Economic Doom and Gloom--Where does it END?

I should start this piece by saying I am a natural pessimist. I like to call myself a realist, but in reality, I am a pessimist. The glass is seldom half full in my world.

It has been through this pessimism, however, that I can play out worse, and worst case scenarios, in order to avoid issues that I will face going forward. Often times, I find this to be a survival instinct that has served me well throughout my life. And it is when I least expect bad things to occur, and haven't prepared for them, that the truly bad things in life have hit me hardest.

With that in mind, I have been attempting to boil down all of the noise coming out about the economy, and separate fact from fiction, genuine prognostication from tired, irrelevant talking points, and figure out where things are going, so I can hop off the train, as it heads for the cliff.

Here's where I have gotten to at this point:

The economic downturn still has a ways to go:
Sorry, Charlie. Like me trying to grow grass in by backyard, green shoots have a tendency to get me excited, for a week or two, before dying out in the hot summer sun, or the snows of November and December. I am afraid a Stimulus package (or perhaps even a second one being discussed), can't really change that very quickly. Here are the other reasons I am pessimistic:

a. Commercial Real Estate--this has started to crater. I have read estimates that this could be a multi year bottoming process. And before you start to call me a pessimist, let me know how that Residential Real Estate collapse, which started in 2007, is doing two years later? Still don't think Commercial Real Estate has a 2-3 year bottoming process inherent in it? Then I have some swampland to sell YOU in Florida...

b. Consumer demand/sentiment--People are not making purchases these days. They are concerned about their jobs. They are concerned about their debt to equity ratios. They are concerned about their mortgages. And who can blame them? Despite news that the savings rate has improved and turned positive over the past year or so, there are more than a few good fiscal savings and spending months before we are out of this consumer debt situation. This could take a decade or so of responsibility on the part of the American Family. Let's hope that the economy can stay afloat in the meantime.

c. Oil and Gas--I'm sorry, did I miss some sort of major oil strike, or find recently? Why are people under the impression that oil will be there for the next number of decades at $50-80 a barrel? And since when did we think that the US Dollar, which is the de facto currency peg for oil, would stay strong, in the midst of a lousy US Economy, debt levels over $10 Trillion, and no sign of strength in the economic leading indicators? Perhaps we need to rethink this strategy, and start to figure out how we can really get our dependence on Foreign oil under control. All options should be on the table...

d. Federal Debt--Speaking of Federal Debt, recent public auctions have gone pretty well...for now. This just can't continue indefinitely, and once it breaks, it will break HARD. I'm not predicting a great depression, but if we can't finance our government, we will be wishing for the economic prosperity of 2008-2009 by this time next year.

e. A broken economic engine--I am wondering what we actually MAKE in this country anymore? Perhaps the only good news about a downturn like this is the fact that labor here may become cheap enough that India, China and Brazil send their outsourcing efforts to the US for a comparative advantage. If we are ever in that situation, you know that America's influence in the world will have long since "jumped the shark".

Wow! Depressed enough? Well, let's not get hysterical. Here's a few things to look for, though, to tell us that we have avoided some of this debacle.

What to look for:

a. Consumer debt improvement--There are monthly measures of consumer debt, and I have been paying attention to these, as a measure of financial strength in the private sector. I care more about this than even the US Government's financial situation, because in the end, the US can always float the bonds necessary to keep itself going. If the US private sector has the wherewithal to buy these bonds, then things can't get too far out of whack. But it does mean that SOMEONE has to have the assets on their books to make the system work...

b. Housing to level off--I am glad to see that housing hasn't continued to be in free fall. However, I don't think people's leverage on housing loans has gotten much better in the past year. And I am hearing about all of the predatory loans, and easing of mortgage restrictions coming back into vogue. If we are ever going to have a recovery, home equity has to be the basis for it. People have to feel like their debt burden is manageable, and the home mortgage is by far the biggest piece of debt for most families.

c. Car sales improvement--another sign of improvement would be at least a levelling off of car sales declines. This has been an indicator of a terrible drop in personal wealth. Cars are being sold at below replacement levels, which may not be a bad thing for the environment, but is a terrible thing for our automakers. Perhaps GM can survive, post-bankruptcy, but I'm skeptical. Anyway, even a modest improvement here would be a tremendously encouraging sign.

d. Economic growth--Job Creation--As a starting point, the rate of job losses has slowed. That's good. But to reach at least parity, we need to see about 100,000 job losses a month. It used to be more, but since no one has actually been HIRING lately, a monthly job loss of 100,000 would probably indicate the tide is turning. Sadly, we are 4-5 times higher than that, and most people who have been unemployed, are not getting rehired.

Where will we be at year end?

I love playing prognosticator. As my caveat, please note I am NOT an economist, nor do I play one on tv. My predictions should not be relied upon, but are merely meant for scenario testing, and a means for looking back and making fun of my personal naivete 5 months from now. With that in mind, here we go...

1. Unemployment rate--11%, with an underemployed rate close to 20%--I think the factors I mentioned above will end up really hurting us. States won't be able to close budget shortfalls without laying off workers, and those states that can use fiscal stimulus to either keep some existing workers on the payroll, or boost unemployment payments, will do so at the expense of hiring people for "shovel ready projects". As my grandmother would say, "nah good!"

2. Oil--$85/barrel--why so high, in an economic downturn, you ask? Simple. The dollar will continue to weaken. Auctions will start to fail, and the fed will have to consider raising interest rates to entice interest. Another real deflator for the economy.

3. Health Care? Not happening--This will also really hurt, since people are struggling with the existing health care issues we face now. But it will signal a real shift in economic policy from the Dems to the GOP. I think a second stimulus is out, and Obama will have to start to discuss ways to expand tax cuts, or reign in major spending programs. This will NOT help economic expansion short term, but could be a longer term benefit to the perception of US Debt in the broader markets.

4. Major Bankruptcy filing--I would expect at least 1 major bankruptcy. Sadly, if I have to choose, I'd prefer it be General Motors over AIG. Why? If AIG should fail, we will see what true financial pain is. The financial markets could implode with the fall of AIG, and a bailout of obligations will make our hand-ringing about $160M in bonuses look like a pittance.

5. Conflict with North Korea--This may be inevitable. I am wondering how their recent sabre-rattling ends without military confrontation, unless we work out a deal quickly. Obama's got a challenge on his hands here. Can he get out of Afghanistan and Iraq, and escalate with North Korea? Not likely.

How's that for doom and gloom? Fortunately, these things seldom come to pass all at once. However, I'd like to think that putting them on the table can help to identify what to tackle first, and gives us a chance to react to each scenario the right way, rather than in a knee-jerk fashion, or from the gut.

And lord knows, we have an awful lot of work to do here....