With most pundits assuring us that the stock market has hit its bottom and with a new president about to take office, many have a great hope that the worst of the economic crisis is behind us. That the worst is behind us is almost certainly false. As the famous line goes, “It’s hard to make predictions—especially about the future.” With that in mind, here is how I see 2009.
Of course, I must issue the traditional caveat—that the following is not intended to be investment advice. Market timing is an incredibly difficult art and very few have been successful at it over the long-term. The truism in that last statement has been used by many who advocate a buy and hold strategy. However, a buy and hold strategy in this current environment is very problematical.
Home Prices: After falling about 20% last year, home prices are back to their March 2004 levels. In history, there has never been a bubble that ended before prices had fallen to below pre-bubble levels. It is hard to date the beginning of the housing bubble; but if we say it began somewhere around 2000, clearly housing prices will be falling much farther from here. Survey after survey shows that the average homeowner believes that their home has not fallen in value; housing will not be at the bottom until this psychology turns.
Houses are something you consume; they are not something to invest in. Like a new car, a new house begins to fall apart from the moment you purchase it. When the average individual realizes that truth, we will be at the bottom.
Stocks: Despite the tremendous amount of liquidity that the Fed has been injecting into the system, deflationary forces are for the moment stronger. The stock market is almost certainly not at its bottom. Extreme excesses cannot be corrected in a single year, particularly when the government is doing everything it can do to prevent the liquidation of bad assets.
Nothing goes straight up or straight down; and it is very likely that in 2009, within the continued bear stock market, there will be at least one very powerful countertrend rally. As the 1930s demonstrated, great fortunes can be made in a short time by those individuals who are smart enough or lucky enough to trade those countertrend rallies. The obvious corollary is that you can lose a lot of money in a short time if you are wrong.
Commodities and Inflation: For now oil and other commodities have succumbed to deflationary pressures. However, the Fed has injected an unprecedented amount of money into the banking system. According to Robert Higgs “since August, the amount of excess reserves has risen from $2 billion to $559 billion.” Banks are not lending out this increased liquidity—partially because of decreased demand and partially because of increased lending standards. Eventually, when these reserves make their way through the banking system, the money supply will increase by a huge amount. Some are forecasting hyperinflation as a result. Clearly the Fed does not want that—in a hyperinflation the very fabric of civilization is destroyed.
The Fed is playing a dangerous game, and I find it impossible to forecast when and if the turn—from deflation to hyperinflation—will occur. In 2009, the forces of deflation will not be overcome easily—and we can only hope that they are not overcome easily, since hyperinflation will devastate the economy beyond what we can imagine. Here is one warning—if hyperinflation visits us, the current bull market in treasury bonds will turn out to be the mother of all bubbles. Be on the alert for the turning point in interest rates.
Healthcare: 2009 will represent a transition year; increasing numbers of individuals will begin to realize that the healthcare model that is in place—take no responsibility for your health, eat bad food, don’t exercise, and then expect to get patched up with a pill or surgery—is no longer sustainable. In a national conversation—forced on us by the economic depression—we will hear about reducing entitlement spending.
Although we will begin to realize that there is not an unlimited amount of funds to be spent, in 2009, reactionary forces—those are the forces that demand that government covers everything in healthcare for everyone—will still be on the ascendancy.
Economic Ignorance—Again 2009 will mark a transition year; there will be growing interest in conversations about the proper roles of the Fed, of government, and of free markets. As with healthcare issues, this conversation will expand; but the forces of ignorance will prevail. For now, Keynesian nonsense –namely, that you can spend yourself to wealth—is on the ascendancy. Individuals completely ignorant of economics and history tell us time and again that we should not repeat the errors of Herbert Hoover; then they go about replicating the policies of Herbert Hoover and Franklin Roosevelt.
In a recent interview, Alice Rivlin, former director of the Congressional Budget Office, was urging consumers to spend. “It doesn’t matter what you spend it on,” she said. The newest Nobel laureate in economics, Paul Krugman, writing in the New York Times took the position that states should not have to keep a balanced budget. “The nation,” he said, “will be reeling from the actions of 50 (the governors of each state) Herbert Hoovers.” When my twins were nine years old, they read Richard Maybury’s Whatever Happened to Penny Candy and they already understood more about economics than Rivlin and Krugman. There will be no end to the economic crisis until this Keynesian nonsense is repudiated in the same way that medicine has repudiated bloodletting.
Jeff Macke takes on the “too big to fail” nonsense that we hear our “leaders” cite:
When we look back on 2008, statements such as “(company XYZ) is too big to fail” will be every bit as absurd as anything from the Great Depression. The very idea of the government being powerful enough to “save” corporations in a recognizable form to the benefit of shareholders is simply asinine. It’s roughly the same as declaring a person “too important to die.” Regardless of whether you are flesh and blood or an obsolete organization, there is no bargaining with death. It comes to us all; even if you have the ability to print your own money.
Winston Churchill said, “Some regard private enterprise as if it were a predatory tiger to be shot. Others look upon it as a cow that they can milk. Only a handful see it for what it really is—the strong horse that pulls the whole cart.” The good news is that Churchill’s “handful” of people has shrunk to such low levels, that the numbers can only grow from here.
Conclusion: Did you ever hear this story?
There’s a story about a man who falls over a cliff, and on the way down he grabs hold of a root. He’s hanging there by this root, and he’s hollering to high heaven, “Help me, God! Please, help me!”
And God says: “Sure, I’ll help. What do you want me to do?”
The guy says: “Save me. Get me down from here.”
God says: “OK, trust me, and let go of the root.”
After a pause the guy says: “Is there anybody else up there?”
Collectively, we are hanging on to a lot of false beliefs and hoping that we can be saved without letting them go. Fortunately, for the future of the planet, this is impossible. 2009 may be treacherous to our finances, but each of us can still be a “beneficial presence” in the world as we extend a spirit of kindness and generosity to others.
When false hope is gone, real change can begin.