Monday, February 2, 2009

Economic Outlook for 2009 and Commentary

By Joshua E. Stone

Monetary Policy: Expect the Fed to keep the Federal Funds Rate at current levels near 0-.25% for the remainder of this year at least. The Fed will worry about inflation later. The main focus for them right now is to stimulate the economy and get credit flowing again.
That said the Fed is setting up a nightmare scenario for supply and demand. The thing to understand is that business inventories are getting lower. When demand kicks up again as the Fed plan, it will put pressure on supply. This combination of forces leads to inflation.
So it is clear that at some point, barring a massive depression that the Fed will have no choice but to raise interest rates again, and quite aggressively.
Ultimately inflation may go higher than 10%.

Housing: Expect the housing prices to start to bottom in the next year maybe even longer. The recession is already one of the longest in history, and I expect it to last longer than any in the past.

Employment: Expect unemployment to reach double digits before this recession is over. I am guessing it may go as high as 10% this year. I don’t see much of an employment recovery really. This will be a jobless recovery. Unless the new Administration in Washington can get the corrupt politicians to make a new energy policy that creates jobs. Yes We Can!

The Dollar: The North American Union will become a reality soon enough, sadly. I am not sure what this spells for the Greenback. I don’t see it becoming history all together, but certainly revalued.
The oil will go to 600 a barrel if they don’t do something soon about energy policy. Expect oil to go to 75 a barrel this year, then 150 in the next few years if not sooner.
Gold has decoupled from the currencies and will most likely keep going up and not look back much at all. If S&P 500 goes down 50% from these levels then gold would go even lower maybe. Into the 400 handle perhaps is my speculation. But only a speculation on my part, many think it’s on a one way road up.
The S&P 500 has a 50% downside risk from these levels and is the key to the recovery, besides a good energy policy. If S&P moves up from here for the rest of the year, then expect a quick recovery in 2010 and oil, gold,stocks and the others will start flying high. (i.e. inflation)

Will It Work? Will the stimulus and bailout efforts of the Fed work? According to folks much smarter than me it will. There will be so much money coming into the system by just the first half of 2009 it will have an amazing effect on the economy. The problem is that these efforts are the equivalent of giving a drug addict a dose of his narcotic he is coming down from.
History tells us that the efforts of the New Deal actually did more harm than good, till WWII; when the real big spending kicked in full force.
This makes me think that the current efforts ultimately will not fix all the problems, but a new currency and global tax system or war would. The bill is just too large and someone is going to have to pay it somehow. But this is more long term and I will not go into it here. For the near term just the efforts of the Fed with TARP, the expected tax rebate on the way and the hope surrounding Obama will provide a remarkably quick recovery albeit a hollow one to say the least.

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