Wednesday, November 19, 2008

Hormats' Grim Economic Portrait

At the start of his presentation today Goldman Sachs Vice Chairman Robert Hormats mentioned the last time he spoke to the National Capital Chapter of the Association for Corporate Growth (ACG) it was late 2002 and the DC-area was paralyzed by the sniper attacks. Whenever I show up for an ACG speech there’s a crisis, he joked.

Hormats and the 100 or so dark suited investment bankers, private equity types, M&A advisors, attorneys and commercial bankers in attendance all agreed the economy is in a state of crisis. In fact, Hormats painted quite a grim portrait of how the next 18 to 24 months will play out in the US. (Image courtesy of Future in Review.)

Here are a couple of relevant points from his presentation:

-The financial markets are in a “downward spiral of death.” Falling asset values lead to write downs which hurt confidence and then result in a further decline of asset values.

-Like financial institutions, consumers are now forced to rebuild their personal balance sheets by using capital to pay down debt. Ironically, what is good for the average household is bad for the economy.

-Goldman Sachs projects unemployment will increase from its current level of 6.5% to 8% by the end of 2009.

-While there is some excellent media reporting of the financial crisis, many of the “talking heads” on television are more alarmist than factual in their evaluations. This makes it hard for the consumer to determine what is really happening and to plan accordingly.

-We should all expect slow growth (if any) for the next two years.

OK…so it is no secret the economy is in a fragile state. What can we do? Hormats believes a massive fiscal stimulus to the tune of $500M is needed to prevent a further decline. Those dollars could be invested in infrastructure improvements at the federal and state/local levels with spending parceled out over the next two years.

There will be a deficit one way or the other, Hormats concluded. It’s only by the government injecting a significant amount of spend will we be able to eventually pare down that deficit in more prosperous economic times.

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