Corporate profits and the market are saying sayonara to the recession (and the worry-warts), but I still see us facing many structural headwinds in the future. The problems are not insurmountable, but they are serious and require substantial change in order to address the issues.
The question that I am asking myself is, when will those problems reflect in real world results? When will they weigh on profits? For example, the Pew Trust came out with a study today indicating a $1 Trillion funding gap for State and local government pensions. At what point will that funding gap impact the real world and who within corporate America will be effected by that? Is it possible that most of the problems are isolated to government entities and, as such, will only effect the private sector indirectly? I find that hard to believe. The ultimate solution to government over-indebtedness is increasing revenues (taxes) and reduced consumption - or default. All of which impact the consumer and companies doing business with the government directly and indirectly.
Pension funding gaps are only the tip of the structural iceberg. We have significant Federal obligations from unfunded medicare and social security liabilities, structural funding gaps at both the Federal and State/Local government levels, over-indebted consumers, not to mention more rounds of default and delinquency in the residential and commercial mortgage markets. Where is the money going to come from to pay for all these things?
The market typically goes blithely along ignoring structural problems until it is forced to deal with a situation - usually in crisis mode. Is the market that dumb? and, Why does it do that? Are we simply playing a game of chicken, and that is the way the game has always been played?
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