Berko: Headed for a 2015 recession?
Friday, October 11, 2013 7:00 AM
Dear Mr. Berko:
It seems that a larger number of economists are predicting a horrendous recession by 2015. They believe that the banks are making it difficult for Americans to borrow money and that the consumer doesn’t have the borrowing power to improve corporate profits. I would appreciate your comments. Also, please tell me what you think of GlaxoSmithKline. Our son works there and has advised us to buy the stock because of a blockbuster drug the company recently developed.
S.S., Kankakee, Ill.
Consumer spending is essential to a strong economy. And you’re right; a growing number of economists are becoming gloomy and suggest that Congress is leading us out of a slow recovery. Sheila Bair, former chairwoman of the Federal Deposit Insurance Corp., Allan Meltzer of Carnegie Mellon University, Paul Krugman of Nobel Prize fame and others – including Peter Schiff, Richard Duncan, Michael Lombardi and even the computers at MIT – suggest that the consumer has been emasculated, and they’re not sanguine about the future. The key to our recovery is the consumer, who represents 70 percent of our gross domestic product.
Last year, I was a guest lecturer at the University of South Florida and asked one of the students how much he paid for his 2010 Honda with 47,000 miles on the odometer. He responded, “$229 a month.” I said, “No, what did the car cost you?” And again he said, “$229 a month.” We went ring-around-the-rosie for a few minutes. He couldn’t grasp my question and continued to give me the same answer. And even more disappointing was that he was unable to tell me the number of months he had contracted to make those payments. I couldn’t get this lad (as well as several other students in the class) to understand my simple question; it was as if some of us were on different planets. That monthly payment was the price of his car, and that’s all he understood.
British scholar Thomas Malthus wrote in a popular 1789 essay on population growth that the population of the world, which was growing geometrically, would soon outstrip the food supply, which could only grow arithmetically. He argued that pestilence, famine, wars and earthquakes were blessings because they “serve to prune away the luxuriant growth of the human race.” Malthus’ reasons were logical, but he was wrong. Now it’s suggested that the rapid growth of the world’s population is exceeding the world’s brain supply, and some observers can cite convincing evidence. So thanks to lads like the Honda owner, ascending consumer debt, which just a few years ago bankrupted families across the nation, reached a record high of $3 trillion in August. Considering that the median family income is down 4 percent from the pre-recession high, that new job creation is anemic, that interest rates are rising, that new home sales are slowing, that food prices, insurance costs and rental and transportation expenses are increasing, many economists expect another wave of consumer debt defaults and another recession in the coming two years. As in Malthus’ case, the evidence is logical, but I think those economists will be wrong. But remember TGIF, or the government’s in foreclosure.
GlaxoSmithKline PLC (GSK-$49.37) recently received approval for an HIV drug, called Tivicay. The HIV drug market is worth about $17 billion. Gilead Sciences Inc. (GILD-$59.99) owns 51 percent of this market, which is growing about 7 percent annually. GSK’s Tivicay, a once-a-day pill, has shown positive results in blocking the virus in 88 percent of patients, compared with GILD’s 84 percent success rate. Meanwhile, Tivicay is priced less than other HIV drugs and costs $1,200 a month, which is much less costly than GILD’s twice-a-day drug at $2,375 a month. It will take a while to capture the HIV market, but GSK expects Tivicay to produce $1 billion worth of revenue by 2017, with revenues peaking at $5 billion or so. GSK is a darn fine pharmaceutical company. It pays a 4.5 percent dividend and has excellent long-term prospects. Buy it.
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