Wednesday, September 30, 2009

Economic Forecast

The following predictions are based on a lack of significant world events, such as a major terrorist bombing in the U.S. or an Iranian war. Any events like those immediately changes the scenario to significantly worse than what I am predicting.

The stock market will continue rising through at least October. After that, it will run into a brick wall, as high unemployment will keep demand for consumer goods down, thereby keeping a lid on earnings. Large businesses can only add in so much efficiency before they need sales to improve. Without increasing sales, they will be faced with flat earnings, and the markets will begin to flounder.

In addition, real estate prices will either stay the same or begin to drop this Fall, as the main real estate season has ended. This will add more pressure to the equities markets. Next year will see another round of home foreclosures/defaults, as many adjustable mortgages come up for re-pricing. If the Federal Reserve raises rates at the beginning of 2010, this could impact the mortgage rates, increasing foreclosures and defaults significantly.

Speaking of the Federal Reserve, they are the wild card in the economic deck. If they decide to keep rates too low for all or most of 2010, we could see a short economic recovery accompanied by a huge burst of inflation, which in turn would push us back into recession. On the other hand, if they raise rates too far too fast, it could kill the housing market. This is just speculation on my part, but I would expect the Fed to dip their toe in the pool with a small rate increase in January, just to see what happens. They will follow this with low to medium-size rate increases through June. Then we will see the economic havoc commence.

Specifically, we will see the rise of stagflation. As commodities begin to react to the excessive money supply, their prices will rise significantly. This in turn will bring economic growth to a screeching halt. The Federal Reserve will predictably reduce their rates once more, which will only exacerbate the problem with commodity prices, which in turn will keep the economy in a slump. Ironically, if the Fed would take the opposite approach, they would probably succeed in righting the economic ship eventually, although somewhat painfully at first.

Another aspect which will be ignored will be the tight credit conditions in the banking industry. Mind you, I consider this a good thing. However, when the government increased bank reserve requirements, they created the tight credit we have. Even a light loosening of the credit would allow for some economic growth, however artificial it might be. Without it, expect any economic growth to be small, if there is any at all.

Because of this, the stock market will drop, possibly even crash, in 2010.

Politically, I expect Obama's health care plans to continue to meet stiff opposition in Congress (especially the Senate), as "blue dog" Democrats are confronted with angry constituents who oppose the public option which more liberal Democrats insist upon. However, their opposition won't save them as the economy comes crashing down. The good news is the Democrats will lose control of the House in 2010. The bad news is the Republicans have no better ideas, but at least will stymie Obama's grandiosely stupid plans. On the bright side, with deadlocked and ineffective government, the economy MIGHT be able to gain some traction by 2012, although I doubt it only because the Federal Reserve will continue to feed the stagflation. Expect Obama to be a one-term president, with a massive sweep out of incumbant politicians in 2012.

For the next 4 years, and possibly longer, your best investment bets will be commodities, such as oil and precious metals, and foreign stocks, ETF's, and mutual funds. I personally recommend China, as they seem to be preparing best for what is about to happen, by purchasing precious metals to shore up their currency, as well as turning the direction of their commerce inwards to their domestic economy.


William R. Barker said...

"...we will see the rise of stagflation."

Yep. As I've been saying since 2007, mid/late 2010 will see the return of the Carter economy.

"...the stock market will drop, possibly even crash, in 2010."

Yep. (That's part of the "stag" in stagflation.)

Pray for a military coup my fellow PandPians!


EdMcGon said...

Nope. Secession. ;)

Justine Nicholas Valinotti said...

As an admittedly uninformed layperson, I'd like to add something to your forecast, Ed.

In past recessions and depressions, there were sections of the nation and sectors of the economy that did relatively well. They either had solid fundamentals or something that was needed or in demand, even during the worst of times.

I don't see that happening this time. Even the most seemingly solid industries were invested in one way or another in a system of easy credit and little or no accountability. And those parts of the country that seem to have weathered the storm have their own tempests brewing within them. I think of, as an example, my hometown of New York. For the most part, it hasn't been as been as affected by the residential mortgage meltdown as, say, Nevada and Florida. But there are areas, such as Jamaica in the borough of Queens, where foreclosure rates rival those in the Sunbelt. And, this is anecdotal, but I am seeing far more commercial spaces available to rent or buy than I can recall having seen in the past 25 years.

EdMcGon said...

As an admittedly uninformed layperson

Justine, don't worry. I'm what you might call an amateur economist. ;)

You do have a valid point about the over-extension of credit. You only have to look at financial statements for American companies, then compare them to Chinese companies. Yet another reason why I have quit investing in American companies, and exclusively invest in Chinese companies (aside from commodities).