Defenestrating Thoughts from the Bivouac

Since I already did resolutions on my birthday, I thought it would be fun to make some economic and political predictions for the New Year. Here’s what I think will happen by the end of 2009:

Unemployment tops 10% with real unemployment over 15%

We still have way too much capacity and since consumers can’t add more debt, we’ll continue the correction to bring production capacity in line with the reduced demand. This means more businesses closing or reducing their workforce.

Additionally, much of the recent employment growth (commercial rent estate, sales, etc) has been fueled by discretionary spending. This spending will decrease and those jobs will be lost.

Over 30% drop in the major US stock indices

I expect the Dow to be in 6000 range this year and possibly in the 4000 range. The economy will get worse and this is only partially priced in. Sales and earning will drop drastically — just wait until Q4 earnings are announced. Additionally, with increased unemployment, people will be forced to sell stocks in order to cover living expenses.

Plus, in a bull market no one cares about fraud, but when the chickens come home to roost, all the lies come out. So far we’ve seen Madoff and now Satyam; we’ll see more scandals through the year.

Deflation, No Hyperinflation

A big worry is that the US dollar will see Weimar or Zimbabwe style hyperinflation. While this is a risk due to the Fed’s policies, I think 2009 will be deflationary. Though, in 2010 and beyond, we’ll have to contend with the consequences of the Fed’s printing.

As assets get marked to market, the value will continue to plunge. There no way that Obama or the Fed can print faster than this. Even if they do print faster, lenders and borrowers will continue to be cautious.

Plus if stocks are dropping and the Fed holds the rate really low, there’s no way we can simultaneously have hyperinflation.

House prices drop over 25%

We still have a few storms coming here. Foreclosures have been up due to sub-prime loans, but we still have Option ARMs and ALT-A loans coming. We’ll see lots of selling from people who can’t make payments anymore, bank foreclosures, and new development projects that are now coming online.

And there won’t be buyers for all of these homes. It’s not that credit isn’t available, it’s because nearly no one is credit-worthy. The few credit-worthy are the prudent people who have saved money for a 20% down payment. Very few of these people will be buying a home while prices are dropping.

Personally, I had thought Crissy and I would be buying a home this summer (we have our 20% down ready), but as I expect home prices to drop all year long, we’re not buying. The only exception would be a phenomenal deal on short sale for a home that we deem “perfect” and would live in for more than 15 years.

Consumer savings rises to 3%

The American consumer will spend substantially less and start trying to live within their means. This means lots of debt will be paid off (a form of savings) and people will start building a nest egg.

Global unrest rises

It’s hard to quantify this, so I almost left it off the list. I expect to see China have significant unrest as their economy collapses. They have a much worse over capacity problem and unwinding this will be hard.

We’ll likely see more Gaza style battles scattered around the world. I wouldn’t be surprised to see Georgia flare up again.

Obama’s halo wears off by the end of the summer

Obama is widely popular as The Anti-Bush and The One that will solve all our problems. This veneer will wear off rather quickly. First off, even though most people didn’t realize it, his policies are very similar to Bush’s. His appointees are mostly Washington insiders. And in February, the Supreme Court will force him to publicly declare if he will allow torture.

Secondly, Obama’s crowd is split into many ideological camps. Throughout the election he was able to speak in very general terms, but now he will have to be specific. Economically, he voted for the bailout which the vast number of Americans were against. And yet, he’s already announced lots more spending. Socially, does he support gay marriage? His white liberal supporters do, but most of his African American supporters do not.

Lastly, Obama’s spending will be thwarted by the bond market. Foreign purchases of Treasury bonds will basically stop. Foreign banks will need to spend money domestically and instead of building reserves, they will be spending them. Obama will struggle to continue to run large deficits without just printing money.

These are obviously grim predictions, but I think it will be rough year. As I’ve told my friends and family, it’s important to be very prudent with money now. Build up savings, get out of debt, and don’t buy things you don’t need.