Despite all the media coverage pumping up the economy, the fundamentals have not improved. In fact, it's worse! But because 401k accounts have recovered somewhat in the last 9 months, the perception is that the recession is over. Or is it? The stock market has recovered by more than 50% since the March 2009 lows but that doesn't mean we are out of the woods. Quite the contrary. Chances are that the next leg down will be dramatic and painful as the stock market resumes its long-term downtrend. I expect to see new lows.To give you some perspective, the stock market rallied (since March 2009) for only two reasons and had nothing to do with fundamentals. First, stocks don't go down in a straight line. Short sellers always take profits on the way down which drives up the markets temporarily. Second, the effects of the dollar carry trade created demand for higher yielding assets. Money is still very cheap and easy to borrow. Investors from all over the world are borrowing dollars at near zero rates and investing elsewhere (i.e., stocks) at higher returns. Once the shorts return and the dollar carry trade unwinds, we could be in for some turbulent times ahead.
For most of 2009, we have been living in a fake economy. Demand for houses and automobiles have been driven by ridiculous government bailout programs such as the Cash for Clunkers and the Federal Housing Tax Credit program. The Cash for Clunker program actually hurts more people in the long run as car buyers took on even more debt trading in a vehicle that had a smaller loan balance or none at all. How does taking on more debt help anyone during these unstable times? Similarly, the $8,000 Federal Housing Tax Credit is nothing more but an indirect scheme to help the crippled banks. The banks are desperate and they are doing everything possible to get people to sign up for new mortgages. Again, how does this program help solve the credit crisis? It doesn't. When all this fake demand goes away, you will see that the economy will continue its downward spiral.
I believe the catalyst for the next downturn will be the bursting of the commercial real estate bubble. Just like the residential housing where homeowners were overly leveraged and could not service their debt. Commercial real estate is starting to fall apart as more retailers, banks, and other companies go out of business leaving behind a huge number of empty office buildings with no renters. These commercial properties were overly leveraged as well and could not be refinanced due to falling values. Sound familiar? This next leg down is going to take out even more banks and put hundreds of thousands more people out of work. And where are these people going to find jobs? Nowhere.
Speaking of jobs, the unemployment effective rate (U-6), currently at 17.5%, will continue to rise in 2010. Companies have no reason to hire when sales are deteriorating in most industries while the outlook remains bleak. I expect to see many more big corporations to fold and file for bankruptcy accelerating the pace for unemployment filings. Without jobs and people spending, a truly sustainable economic recovery is impossible especially when 70% of the U.S. economy is based on consumer spending.
The outlook for 2010 is grim and gloomy. With more bank failures coming, retail stores folding, accelerating home foreclosures and job losses, an economic recovery is unlikely. It doesn't look good for the year ahead. Think twice before committing more money into the stock market for 2010.
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