Market Direction–Through A Glass Darkly

Predicting the directi0n  of the stock market and the economy is both an art and a science.  Even those like Bernacke who have made a career of studying past markets only do so to enhance their ability to project what is around the next corner in the market.   The exalted one here can’t claim any of the credentials of those learned folks but some things do come to mind when trying to figure out what the future holds for our stock market and the economy.   Where will it be going 6 months from now, 18 months from now?  Those who can discern that conundrum will be the winners; those that miss the mark will wish they had stayed home and not gone outside to play with the big boys on the street.

There are some positives and naturally a few negatives that we all have to reflect upon and crank into the gray matter to see what those active littel neurons and axons up there produce.   The positives aren’t that many at the moment.  The biggest one is the American people.  They have proven on a number of occasions to be very resilient and full of tenacious fight to make things better.  That attitude is critical and while you can’t tote up a number on any ledger sheet for it, that emotional stability does always lend itself to renewed growth at some point.  Of course the changing demographics probably has diminished the influence of this positive over the last 50 years but the core of native born Americans is still a force to reckon into accounts.  We do have a tremendous infrastructure in spite of political moans and groans to the contrary.  Of course we have things that need repair and updating but that is always the case.  Considering our size the current repair backlog doesn’t seem out of line.  Very importantly we have a vibrant and productive energy sector.  History teaches without exception that the more energy available to a society and used by a society the higher the standard of living of that society.  You need power to have any kind of economy and lots of it, it needs to be abundant.  We use more energy per capita than  any nation on earth but we also use it at the lowest per capita cost.  We use our energy very efficiently.  That is the fact, not an argument.   Unless we shoot ourselves in the foot our energy abundance gives us an enormous leg up on our competitors around the world.

Now the negatives we face.  Housing will continue to be a problem.  The Sub prime fiasco is mostly behind us but it left in its wake real damage.  Freddie and Fannie are owned by Government, Inc. and only exist because of the billions poured into them.  They are moribund and will remain so for the foreseeable future.  FHA now is responsible for 80% of all home loans being made.  They only require a 3.5% down payment  at most and often it is only 2.5% with special grants.  That is the same formula for failure that was used to create the sub prime mess.  The Alt-A loans and ARMS are looming on the horizon now.  Most of them will be reset in the next couple of years.  Many of those will go into default because the banks at the urging of the government have tighten loan availability.   That will maintain a downward pressure on home prices for a number of years into the future. 

Our major banks are owned by the government and owe the government huge sums of money.  Even with the Fed Funds rate a zero they are traumatized and not lending because of the fear of government regulators criticizing their every move.  They also have their executives under the microscope of Congress for their pay packages and will take no risks you can be assured.  Even if and when the major banks do repay the hundreds of billions advanced to them under TARP it is not at all clear that the money will go back to the Treasury.  Rather Geithner has let it be known that the Treasury will likely keep the money as a slush fund for future contingencies.   Firstly, that is a real negative message saying they think they need it and it only denies the use of the money to reduce the national debt which we desperately need to be doing.

GM and Chrysler are government owned and operated.  The same folks who run the Dept of Commerce, the IRS and the Social Security Administration are now running our major auto industries as a political pay off for the auto unions.  Not a good development and will lead to an ongoing subsidy program in all likelihood for years.  That is not good for the economy.

The Treasury and the Fed have poured money into every nook and cranny of our economy.  The debt is exploding beyond any recognizable precedent.  There is no historical comparison to what they are doing.  Not WWII or the Great Depression or any other recession we have dealt with over the years.  They have borrowed and printed up money.   The Chinese are our biggest creditors at the moment.  They are not our pals.   They can cause real pain quickly by halting their purchase of our Treasury notes and making interets rates rise dramatically in a matter of days.   If the world players do stop or slow their purchases of our debt the only alternative will be to print money and throw it out the Fed windows.  That may happen and will be devastating to our economy.

You have to figure it out for yourself.  There are no easy answers to this one.  There are many more negatives that you know about that weren’t even mentioned here such as TALF, the PIPP program and the taxes that will be increased to pay for cap and tax and the any health care reform.  Those taxes will be killers for entrepreneurs and job creation.   Likely, there will be a statistical recovery this year even but the numbers will not carry much meaning.  The economy will do better but only because of the spirit of the people to adapt and work hard to make things better.  It is hard to see any booms and even little boomlets in the near term.

The Chinese are buying lots of gold.  Ponder what that means.  We still have time to come to our senses and eliminate the ethanol disaster and use our abundant natural gas but will we?   www.olcranky.wordpress.com

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