau of Economic Research hasn't picked the month yet in which the recovery began.

Nevertheless, there remains quite a bit of uncertainty in this recovery. Banks are holding on to huge amounts of excess reserves to avoid risk; otherwise they would be making loans. Sure, the Fed is paying some minimal amount of interest on these excess reserves, which they never did in the past, but there is certainly more to be made through traditional loans.

The problem for banks has been assessing risk. The Fed took action to avoid a Great Depression–type scenario, but by the same token shoved all these reserves into banks that they are not releasing. Consequently, there is a real danger of hyperinflation. Too much money has been printed and it is chasing too few goods. Add this to uncertainty over housing, the deficit, and TARP, and now the government taking on health care, handling it in such a way that it will inevitably bollix it up.

At best, I see a "U"-shaped recovery, barring another shock that would cause a double-dip. I wouldn't rule that out. As Adam Smith once said, "There is a great deal of ruin in a nation." To me, that means that governments can only do so much.

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