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By Sy Harding | 20 December 2008
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I’ve been very accurate in my ‘big picture’ forecasts over the years. Nine years ago, in 1999, I wrote a book Riding the Bear— How to Prosper in the Coming Bear Market. In it I said the market was in a bubble similar to that of 1929, and the worst bear market since that of 1929-32 was just around the corner.
I was told that was ‘dinosaur-thinking’. The popular book of the time was Dow 36,000! But a few months later the severe 2000-2002 bear market began, in which the S&P 500 lost 50% of its value and the Nasdaq 78% of its value.
In 2005, I made the equally unpopular prediction that the real estate sector was in an unsustainable bubble, the bursting of which would cause at least as much trouble as the bursting of the stock market bubble. I was told I was wrong. The economy was strong, and lenders were making it possible for all Americans to own their own home. Therefore it would be many years before overbuilding would be a problem.
In April, 2007 I called the debt/credit situation a bubble that would be the next to burst. It seems to have done so this year.
In June of this year, with oil above $140 a barrel the consensus forecast was that it would hit $200 within a few months. I said not a chance, that oil was in a very overbought and unsustainable bubble. E-mailers told me I was wrong. There was no bubble, just soaring demand, and even if the U.S. economy slowed, China, India, and emerging countries would keep demand high for decades to come. My mistake was in predicting oil was due to plunge to $98 a barrel. It did that, and just kept on going down, now at $35 a barrel.
In a May, 2006 column I predicted "Banks are going to have severe problems again, this time evolving from high risk loans, investing for their own accounts in high risk derivatives, and their contribution to the creation of the real estate bubble… …Banks say they are not at risk because these days they don’t keep the mortgages on their books, instead packaging and selling them to hedge funds and investors." But we all know what happened a year later.
In early 2007 I said the Fed was behind the curve, and predicted the U.S. would be in a recession by year end 2007. Again I was told I was wrong, that the economy was strong and even weathering the bursting of the real estate bubble with no problem. And didn’t I realize that "even the Fed says the economy is resilient and employment remains strong, that the potential for rising inflation was the main concern". Well, we’re now in a recession, and they now say it began in December, 2007.
However, I need to revise my recession forecast. As recently as last week I was predicting that while the recession would not turn into the next Great Depression, it would be as severe as that of 1973-74.
I now don’t think it will be that severe after all.
My reasoning?
The problems facing the economy a year ago were so severe that I have said numerous times since, "It isn’t rocket science to expect that the worst housing meltdown in 30 years, the worst financial system crisis since the Great Depression, the worst consumer debt bubble ever, and a few other ‘worst ever’ conditions, would result in a worse than usual economic recession." However, I didn’t expect the government response to also be so massive and record-breaking. I’ve lost count of how many $trillions have been thrown at the problem in specific takeovers, bailout grants, loan provisions, and programs, to say nothing of the way the Fed has flooded the financial system with extra liquidity.
Some of it, perhaps most of it, has been hastily designed and poorly implemented. But it also doesn’t take a rocket scientist to know that if you hurl enough cannon loads of ammunition, as in massive overkill, even in the general direction of a target, a good deal of it will have an impact. Already financial firms are improving their balance sheets.
Sure, to some degree they’re doing so by putting some of the bailout money in their vaults rather than lending it out, and by using it to add to assets by taking over competitors. But they’re also closing branches, raising fees, and cutting back on employees and expenses. Once they’re sure they have restructured enough to survive, they will lend again. They must in order to move on to the next step of making profits again.
Now the bailout efforts are shifting to Main Street and employment. The most obvious was the White House decision to let the auto-makers borrow some of the TARP money that was originally intended only for financial firms. The decision was not made due to a desire to bail out the auto-makers, but to try to rescue the million or so related jobs.
Meanwhile, home-builders have drastically cut back on new home starts, the number of new homes on the market beginning to decline. And overall home prices have been dropping sharply, bringing them closer to fair-value based on wages. Affordability is also finally being helped by plunging mortgage rates.
The Treasury Department said a few weeks ago it is considering stepping in to force mortgage rates down to 4.5%. But rates are now improving on their own. The rate on 30-year mortgages has plunged from 6.5% in October to 5.1% this week, a 37-year low. And oil prices have fallen from $145 a barrel to less than $40, gasoline from $4 a gallon to $1.65, which also helps significantly.
The major remaining problem is employment. And more help is coming for that problem. President-elect Obama’s economic advisors have a $trillion stimulus package they hope Congress will have ready to sign within days of the new Administration taking over. This plan, ten times the amount of the last stimulus plan from Washington, will fund job-producing road, bridge, and other infrastructure construction, aimed at helping revitalize major industries in steel, cement, construction equipment, trucking, etc., and providing jobs for laid-off builders and construction workers.
I’ve been six to nine months early with my previous predictions of the last ten years. And I don’t mean this time that the economy will be booming next quarter. But I do see improvement coming down the road soon enough to prevent the recession from becoming as severe as that of 1973-74, as I had previously expected.
I hope I’m right, because if all this massive ammunition is being wasted and does not drive the enemy back, the battle will indeed have a bad ending.
M O R E. . .
Normxxx
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