Economic & Market Update: December 15, 2008
“Good Bye 2008!”
Chip Norton, Managing Director of Fixed Income & Economic Analysis
Last Week:
FOMC: Rates to zero
CPI: Down 1.7% on energy price collapse
Dow : 8579 – Finding a level
S&P 500: 887 – Reaching for 900
VIX: 44 – short-term downtrend in place
3-mo TBill: -0.01%
10-yr: 2.13%
3-mo Libor: 1.47%
AAA 10-yr Municipal: 4.27% A bid is seen
Dollar/Euro: 1.39 – Weakness continues
Oil: $42 – Sub $40 hit
Economics This Week:
Date Item Est. Comment
12/23 Final Q3 GDP -0.5% As expected
12/23 Existing Homes Sales 4.93 Mln Showing stability
12/23 New Home Sales 420k Trend still lower
Just a Few More Historic Events!
Since last week’s report not much has happened in the market if you exclude, oh, (i) the Fed moving to zero interest rates; (ii) a $17 billion car bailout; (iii) a $50 billion fraud; (iv)the 10-yr Treasury bond closing in on 2%; (v) the 30-yr Treasury breaking 3%; and (vi) oil hitting $35. But hey, that’s just life in the fast lane in the waning days of 2008. Each week a new and monumental event, and which for now represents the new “normal” – what a commentary!
As a life long market and economic optimist, what I see in my crystal ball is finally a turn for the better. Yes, more companies will fail in Q1, default rates will go up, earnings will go down, new homes sales will be weak, and market volatility will be our companion, but a change is in the air for sure. The VIX is down, inflation is gone, interest rates are low, and we’ve factored into stock prices just about every bad thing we can think of. There’s just no place to go but higher!
The action of the Fed, coupled with what we all know is coming from the new administration (i.e., massive fiscal stimulus) will provide a cushion against almost all shock waves. The stimulus package that’s now being discussed could be as much as $800 billion. Unlike the Japanese government in the early 1990s, which had the money to pull itself out of recession (and also brought rates to zero) but not the political will, our country will not hesitate to open the bank vault early and often. And the massive money printing machine in Washington hasn’t even begun to crank itself up. The good news, of course, is that we can and will inflate our way out of this recession in a zero inflation market (for now). The bad news is that we will inflate our way out of the recession.
It doesn’t take a genius to realize that all this liquidity and all these stimulus plans need to be repaid in the future. We are indeed lucky that the government can essentially borrow for free these days, but that that’s just the interest – the principal payment in the form of new debt, and of course higher taxes, will be back to visit us before we know it. So, we must enjoy the coming recovery while we can, and take full advantage of all that it will bring in equity market returns because we’ll ultimately need those gains to pay our bill for all this stimulus fun!
A Short Holiday Reflection
Ok, I will now take two steps off the soap box. Being the holiday season, we should take some time to reflect on the more important things in life, like our family and our friends – especially those now unemployed. Yes, it’s been a very rough year for the financial markets and all for of our investment accounts, but it’s also been a year in which we remain at war and have thousands of our fellow countrymen serving on the front lines in Iraq, Afghanistan, on the high seas, and in many other places across the globe. We should be thankful that we have those brave folks out their fighting for our freedom and keeping us safe.
The holiday season is about being thankful for what we have and being optimistic about the future. After this past year, there’s almost nothing we can’t handle as long as we keep looking forward. We’ve been through some hard times of late but nothing like the great wars or even the Great Depression. Next week we end the historic financial chapter of 2008, but we also open up 2009 with a clean slate and opportunities in nearly every corner of the market.
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