The Economy Guy

Oil and gasoline went sideways – more or less.  Gold fell again – ending at $705/ounce – still a fantastic buying point.

My gut feeling is that this is a major correction in the bear market, and my reasoning is that the economy is just starting to fall over the cliff – and all the bad news is not in yet – and we cannot see the end of this crisis yet – and there is no good news yet.  All those things say that the bear market will continue as the bad news rolls out.

However, markets do not go in straight lines.  They go in fits and starts (2 steps forward and 1 step back) – and it doesn’t matter whether the major trend is up or down.  Take a look at any historic Dow Jones Industrial chart, and you will see what I mean.

Another interesting phenomenon was the BOND MARKET.  It was foreshadowing the stock move way before it happened today.  And it confirmed the movement by having a massive movement up in interest rates during the stock movement.  This is classic for the market conditions we are in right now.

Unique to today’s markets, the US Dollar collapsed when stocks soared in the afternoon.  I’ve been watching this phenomenon for the last month, and had concluded (and explained) that money was flowing to the US Dollar for two reasons.  First, it was a safer place for money than other currencies, and second, that currency swaps were being unwound, and money was flowing to the US Dollar and Japanese Yen.

Based on these observations, and my guess that stocks will continue going up for the near term, I predict that the US Dollar will continue to lose ground (against the Euro and most other currencies) during this same period.

Foreclosures – 279,000 homes got notices in October, and 84,000 properties were repossessed.  The worst states were Nevada, Arizona and Florida.  It is anticipated that there will be over 1,000,000 bank owned properties “for sale” by the end of the year.  This is VERY BAD news for the market.  Please keep your eye on the housing market ball.  All the problems we are having with the financial sector are driven by the housing market meltdown.  As long as housing prices continue to fall – and they will continue to fall as long as there are more houses for sale than people want to buy – the toxic mortgage securities will be impossible to value (value in the future), and therefore will continue to provide RISK in our financial institutions.

Trade Balance– September was much better than previous months.  Why??  Because oil has come down in price, and we just don’t pay as much to overseas producers now.  The bad news is that the trade balance was a negative $56.5B, and 2008 could be a record trade deficit (or maybe equal to last year – the highest year ever).  The trade deficit with all those dollars coming home to America was the cause of the housing bubble money, and this issue must be addressed to prevent a future episode.

Our recent financial crisis was caused by toxic mortgage securities catching a bunch of banks around the world holding them, and NOT being able to value them.  That stopped almost all lending and caused a massive increase in LIBOR.  This scared the FED and Treasury into asking for a $700B “Bailout” of those financial institutions.

However, time has marched on.  What do you see happening now all around you?  People are scared, and they are definitely not spending the same amount of money in stores, restaurants, travel, etc.  That is causing a bunch of companies to start layoffs and even going into bankruptcy (like Circuit City or even GM possibly next year).  In my opinion, this “secondary” effect of the mortgage meltdown is pushing our economy from a recession into a depression.  And worse, it’s just starting.  Did you see the major announcement that the Mayor of Chicago said today?  He said that the big Chicago employers told him that there were going to be BIG layoffs starting this month in Chicago and that’s just the beginning.  Is Chicago unique?  Nope – it’s typical of almost all cities across America.

So the question for you to discuss tonight isn’t “What’s the difference between a recession and a depression?”  It is “Will there be a third phase of the depression getting worse in 2009, and what could push it in that direction?”