Now, as we head into a New Year, there could be some buying in January given the much anticipated transition of power in Washington, as President-elec...
Now,
as we head into a New Year, there could be some buying in January given the much anticipated transition of power in Washington, as President-elect Barack Obama takes office on January 20. There is so much hope resting on the shoulders of the new Democrat administration to turn the economy and problems around, yet Obama will face numerous serious challenges, including factors outside of the United States that are not within his control. Investors may be optimistic at the beginning, but we could see more market selling once people realize it could be a long and deep recession for America in 2009 and things could get even worse.
To his credit, Obama is enthusiastic and energetic and believes that he will turn things around. I believe it will happen, but feel it could take longer than a few quarters. Turning a massive economic machine around takes time. In addition, global economies must also improve in order for the U.S. economy to expand again.
Soon-to-be-President Obama proposed a two-year $850-billion economic stimulus program to spend significantly on infrastructure to create jobs and drive the economy. The plan makes sense, as it will complement the other financial incentives in place as well as a major cut in the fed funds rate to the zero to 0.25% range, but even the impact of the low rates may not be felt for several quarters at least. The cheap funds will make it cheaper for corporations to borrow and lower financing costs. We have never seen interest rates this low, so it will be interesting to see if it helps. Remember that Japan had a zero percent interest rate policy during its previous recession and it took years for that country to rebound, so we expect it will be a difficult path.
In my view, the Fed needs to try to halt the economic slide. The historically low record rates will be an incentive for consumers to spend. Low rates will also be used to try to improve the metrics in the distressed housing and loan markets. Yet I believe it will take some time for the low rates to translate into more spending and economic growth. The weak jobs market and declining housing wealth will make it difficult for consumers to want to spend.
I wonder if the reduced interest rates will be enough to get things going. I believe that the government will need to do more in order to try to sway consumer confidence and drive up spending. Reduced interest rates will not be enough. I expect to see more financial incentives down the road.
My gut feeling is that the worst has yet to come. Things could get worse for the economy before we see a reversal. I believe that the decision of the Fed to lower rates to zero clearly indicates that the U.S. economy is in far poorer shape. The reality is that consumers are holding back on spending and this is causing an environment of declining prices that could lead to a climate of deflation. The Commerce Department reported that consumer spending fell for the fifth straight month in November.
What makes deflation a worrisome issue is its negative impact on the economy. Severe deflation jumpstarted the Great Depression in November 1929 and some pundits have said that the same could happen going forward if the world economies fail. The fear is that deflation will make consumers hold out on purchases and wait for lower prices. And if this trend continues, spending falls along with corporate activity and this could lead to more slowing. The fact that consumer spending has been on the decline along with two straight months of negative consumer prices is concerning. This could mean more hard times for investors going forward in 2009.
And what also makes the current economic situation worrisome is the poor condition of the many sectors that are suffering under a burden of declining revenues and mounting debt. The U.S. government has already earmarked $700 billion in help, but that apparently will not be sufficient given what we are seeing.
The financial sector has received hundreds of billions in help and the auto sector will receive about $17.0 billion in emergency loans.
And now some of the biggest U.S. property developers are seeking financial help to deal with about $160 billion in maturing commercial mortgages in 2009. In my view, it's the same old story. These property developers had some amazing times and made tons of money. Their executives have made tens of millions of dollars in perks, but now times are bad and they want some help to dig them out of the mess. But where does it end? Could retailers be next in line for the handouts? Wal-Mart Stores, Inc. (NYSE/WMT) employs over two million people and, with retailing slumping, maybe they will be next. The reality is that the government should be careful with handouts, as the treasury should not in the business of printing money for corporations that may be struggling.
Tomorrow, I'll continue with the third part of my 2009 forecast.
Profit Confidential
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