Insights & Advice


2009—the Good, the Bad and the Ugly

For the most part 2008 was a year of anticipation.
The mainstream financial media and market pundits were forecasting a possible economic slowdown, while predicting a pullback in the stock markets and maybe a rough patch for housing and a few financial institutions. As the year went on however those forecasts grew ever gloomier and by the fall, well, we all know now how wrong the experts were.

Yet, it is one thing to forecast a recession and quite another to live through one. This year we get to experience what the Federal Reserve now fears will be a deep and ugly recession with unemployment continuing to rise into 2010. That was their latest discussions according to the minutes of the Fed’s December board meeting. The stock markets, if you believe the market bulls, have already discounted much of what we will face in 2009. I disagree (I remain bearish and have been since my first column back in December of 2007). But forget the markets, what concerns me is how you and I will weather this storm.

“Help is on the way,” promised our President-elect a few weeks ago.

In my opinion Barak Obama is the Good Guy in our 2009 story– at least so far. True to his word and campaign promises, a new Obama stimulus package estimated to total almost $1 trillion dollars was presented to the American people yesterday (including a $300 billion tax cut for the middle class). I suspect many Americans will take some comfort in the new administration’s efforts to stave off a more protracted recession. And I do believe it will help but if you are like me you won’t be counting on the government alone. Many of us are already doing the most rational thing we can do to protect ourselves from this downturn. We are saving more and spending a heck of a lot less if the latest numbers from the retail sector are any indication. Therein lies the rub.

You see the “Bad” part of that strategy is that if all of us save, pay down debt and purchase less (which we should) then who is left to buy? Remember, we live in a service economy. One that is highly dependent on you and I continuing to spend beyond our means in order to grow. I believe we will see a clash of two strategies this year.
The government, desperate to jump start the economy, will offer all kinds of incentives—tax cuts, rate cuts, rebates, jobs—you name it to get us to spend (just like they have tried to get the banks to lend). We, on the other hand, weighed down by too much debt, the inability to borrow, fearful of losing our jobs, will continue to keep our hands in our pockets. The result will be like sitting next to a beginning driver with one foot on the gas and the other on the brake.

Now, I’m sure that many of those bright, experienced policy makers that Mr. Obama has brought together are fully aware of this possibility. I suspect there will be many false starts with some things working and others not. It was no different during the Roosevelt Era of the Great Depression. Hopefully, we will get it right and over a shorter time period than it took in the Thirties. But it is going to take a lot longer than many think—at least the next 12 months if not longer. So get set for that kind of year.

Posted in Macroeconomics, The Retired Advisor