This is the first post for the One Eyed Guide© and what could be more fun than trying to answer the number 1 economic question: What’s Happening and will Obama be able to fix it in his allotted 4/8 years?
According to many Gold Bugs, we are headed to the “Greater Depression” and prudent investors should buy physical gold, guns and build a bunker as the entire global economy is about to collapse.
One Eyed Guidance: Bunkering is probably not a good idea as it just makes you visible to the survivors. Besides, who wants to live in a bunker?
The truth is probably different because:
1. Markets (even with government interference) are self correcting so the end result of what is going on now should give a better growth opportunities for most people than what we had before. After all, most people did not have significant real income growth in the last 20 years.
2. The Government has a playbook on how to fix the current crisis. All the current economic problems started around 1982 when a concerted effort was made to dismantling the controls and transparency put in place by our grandparents to prevent a reoccurrence of the Great Depression. Granny and Pappy were pretty smart and when their 1930’s regulations were eliminated and not replaced by new ones designed to handle modern issues…well, here we are in 2008 -Post to follow (PTF) on this. There was a lot of experimentation in the 1930’s and a few things clearly worked and should be implemented by the new administration:
1. Transparent markets, companies and government actions
2. Level playing field regulations ( a.k.a. fair markets in commodities and other areas)
3. Stable financial markets (1 & 2 above plus significant insurance for depositors/investors against financial company failures -$250K does not cut it.)
4. Social Safety nets to encourage consumer spending (healthcare is today’s issue)
5. Stimulate like crazy (lots of ways to do this with housing and infrastructure)
6. Don’t worry about balancing the budget until excess capacity has been pulled out of the system and consumer psychology on the economy is positive (Yes, we will be in a pure Keynesian environment in 2009.)
3. Currently, Secretary of The Treasury Paulson has made things worse as he seems to be channeling Hoover and is making the same mistakes that Hoover did (see Rothbard’s book America’s Great Depression for a description of what Hoover did wrong – just don’t necessarily believe Rothbard’s solutions.) For such a bright man it’s amazing: if the markets need reassurance that financial institutions are stable, why wouldn’t you publicize exactly how the government is supporting them to eliminate any questions?
In any case, he’s gone on January 20, 2009 and we will assume for forecasting purposes that Obama administration will do what they say which is more or less what’s outlined above.
Here’s what this means for your personal investments:
One Eyed Guidance:
2009 will be a good time to do long term investments in almost anything. However, holding periods, particularly for value stocks, will be 5 to 10 years and market swings will give a worrisome, rough ride.
Speculative investments will primarily be items that will react to government action. Things like gold, gold stocks, corporate bonds and commodities that are good investments in early 2009 will require exiting some time before 2016, possibly as early as late 2009.
US Government Bonds of all types will be a terrible long term investment due to the need for interest rates to adjust to reflect actual cost of money. Many groups who are buying them right now will head for the exit as once when interest rates start up and the exit will be jammed, spiking rates.
International investment in China should not be done until after the potential for a political meltdown due to slow growth has been resolved.
So, the forecast for the next 8 years that this is based on, with some minimal justification (posts will follow with supporting details) and assuming aggressive government stimulus, is :
By the end of 2016:
· Everybody will have had a rough ride having dealt with slow job growth, deficits, inflation, and general worry about would the government get it right. This assumes they more or less do. As the 2009 economy mostly required spending like crazy for 3 years they probably will.
· Inflation will have been controlled after some ups and downs as the money that was created to solve the financial crisis is pulled back. There is no long term negative from the massive infusion of cash into credit markets due to the much greater destruction of wealth from P/E and asset (mostly housing) deflation.
· Stock Markets will not have recovered to the highs of 2000/2007 due to P/E deflation to historical levels of 12 to 15 on the S&P 500.
· GDP Growth will have recovered to levels from before the 80’s (80’s to 2008 growth was below historical average due to underinvestment in infrastructure) as the effects of infrastructure building kick in.
· Unemployment will still be high by historic standards due to continued job turnover caused by rapid technological change from infrastructure building.
· Housing prices will have recovered to be in parity with costs of construction in most markets. In most markets this will be an increase from 2008 levels
· “Peak oil” will be decreasing the availability of crude but prices will be stable as gas usage declines due to increased efficiency of vehicles and limited expansion of alternative fuel vehicles (either Natural Gas or Fuel Cells unless technical battery problems are solved.)
· The dollar will trade at roughly current levels versus the Euro, and down versus most Asian currencies as long term trade imbalances are corrected.
By Year assuming normal historical cycles (projections get less detailed the further out they are as only the broadest trends can be projected past 3 years):
· The economy will start to recover in the third quarter as the effect of stimulus spending on infrastructure projects in the summer start to spread through the economy.
· Housing price declines will have stopped by this time but sales are weak.
· Markets will be flat to declining to at least mid-year due to declining corporate profits and continued P/E deflation. Lows for the year should occur in the third quarter.
· The credit crisis should significantly ease shortly after January when the new administration takes a large bat to banks and forces them to lend, at least to historical levels. One Eyed Note: It’s unknown which bat the government will use but they have a variety. You’ll know it is working when rates drop and banks start to complain about government interference. Banks that don’t take money from the Fed can complain but there are few of these.
· Consumer spending will have rebounded significantly as confidence has increased, gas prices remain low so non-energy spending can be done and extended food stamp, unemployment and Mortgage relief programs allow more discretionary spending.
· Business spending will be a drag on the economy until the end of the year due to over cautious management.
· The dollar will decline against most Asian currencies except Japan yen.
· The Trade Deficit will decline.
· The Fed starts to unwind monetary stimulus in the 4th quarter.
· Republicans and some Democrats start to talk about balancing the budget.
· The economy will start to grow and jobless rate will start to decline by end of year.
· Stock Markets will start to recover, however the best time to buy will have been before October 2009.
· The economy will declared officially be out of recession during this year with the date probably in late 2009.
· Stronger talk will be heard on balancing the budget and a tax increase on high earners will be passed. Much discuss will be done about avoiding repeating the Recession of 1937.
· The economy will strengthen as will efforts to balance the budget.
· Broader tax increase will be passed to be effective in 2012
· The economy will peak just before the election as the effects of budget balancing start to slow down the economy.
· Inflation will start again as shortages in raw materials occur due to increased demand and greatly decreased short term capacity.
· The economy will significantly slow down; though probably not reach recession levels.
· Inflation will spike and decline.
· The economy will gradually improve and deficits will decline.
· The economy will peak shortly before the election and be declining on Election Day.
That’s what should happen if Obama does most things right – it’s pretty good but most “conservative” recommendations will derail this. Hopefully, politicians will heed the lessons of the Great Depression.
Get Ready for a Rough Ride and Good Luck for the New Year!