The Economy & The Markets – What’s Next

Is the recession over? Are we going to see another major financial institution go under and drag down the market? Are there more “shoes to fall” in our fragile economy? Are we out of the woods yet? Are the markets headed up, up, and away? What about inflation? What will the commodities and metal prices do next year?

All good questions, being asked by our members and others. We have all seen our investments go down, house prices fall dramatically, and business way down in the past 12-months. So, let’s look into our crystal ball and see what’s possibly next on the horizon and past the horizon:

Is the recession over? Yes, by this December, we should be out of recession. We should see some growth next year; The first half may actually be stronger due to two factors: (1) The government stimulus has still not worked through the system; this will kick in early next year; and, (2) The inventory rebuilding has sparked a major up tick in manufacturing activity in the past few months, this will continue and may accelerate in the next 3-9 months. All these factors should be good news for the market and for our mfg and metal casting businesses.

Are we going to see another major financial institution go under and drag down the market? Probably not. I think, the worst of the financial storm is over. It was a “level 4 hurricane” storm that no one saw coming. But when we look back, all the signs were building but were ignored: low interest rates for a long time + push by government to lend to people to increase home ownership + really shady lending practices (to get people into mortgages that had negative amortizations and artificially low monthly payments). All this build up into a huge consumer debt bubble. People borrowed against their home and spent the money on whatever to live. The bubble was building up for years – probably ten years before it finally burst when too many loans were going into foreclosure and the institutions holding these bundled loan packages had leveraged 40:1, hence the collapse of such places as Lehman brothers and bankruptcy filings of Washington Mutual and Countrywide Credit. This was the so-called sub-prime mess. I think, we are past that. The government has flooded the system with liquidity and taken steps to manage the failures. (There are a plenty of failures going on every week but they are on a smaller, controlled basis ie the banks that are too big to fail are not going to fail given the current measures in place.)

Are there more “shoes to fall”? Are we out of the woods yet? There will be some commercial bank issues as the foreclosures in office and commercial buildings go up but this will be manageable. So, we do see light at the end of the tunnel. Next year should be much better than the last 12-months.

Are the markets headed up, up, and away? In the near-term no but longer-term yes. I believe, we as a nation and certainly as a media are way too negative. So, if you are a contrarian, that’s good news! Too many people are yelling ‘fire’ still when it comes to the economy and the markets. So, I believe, we are sideways to slightly down short term and higher in 2010. Technology will be back in vogue and more importantly in demand such that earnings will be strong and profits up.

What about inflation? Most of the media and many of the pundits are worried about the fed flooding liquidity leading to huge inflation in the future. I say, probably not. The only way that’s going to lead to inflation is if people barrow like crazy and lenders lend like crazy…we all know that ain’t happening for a while, a long while. So, money sitting in banks is not going to cause inflation. Federal spending may cause inflation but if the consumers and corporation are cutting back and fed is spending, no inflation.

What will the commodities and metal prices do next year? If the dollar continues to fall, which there is a good chance, then the gold and oil prices will trend up but I do not see spikes up in commodities prices like we saw in 2007-2008. Demand in China and India will continue to push prices of raw materials higher but only speculators will cause the prices to spike up AND down. So, stable to somewhat higher.

Bottom Line: Demand worldwide will pick up leading to good economy here and decent markets everywhere.