The Economy Guy

Stocks showed their optimism again – the first trading day of the year.  This is a very positive sign for stocks.  This will be confirmed or not confirmed on the last trading day of January – let’s wait and see.

Bonds continue to increase in interest rates rapidly.   Gold and the Dollar are going sideways.

Oil and gasoline continued going up on Middle East tensions.

Predictions for 2009

Background Information

The 2008 economy feeds into the beginning of 2009 with a dismal GDP, unemployment, and lack of a solution for the housing meltdown.  In addition, President Obama will be inaugurated in January 22, and he will implement a program that we are beginning to understand, and this program will have a direct bearing on some measures of the economy.

What is most interesting in trying to predict the future is the “unknowns.”  These are things that could happen, but you don’t know they will happen.  I call these “wild cards.”  I will talk about some of these “unknowns.”

I will go through each of the key economic indicators that I report on each day, and give you my prediction.

In my opinion the economy is going to continue to contract throughout 2009.  Perhaps it might stabilize in the 4th Quarter.  The key driver in 2009 will continue to be the housing market.  The key measure of the housing market is the median price of houses in a given area.  While real estate is always “local,” I will continue to report on the total US picture as a measure of what’s driving the overall economy.  We might see some few “local” areas of the housing market stabilize – and that will be a very positive sign for the future.  The reason that I choose the housing market as the key driver of the economy is that the banking sector still has tons of bad mortgages, and could be getting many more bad mortgages as people walk away from their loans.  The falling housing prices put downward pressure on these “bad debts” held by the banking sector, and the direction will be downward throughout 2009.

We will also see unemployment increase throughout 2009, and GDP continue to be negative (with the exception of the 2nd Quarter which might turn positive from an Obama stimulus package.)  The commercial real estate sector will significantly decrease in value as stores shut, offices close, and factories quit.  Inflation will continue to be “under control” as far as the CPI measurement is concerned.  The government will “print” a ton of money, and this will have a future inflationary action.

Dow Jones 30 Industrial

The Dow Jones 30 Industrial (as a measure of the overall stock markets) will have a downward bias throughout 2009.  One of the actions anticipated from the Obama Administration is a significant ($1Trillion??) stimulus package.  The anticipation of this stimulus will cause the market to start rising at the end of the 1st Quarter, and have a run up in the 2nd Quarter.  The 3rd and 4th Quarters will fall back into the gloom of bad economics as the stimulus package dissipates into the economy.

2009 will end with the Down Jones 30 Industrial Index being more than 1000 points lower than it is at the start of the year (8776).  High volatility will continue to provide the action for the traders and hedge funds.

10 Year Treasury Bond

The FED has stated that they intend to keep interest rates low for a considerable amount of time.  I think Fed Funds interest rates will not be changed anytime during 2009.

The 10 Year Treasury Bond will fluctuate, but should stay within the range of 1.5% to 3.0%.  If inflation starts to show its ugly head, the 10 Year Treasury Bond will soar to 5%.

The Euro

The overall long term trend of the Dollar against the Euro is downward.  A recent rise in the Dollar was caused by the panic of the world’s economic condition, and a rush to “safety” as seen as the Dollar.  While the Euro is not the strongest currency in the world, and has its own weaknesses which could become apparent during 2009, the overall trend of the Dollar against the Euro for 2009 should be downward.

I expect the Dollar/Euro ratio to be near its all time low of $1.60 by the end of 2009.

Gold

Gold has performed very well in 2008, and will continue to perform even better in 2009.  Gold is not only a place where people afraid of inflation place their wealth, it is also a place where “safety” is sought in times of great uncertainty.  We should be having more uncertainty in 2009 in terms of world stability.

I believe Gold, while fluctuating significantly during 2009, will end 2009 above $1200/ounce.

Oil and Gasoline

Oil was an amazing commodity in 2008.  It made a lot of people very rich during the year.  2009 will be no exception.  I firmly believe that the oil and gasoline markets are manipulated by speculators, and this will provide the volatility.

The continued decline in the world’s economy has cause oil prices to decline even in the face of declining oil supplies.  2009 will continue to show the declining economic conditions, and oil should continue its decline.  Instability in the Middle East if even sensed, would cause a significant increase in the price of oil.  Inflation would have the same effect.

Oil is extremely hard to predict.  I believe that oil will fall as low as $28/barrel, and rise above $60/barrel during 2009.

Wild Cards

What could happen in the world that would cause the markets to go nuts?  War, terrorism, natural disasters to developed countries, as well as more easily predictable events such as national defaults.  The results of these events on the markets is fairly predictable.

Anything that slows an economy would have a negative effect on stocks and oil.  War and terrorism would have a positive effect on gold and the Dollar.  

Another wild card that cannot be overlooked is the possibility of a default in the derivatives markets.  Credit Default Swaps have been resilient in today’s turbulent market, but future bankruptcies could bring that market down.  The failure to balance the books at the end of each day in the futures markets could be disastrous to all world economies.

Here are Today’s numbers:
Dow Jones 30 Industrial – 9033 (down 258 points)
10 Year Treasury Bond – 2.42% (up 0.17%)
Euro – $1.3904
Gold – $880 (down $5)
Oil – $46.34 (up $1.74)
Gasoline – $1.11 (up $0.05)