Outlook: 2010 Q1 update

New year, new site, new graphs!!!  So much good to talk about, and yet the economy could not be in any worse shape.  Remember those green chutes no one talks about any more?  Exactly where did they go?  It is an interesting balance between hope and expectation now.  Back in the spring, it was all about hope.  We talked about green chutes, things were getting better, and hope.  But now, the Dow is up 3500 points and there are no green chutes, flat seems to be the new green chute.  If we can hold this, things will be ok, or so they say.  Very few expect things to get a lot better from here.  It will be an interesting year, for sure.

So I have updated charts, and put down where I think things will end up in 2 years.  To say I have a rosy outlook would be dead wrong, or at least for the next couple of years.  After that things should turn around... but most will be so miserable by then that they will not listen, nor care.  As with any prognosticating, I will be wrong.  Live with it.  My timing may be off, but the general state of affairs has not been all that off.  As always, make your own decisions, and at your own risk.

Unemployment.  So far this has been fairly easy to predict.  Simply add 0.4% to last months value and that is what you get for the next month.  Worked all of last year, but doubt it will for this upcoming one.  The increase should slow, possibly flatten (I show a shallow increase) and then get back on track after that.  My back on track number is 0.3%/month, but that could go up or down 0.1%/month.  Impossible to say.  The real takeaway is unemployment is not over. You may hear about the census impacting this, but history shows that it is not significant (maybe at most 0.1% for one month) but all of the workers are temp, so you can down play any story on this.  Below is my graph, but remember, this is the low ball number.  For an alternate, check out the U-6 line here.

Inflation continues to be difficult to foresee on a month to month basis, and different folks continue to argue how the number is tracked, and whether or not it is positive or negative in value.  No matter, the main theme is that as long as the real estate market continues to deteriorate, deflation will be hard to argue against.  Toss in consumer debt, if that continues to shrink, deflation is going to be the order of the day (or year).  I am not sure everyone understands deflation, and I cannot go into great detail here, but every time a house is foreclosed on and the bank takes a loss, that is deflationary.  The other side is those that hoard cash and do not allow it to be loaned out (debt deflation) and lastly debt repayment which also destroys money.

So, I will make a guess, but it is merely a guess and not much more than that.  You can see how the number bounces around.

The stock market continues to hold on, and yes, I still am very happy having stepped aside at the beginning of August.  Yes, I missed now about 1300 points of upward action.  Boo-who.  It is slow in developing, but it is long past due to end this bounce and let the true state of affairs lay the cards down on the table.  Can you believe the P/E ratio for the S&P 500 is 40?  Actually, it is not.  As of Sept 30, 2009 results it was 86.34  Historically the median is 15.  Really, look for someone to tell you with a straight face that the market will go higher, or better yet... earnings will skyrocket to lower this formula.  And to be honest, I have now triple checked this number, as even I could not believe it.

And I am happy to say I finally found a site for gold and silver prices (of course I was looking for prices on the US dollar, go figure).  So as the US dollar bounces after dropping since March, and now is on the rise (for 1 month so far) which should put pressure on gold.  As money dries up, so should the speculation on gold.

National debt is on track and the government continues to spend like drunken sailors.  If everyone in the US (including babies!) paid their share today it would be $39k each.  So maybe we line everyone up to pay what they owe.

Average income for each person is roughly $39.5k, and only 60% of people work, for each wage earner the debt is about $79k.  But, back to the debt and its growth.  My projection for the first year is pretty much what is projected by the government, plus a bit extra as another stimulus of some sort is likely.  The take away is I am not getting at all creative here.  Expect some serious pressure come this fall to fix this, which means less government employees and higher taxes.  Obviously this will put pressure on unemployment and consumer spending in a bad way.

And consumer credit continues to shrink, this does not bode well for the economy.  As a quick review, consumer credit are loans not backed by real estate.  To give you an idea, mortgage debt is currently about $14.5 trillion.  My take is that people will continue to shun debt, and that trend should pick up next year as the non-revolving debt also starts trending down.  It will be very hard to jump start an economy if everyone is scared to spend.

I am going to swap from new residential housing figures to existing house data.  Namely given the fact that the new sales make up such a smaller segment of the market and are more volatile.  But rest assured, I will be watching the new housing closely.  The argument is that new housing is where all of the jobs are.  The first chart is sales rates, and unlike the others I am not going to project an expectation, as it would be more guessing than not.  It does not matter to me how many are sold, but more important is at what price.

And here are the prices, nothing spectacular here either.  Prices in theory should fall faster than I put down at the end, but other factors may or may not be in play, namely deflation, so I may be a little too positive on the projection.  If things like interest rates and national credit ratings change negatively, this could tank even faster.  Either way, it is not going to be good.  I do not see any positive signs as what was a sub prime problem that has worked it way to the Alt-A's and is now eating into the low end of the prime market.  Toss in the FHA being in some serious trouble with people defaulting, and it has to continue the downward spiral.

So there it is.  I am not completely satisfied with this, as projecting 2 years out across the board has pointed everything in the same direction, which will make everyone think that either a) I am a complete doom and gloom person, or b) I am simply projecting the past into the future.  I suspect housing hits bottom, but not till the end of 2014, unemployment is a tougher call, but probably 2 years after that, and the Dow Jones should touch bottom in 2014 and tread sideways/up for 5 years.  Shear pie in the sky however at this point.

Keep your money safe!!!  Stocks, bonds, real estate, and anything that depends on a healthy economy is not safe.  US Treasuries, cash, and if you are very brave shorting stocks are good calls.  Don't trust the banks, nor the government.  Both will be hurting for money, and will need to tap someone to fill their coffers.