The last post about the S&P volatility got me thinking about what 2009 has to offer for the stock market (and the economy).  I don’t have a crystal ball, so don’t take what I am saying as gospel truth… just putting two and two together based on information that is publicly available.   

1. The economy will stay in recession for most, if not all, of 2009.
2. Stock markets will continue to have volatility and remain range bound until October, shortly there after the market begins to move out of the range toward the positive in anticipation of the Recession ending in 2010.
3. Due to the massive amount of capital put into the market the dollar will remain weak unless there is a major war that breaks out.
4. The housing market is in the crapper for most of the year, values continue to fall and foreclosures will continue to rise – the fed will take more action to stop the decline in values which will create an environment that will allow for the housing market to bottom late in the year.
5. Unemployment will catch most people off guard and may go higher than 10%.
6. The credit market will being to defrost (and in some regards it already has) which will help the economy come out recession.  The big indicator here will be when Companies start to merge/buy each other out by returning to the credit market.
7. Inflation will be a non-starter in 2009 but will come back in full force come late 2010/early 2011.
8. More bailouts to come…

Again, I have no clue what is going to happen, no one does.  Just experience and a bit of knowledge talking.  

The big unknowns are the global and geopolitical factors.  A war breaking out, a major terrorist attack or huge natural disaster in a major economic zone can change the playing field in the blink of an eye.

There are a number of things that are being said in the news / press / world of blogs that I need to be addressed.

The Stock Market is not the economy

Without a doubt, the stock market is wild right now.  The press gets excited when the wild swing and destruction of capital takes place, but it has happened a number of times in the past – it’s all part of capitalism.  It happened in 2001, in 1990, 1987, early 80s… and on and on and on.

Corporate scandals, poor business practices, and just plain dumb luck will lead to situations like this all the time.  Currently, the financial industry is in disarray but this does not equate to an overall bad economy.  While economic growth is not historic highs it is also not contracting.  As of now, the United States is not, officially, in a recession.

The collapse of AIG, et al., is not a giant conspiracy

I want to know if people are still taking their medication.  More and more there are stories / commentaries that the bailout of AIG is due to the company being a front for the government or that we are heading into a financial dictatorship.

The reason AIG was given what amounts to a structured bankruptcy is quite simply. Their debt, the bonds they offered, was considered to be some of the highest-grade investment vehicles on the market.  Just about every major company in the WORLD owns said bonds and if the assets suddenly became worthless, the potential for failures of companies worldwide was very real.

The $700 Billion dollar rescue is the right thing

The creation of a Resolution Trust is the right thing to do and creates a bottom for the mortgage industry – the mortgages are now set with a value established by asset managers, backed by the government, and create a tradable security for the investment market.    Furthermore, as the real estate market improves the government will be sitting on A HUGE asset bank that goes right back into the treasury.

This is all caused by poor regulation, greed and policy

Yes, policy created this current situation, but it wasn’t Bush policy – it was Clinton policy.  President Clinton pushed extensive changes allowing lenders to distribute and fill “questionable” loans, his legislation – essentially – allowed the sub-prime mortgage industry to start.

In 2002, Ron Paul called for change due to the financial risk, in 2003 President Bush recommended a regulatory overall to prevent a collapse and in 2005 John McCain warned of a financial collapse but NO one acted.

Who failed to act?  Congress.

Bankers utilized the “loose” regulation and got greedy.  They started to issue loans to individuals who could not afford their loans and, next thing you know, boom there is a crash.

This is life…

The stock market, the economy and life are full of ups and downs.  What the government is doing right now is attempting to provide stability to the financial and credit markets, and as the economy as a whole.  Is it what I want to see in a free market society, no?  Is it the right thing to do, yes.