Friday, January 2, 2009

Economic Predictions for 2009

Making predictions for an entire year is usually an effort in futility or, when the year comes to an end, a message of humility. Nobody has the crystal ball of the ancient prophets. Nowhere is there a font of knowledge from which one can plumb what people will do tomorrow, next week, or next month. Thus, predictions are nothing more than educated guesses, or just plain guesses, without the benefit of analysis.

Fortunately, we have projections and predictions all around us. For the most part, they offer glimpses of what people hope for, not what they fear. But it is only by facing the fear, realizing the worst, that we can proceed onto greater things.

The Roman philosopher Lucretius intoned, many years ago, "Fear was the first thing on earth to make gods."

How right he was. In the earliest days of recorded history, people feared their environment. It was harsh and brutal; there were wild beasts and floods and storms and fires and rain. The people turned these elements into gods to be not only feared, but revered and honored. Sacrifices were offered to them in hopes that their wrath upon the race would not be severe, that we would be spared.

It worked. Humanity survived all the pain that the earth and the skies could produce. Better yet, humanity prospered and grew.

Facing the fear was fine in ancient times, but today, we longer offer sacrificial lambs to the sun or the moon or the seas. They have been tamed (what a fine conceit that is), or at least we've devised ways in which we survive the occasional natural extreme, better. Houses are stronger. Oil and natural gas heat us in winter. We have even harnessed some of nature - in many marvelous ways - to our benefit.

We no longer fear nature. Men and money are the more obvious threats today. The global financial system is creaking under the weight of mountains of bad debt and fiat money, even more produced during the 2008 crash, that has to find a way into the system, even though everyone - from the banks down to the individual piggy bank - is hoarding it. The government is giving it away, and that's essentially inflationary. As the money trickles into the system, inflation will eventually emerge, though that seems a far-off event as we enter the new year.

The first thing one needs to understand about 2009 is that it's likely to be worse than 2008, and that's the fear up to which we must now face. Most people only saw their "nest eggs" decline by 50%. Some people lost their jobs - about 2 million, roughly. More sizable layoffs are coming, beginning with retailers in January. But, I'm getting ahead of myself.

Here's the most elemental of predictions: Will a very small basic basket of food - say a chicken, five pounds of potatoes, a couple cans of vegetables, a loaf of bread and four sticks or a tub of of margarine (it's better than butter) - cost more today or on January 2, 2010?

It just so happens that, as a human, I have to eat in order to survive, so I know these prices pretty well. Here's what I recently spent on the above-noted items:

7 Pound Chicken: $5.53 (79¢ a pound)
5 pound bag of potatoes: $1.99
Canned corn or peas: $0.39
Loaf of bread: $0.99
Four sticks of margarine: $0.99

Grand total: $9.89.

I'll check back in a year to see what it costs then. Of course, prices vary by locale, where you shop and use of coupons, but these are, in my estimation, pretty low. It doesn't seem likely that many are going to go hungry or starve when a family of four can basically have one solid meal for a mere $10. I predict food prices to go even lower during the year and probably remain slightly depressed throughout the year. Demand being the big driver in foodstuffs, the prospects for anything more than a 10% dip would assume that more people stop eating or that people eat more of their own produce. Either of those are not probably going to occur in any great way.

Next, the big question, will oil and gas stay low, or will they skyrocket again?

Right now, oil is ranging around $38-45 per barrel and gas is generally $1.50-$1.80 per gallon in the US. These prices are going to fluctuate up and down with the seasons, though they won't be anywhere as volatile as the past few years. Gas should not top $2.00 a gallon in most locales outside the big cities, and it could go under a buck in some Southern states. Oil's ceiling is probably $50, and slack demand could drop it into the high $20s, though it should spend most of the year right round $35, a very sustainable price level.

Gold and silver will still be safe-havens. Gold should top out just below $1000 an ounce and not dip below $650. It won't be a great year for the gold bugs, but they'll still be better off than most. Silver could very easily be a big winner, up 30-50%. The Gold-Silver ratio is far out of whack. It used to be 15:1. Now it's closer to 80:1. Look for mean reversion, with gold going lower and silver going higher, relatively.

As for currencies, they are a mixed bag, but everyone is going to feel the pain. The US dollar might continue to gain against other currencies, since they now are all feeling our pain. Americans need to change their habits for that trend to continue, however, and they will, as people hoard cash.

Speaking of cash, it will be KING. Anybody with disposable income or money on hand may find incredible deals on everything from automobiles to real estate. Collectors of anything will be able to add or fill in missing pieces at very reasonable prices. Art, jewelry, baseball cards and everything else collectible will fall in price as demand withers.

Stocks will stink. Even from the depressed levels of today, there will be further declines of 15-25%. Naturally, there will be some gains, with most of them occurring in the first half of the year. But, when the GDP figures and economic indicators begin to reveal just how long and deep this recession has become, investors will bail out of stocks once more. Here are the ranges for the major indices:

Dow: 6500-9700
NASDAQ: 1165-1840
S&P 500: 720-1175
NYSE Comp.: 4500-6750

I'm not about to speculate in those markets because they're going to remain somewhat volatile, but the long-term primary trend is still down, the bear market has not been broken; nor has the bottom been plumbed. Stocks have to be seen as absolutely horrible investments before they begin to act like good ones. So far, sentiment is still not completely negative on equities, so there's still room to fall, plenty of it.

Besides the economic distress that will continue to spread across the nation and into nearly every industry, comparables are going to be tough in the first three quarters. Many companies turned solid profits in the first three quarters of 2008, but those will be tough - if not impossible - to replicate. The big losers will be retailers, followed by banks, insurance companies, and anything financial, manufacturers, health care providers, consumer discretionary and recreation and entertainment. The few winners will emerge from the internet sector, high tech, energy (especially those offering clean or green tech solutions) and agriculture.

Some regional banks may post profits, especially if they are outside the Federal Reserve system and are invested locally, though there aren't many locales which will be spared from the economic consequences stemming from global confidence collapse.

Real estate will continue its slump as Alt-A and ARM mortgages begin resetting, taking the place of subprime. More people with standard mortgages will default as job losses grow, and the commercial real estate market is going to break apart. 250,000 retail stores could close between 2008 and 2009. More than half of that number has already occurred or been announced. The glut of commercial space will be monumental and not worked out for at least 7-10 years. Even though the commercial sector is only 1/10th the size of residential, its demise will be so complete as to add to the misery and lengthen the economic correction.

Of course, much of this favors the consumer, for a change. Prices will go down, and those with jobs and money will be able to afford a decent lifestyle. There will be more people on unemployment or some kind of government assistance than ever before, further straining the already bloated federal budget and busting some state and local bodies.

Government authorities will have to walk a fine line between cutting services and jobs. Government revenues will be hard hit across the nation, and job cuts are sure to embolden unions who will fight for every position. Service cuts are easier, and will be the likely choice for narrow-minded politicians who populate state and local offices. Eventually, the public outcry for tax relief will be the loudest, starting with reassessment of overvalued real estate by distressed property owners and ending with income tax revolts against states. In between, there will be more cheating and outright refusal to remit taxes on every level.

Protests and even riots could occur as government begins to be seen more as the problem than the solution.

Some caveats and wild cards:

President Barack Obama: Obama could be anything from a tremendous, creative leader to an outright bust, depending on his policy initiatives. Beginning with what we already know, that an infrastructure stimulus plan is going to be on his desk - and signed by him - on January 21, the prospects aren't that hopeful. while Obama preached "change" during the campaign, many of his appointees seem to have been recycled from the Clinton years, so a minor departure from the "status quo" is expected. He needs to make bold moves, but may opt for safety in closely calculated small changes. In the end, even very aggressive fiscal policy won't undo the monetary blunders already in the works.

War and Pestilence: The threat of widening wars are still with us, though it seems certain that we will be out of Iraq - for all intents and purposes - by the end of 2009. Afghanistan is another powderkeg altogether, especially with disruptions in Pakistan and India. There are other areas of concern, such as the former Soviet satellite states of Georgia and the Ukraine, and much of Africa. The chances are good, however, that we'll stay out of serious conflicts, at least for a while. While nobody can predict the next outbreak of the Bubonic Plague or similar scourges, disease seems to be the least of anyone's worries right now. That probably won't change, though one never knows.

More bank failures and systemic collapse: We can almost count on more banks falling into insolvency, but a big one, like Citigroup or JP Morgan Chase defaulting remains a particular threat to the global environment and could trigger a worldwide crisis which would make today's environment look like a summer picnic.

In the final analysis, 2009 should not be bad for people at the lower income levels, at least those already receiving assistance or with full time jobs. An phalanx of middle class people will fall into poverty due to job losses, and investors will continue to seek profits in stocks without finding them. The rich will get poorer, if that's any consolation, but their money will go further. The huge disparities in incomes has not yet begun to be wrung from the system, and that will take years, not months.

If anything is for certain, GDP will shrink by as much as 5% and maybe more. Recovery is still a long way off, as this recession begins to look more like a depression. Money and credit will remain unusually tight, though interest rates will stay low. Government efforts to reflate will continue to fail. Unemployment will reach 9%, according to government numbers, though the real unemployment rate will be closer to 20%. Home prices will fall another 10-15% and the number of foreclosures will not subside. Delinquencies, bankruptcies and business liquidations will spur a new age of entrepreneurism based on a cash model which excludes most traditional forms of financing.

Cash will be king. Silver will be a knight in shining armor. It doesn't have to be a rough year if one understands that the fear we must face is that of an economy and monetary system which has failed. It's time to readjust and realign.

Good luck. You'll need some of that, too.

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