There have been a lot of stories within the stories that may be easy to miss - optimism is a very powerful force and it can work as a filter not only for the speakers but also for the audience.
Take for example this week's unemployment report. Broadly, total unemployed reached a 25 year high. However, because initial claims were down and it was a brutally slow news week, the focus was on the improvement in initial claims. You could say that it just meant that the market had already priced in the figures. I think the market was completely asleep before and after the figures came out, so it would be hard to say whether or not the news was priced in.
I think there are other likely events this year that will be negative news catalysts that will pressure stocks.
First of all, a retest of the 750-800 range on the S&P is pretty much universally expected. What will people be saying when this happens? Assuming it happens after a run to 950-1000, we're talking a 15-25% high-to-low. That has got to knock the wind out of anyone's sails for a day or two, and every time we get whacked like that (Sept 29, Oct 12, Nov 19 I think were the dates this year), somebody new calls their broker and says, "get me out." And once you get out, there really is no longer a sense of urgency to get back in. What you feel is a tremendous weight lifted off your shoulders. It is a feeling you could get used to, and it gives you a lot of objectivity that you simply couldn't have when you were betting your life savings on the stock market (real estate market, etc.). We break 800 again, and I don't see how we can muster enough confidence to will this market back up again.
When we figure out that you can lower mortgage rates to 100-year lows and it has little impact on property values because the people who are underwater, who need it the most, cannot afford any mortgage, because in the process of failing to pay their mortgages, they have already neglected the electric company, their credit card companies, their car payments, etc. They need a "clean slate" (aka the type one gets from bankruptcy), not a quick fix. The program will appear to be working, as refinance applications will rise and there will be reports about how many people have taken advantage of low rates. And there will be stories about first-time buyers who can afford a house for the first time because the decline in market prices and interest rates has finally put home ownership within reach for them. However, as housing continues to decline, these folks will face the emotion of being underwater and feeling like they should have waited, and they'll see so many others not paying their mortgages getting handouts from the govt. Then there will be the majority of home owners - those that have jobs and savings and can afford to pay their mortgage will hoard the supply of new mortgage funds, because they will be the preferred customers from an underwriting perspective. Ultimately, completely new programs will be developed to prop up home values. We may see some completely different programs this year or not, but what they have going so far is not going to work for all the above reasons.
Right now the Fed has a Zero Interest Rate Policy (ZIRP). I'll bet you a cup of coffee we have near zero percent mortgages before it's all over. It's very simple, really: if you believe the Fed's current actions will stave off deflation, then they will stop expanding programs ad nauseum; however, if you believe that the Fed will do "whatever it takes," and you also believe that the Fed's actions won't be enough, then "whatever it takes" includes taking mortgage rates to zero. I'm sure you've heard the many talking heads say that something has to be done to stabilize prices ("that's where it all started and that's where it needs to be fixed"). As long as the recession continues, they'll get crazier and crazier in terms of what they'll try to do to stop the bleeding. What would come after zero-percent mortgages? Why, the government purchasing homes directly to suck up the excess inventory (or simply knocking them over) of course. I think the term for this is "quantitative easing." If they could apply ZIRP and quantitative easing to solve liquidity challenges and lack of credit in the marketplace, why wouldn't they do the same for home values? [PS I like the "knocking them over" plan better. It will create jobs and sop up the glut pretty quickly. Then the builders could go back to building...]
I also think that this year will afford investigative journalism time to piece together the story as to why the economy went from "so great" to so terrible, so quickly. The SEC's internal investigation into the Madoff case may be the catalyst. For now, we can blame Bush and his team - they're easy scapegoats since they are on their way out. Certainly, they provided their share of botches. However, when you think about the economic stimulus of the war in Iraq, the creation of 100,000+ new jobs creating the TSA (not to mention all the make-up, nail files and shampoo and bottled water that people still have to throw away and repurchase at airports), I think you can chock up a whole bunch of silent stimulus that forestalled the recession. The biggest mistake that Bush made was to not appreciate the inevitability of the situation during the recession earlier in this decade. But I digress somewhat. At some point there will be a tell-all on what was known, and when, over the last year, and the smart and dumb moves that were made. When the Dateline audience starts hearing that maybe the government didn't really know what they were doing, it will provide a nervous awakening that "Joe the Plumber" had previously not contemplated. There remain a whole bunch of folks just doing things the way they always did, listening to Charles Schwab in his commercials tell them to stay the course. A Water-gate sized story is in there somewhere, and somebody will find it, and the media will love it.
Bottom line, a perception that there was either government incompetence or, worse still, a cover-up, will shake the foundation of this recovery and ultimately contribute to it's delay. It is also likely to create a wave of completely new thinking and ideas in terms of regulation and viable solutions.
People have developed a severe lack of patience over this consumerist era. "What have you done for me lately?" is a common tone of interaction. This recovery is going to take longer than the average person thinks it will, and that will wear them out. And they will take it out on politicians and regulators that told them 2009 was the year of the recovery. The more optimism is encouraged, whether the motive be genuine or not, the harder the fall from optimism will be, and the more blood the masses will seek. Only after this cycle ends with the consumerist seeing themselves as part of the problem ("maybe we should have given New Guy more time") can we begin to cleanse this immediate gratification element from the collective public psyche.
I think I mentioned before, "under-employment" will be the trojan horse of "unemployment that is not as bad as it could be." We'll have a good opportunity in the next few months to frame the unemployment data as not-so bad, what with the extremely low expectations that we've set. However, the proof will be in the pudding: (a) disposable income will shrink faster than unemployment grows, effectively meaning incomes are shrinking and (b) consumer spending will continue to decline no matter what they do about home values or mortgage rates or anything else. A huge amount of money left the stock market for good - the 50+ crowd cannot afford to get back in, now that they have seen first-hand that it could get whacked in a way that never recovers. [OK, some will, and they'll take on more risky bets to try to earn back what they lost, which will prop up volatility, but ultimately they'll lose that money, too.] The answer to the undercapitalized next decade's retirees? Working harder and saving more has always provided a pretty good return on assets. Wealth creation for this crowd will come from spending less, saving more, working longer and being grateful that things aren't worse. And when they start understanding that they can impact their asset growth faster than any money manager ever could, by simply being smarter about how they spend their money, they'll be done with the markets for the rest of their lives. By the way, this is the baby boomers we're talking about, so it is a very disproportionate amount of money that will not return to the markets. The only upside to this is that this mass exodus was going to happen at some point as this population base matured, so we'll be better off when they are all on social security.
The March Fed economic data will tell some of the story, but it won't be until June that there will be no denying the situation. And when folks start framing the recovery as "some time in 2010," we will have chipped yet another piece of optimism away.
Another good storyline for 2009 will be how many jobs we've lost as a result of the auto industry slowdown and the federal intervention. I never once heard anyone on TV say that we'd lose X jobs even if we give them the money, but when the Treasury put conditions on those loans, I heard those conditions translate into lost jobs in the industry. If they shift those jobs to green specialties, there is no skills overlap that will allow the auto worker to migrate to this new paradigm.
One of the simplest things the Govt could do is to give "vouchers" for the new low-wattage flourescent bulbs to everyone, and then give grants to the companies that make incandescent bulbs to get out of the business, or at least give them an incentive timetable to reduce production. Rewarding energy efficiency while accelerating the advent of new technology (and therefore the destruction of old technology, which creates consumption) sounds like a good approach to spending our tax dollars while stimulating the economy.
Schools are another interesting change that are likely to come. As states cut their budgets on everything, schools will be far from exempt. And with municipal bonds out of favor and likely to deteriorate, long-term funding that would forestall the inevitable won't happen. The cycle of lower property values and higher property tax rates to make up the difference will break the backs of the property owners and the state budgets. The solutions are on two ends of the continuum: either the Fed starts providing a massive amount of funding to public schools nationwide (not a bad idea) or the states start outsourcing the education process by providing vouchers or selling public schools altogether. 2009 will be the school year that they cut all the fat; 2010 will be where they have to start cutting to the bone.
The 401(k) match will start to become an anacronism this year. And the reduction or removal of match will add to the current disincentive of a lack of a return over the last 10 years. That will also impact 529 plans. Another example of money leaving the market in a self-feeding spiral.
Some time this year you'll hear the term "the new protectionism." We bail out our auto industry, they bail out theirs. Immigration goes down (because we have no jobs) and they'll do stories on how effective the new border patrol programs have been, which will be perceived as protectionist. We'll discourage exporting jobs (that's old news, it just hasn't been called protectionist, exactly). "Buy American" will come back as a rallying cry as we try to will ourselves out of the recession.
I made myself depressed writing this...
Joe
