Tuesday, January 5, 2010

2010 here we come

I guess I will be stuck as a bear for the next several years. But, unlike the past, I think I have a good chance to be right. 2010 holds a lot of interest for us that love markets and economics. It also is leading right into disaster. The end of the world in 2012 could get a real boost this year.

First, there won't be a double dip recession because there really isn't a recovery. There were over 26 million first time claims filed for unemployment in 2009 and yet all we heard about since May was we had a recovery on the way. In examining the consumer confidence numbers last week, which were reported to have improved, I found much of what I found back in the middle of the year, hope 6 months out and a horrible present reading. In fact, the reading for December for the present was so bad it was the worst number in 26 years. That didn't make the bullish news, but it was on the conference board page for the index none the less. 6 months ago, the reading looked the same, a real bearish current reading and a more optimistic 6 month from now reading. So, the 6 month expectation turned out to be a dud.

They had a great housing number, but housing collapsed with boom time sales numbers all the way to the bottom. What is going to happen with housing once they get the last first time buyer to the closing altar? New home sales are at depression levels, so the game is buy a house on the courthouse steps and flip it to a first timer complete with a free downpayment from Uncle Sam and a guaranteed mortgage from FHA. Time is running thin here, as there are too many losses in the system to save it.

Factory orders or something of that sort came out today. They beat expectations, but these orders had fallen a sum of nearly 30% during the period between July 2008 and January 09 and the sum of the rebound has been about 5% since the bottom. Bulls are claiming the numbers indicate a boom, but the sum so far has been a dead cat bounce that is at best a weak inventory rebuild effort. Some boom for $800 billion plus the TARP.

I think the economy just continue to recover until it is discovered to be in a depression. There is too much debt and too much damage and not much other than the desire of China to buy up American goods to put in their empty array of buildings so they at least have the appearance of maintaining a nice group of museums can change this. Just like I heard the Ocean was the icebox in Hawaii, the homestead is the ATM for the US consumer and it has been overdrafted. We had record level auto sales and record level home sales in the US for a good part of a decade and we are still showing high levels of preowned home sales. This pool of autos and homes will carry the US consumer a long way while he gets his house in order. Credit is tapped and card companies have their share of high losses. Not many people that can avoid it are going to pay the rates on these cards, save those that can't pay the debt back.

Forecast: Real US growth will be negative, but reported growth will be around 2%. Real growth is negative because dead cat bounces and government gifts don't count.

China. I don't know what it is going to take to knock over China, but from what I can read, what they call growth is not what I would call growth. If building capacity and buildings that won't be used any time soon is growth then I buy into it. As a result of this policy, China has pinned the price of commodities to the ceiling. Because their necessity is they keep the public employed and the money flowing, this could go on for awhile. Their government isn't much different than ours in this matter. The longer this goes on, the longer the bust will be that follows.

Forcast: China probably reaches its growth goals, but they won't be real. Cracks are already showing in China in the eyes of a lot of analysts, but the public is being told they are hot. I think by the end of the year, the construction industry in China will have officially hit the rocks and the commodity producing countries, namely Australia and Brazil will be having a hell of a hangover. A crash in the stock markets in those 2 countries could very well occur

As a result, world growth will have spent itself. From what I can read, India is a better long term play than China, but it is clear that India will have its own bust. Deflation will have re-established its grip on the US and this will be devastating to world demand. Growth is more than a word, but a business around the world. It must be 30% of the economy around the world. The portion that puts an economy on the plus side is about to vanish.

The financial sector will do well for another 3 months. Though I don't expect another large failure in the US this year, there will be a restart of the crisis. The worst probably hits in 2011. 2 or 3 large US banks will be taken over and broken up before 2012 is over. Their condition currently is being concealed in hopes something doesn't get worse in the meantime. The US isn't the only part of the world that has to liquidate debt and it is quite conceivable that 30% of the worlds supply will be defaulted or liquidated in the next 5 years. This is not conducive to putting things on the installment plan. One of the major Japanese auto companies will be in GM/Chrysler land by mid 2012.

The stock market will finish 2010 lower than it started 2009.

It is quite likely that it could recapture the entire loss that followed the bankrupting of Lehman Brothers. The Dow is already near the bottom it made in July 2008, but the S&P still has another 7% or so to go to make that bottom. The difference is likely due to the fact that the Dow lost points from AIG and Citi while the SPX lost value and the replacements put the points back in the Dow on the rally, but Citi and AIG never came back. There isn't a lot of promise for stocks due to a lot of reasons, but mainly to the fact that the credit flow that created the earnings in the market isn't coming back. Being able to borrow money at less than 1% doesn't make up for the lack of cash flow that is going to continue with the market. The customers are lacking the most important feature of all, credit and cash. Once the market reverses, the liquidity crunch is going to return with vengence, as there won't be a takeout.

The sovereign debt market will get interesting.

I don't believe Greece and Italy will default this year, but I do believe that as time goes forward, these countries are going to default or better yet, repudiate their debt. Currently we are seeing Iceland being tossed a bargaining chip of membership in the Eurozone in order to get them to agree to assume the losses of European investors in their 2 failed banks. I don't believe it is possible for that few people to agree to assume that much debt, nor should they. That will be an early story this year, a sign of things to come, but not much of an event at this time. It will be when Greece, Spain, Italy or Ireland tells them to stuff it.

Funny financing will cease

The focus seems to be on the Fed and the US, but the wildest financing is being done by China and other Asian countries. I do believe we are going to find out there is less to these sovereign wealth funds than has been mentioned. I wonder what kind of duds they contain that we haven't seen. China contains entire vacant cities that must cost tens or hundreds of billions to build. Dubai is todays tower of Babel. Much of the money of the middle east is tied up there. London is going to have its share of problems, especially if they drive their financial mob out with taxes. American commercial property is going to weigh on the US banking system and some are going to begin to question the US commitment to FNM and FRE. It is possible that the US will have to withdraw from its Asian wars.

The Democratic Party will lose one of the houses in Congress

This seems next to impossible at this time, but this economy is going to be hung around the neck of Obama and people are not very interested in the goals of the liberals in Congress. States are about to have to dump a massive number of employees and maybe sue to get out of some union contracts. The Republicans and other parties, should there be other parties, are going to hang the unemployment is going to stop at 8% with this stimulus around the necks of Democrats. The requirement to get health insurance is going to be one more boat rocking event.

Bernanke will be approved, but he will resign by years end

I have contended for some time that the dollar plays too big a role in the world economy to be treated in any fashion imagined on the whim of an economic tyrant. This goes for the government of the US as well. I can see the government being such a burden on the debt market that the private sector will be short of capital. the market will raise rates and the Fed will have to follow. The world will experience another liquidty crisis and that will prevent a dollar collapse.

The economic problems will become officially knows as Depression II

This downturn will become worldwide and it will become significantly worse. The only thing that will prevent collapse of governments will be the fact that money and credit are so short that governments will be able to stimulate without the money collapsing. China and India will join the depression, which will seal the deal.

So much for my bearish predictions. Everyone that was going to survive will. There will be benefits and opportunties for those that have the right strategy and the idea that something can't go on forever will sink in as the truth. There will be a lot of bankruptcy and a lot of liquidation. Unfortunately for most of us, we are going to be wiped out financially either way we go. We should all recognize that any one of us may be anothers only means of survival on a given occasion, so lend a hand if you can.

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