February 10, 2009
He believes the stock market bottomed at the start of 2009, while housing prices will bottom in the fall of this year, just after the peak in foreclosures. Unemployment will peak in the first quarter of 2010, after which the Fed will begin to tighten monetary policy. The write-off process will end in mid-2010.
Monitoring three key variables will show whether his timetable is realistic, Zandi said:
1. The TED Spread. The TED spread (LIBOR rate minus T-Bill rate) measures the general level of “angst” in the financial system. Currently at 100 basis points, Zandi said it should narrow to 50-75 basis points rather quickly.
- Unemployment insurance claims. Unemployment is going skyward, and Zandi assumes we are seeing the worst of it now. His timetable calls for new monthly claims to moderate to 500,000 by this spring, 400,000 by summer, and to 350,000 by the end of they year. “If that does not happen, the script does not hold and the economy will weaken,” he said.
- Consumer confidence. “This environment is disconcerting and incredibly difficult to forecast, as the collective consumer psyche is shattered,” Zandi said. “An element of irrationality has taken hold as consumers are running for the bunkers.” As long as confidence is falling or remains low, the prospects for recovery are negative or, at best, uncertain. Unless key metrics like the Conference Board Consumer Confidence Index improve by this summer, Zandi said, “the 36% peak-to-trough forecast in housing price declines” will be a best case.
Zandi dismissed the risk of hyperinflation as a consequence of aggressive monetary policy for two reasons. First, excessive unemployment will depress wages and wage growth. Consumers will not be spending and businesses will be unable to raise prices. The economy will not get back to full employment until 2013, he estimated.
In addition, many of the recent monetary facilities enacted by the Fed are temporary and designed to become more costly as credit begins to flow.
One good thing to come out of this fiasco, according to Zandi, is that a long-standing debate among economists will be settled. One school of thought contends strong monetary growth is inevitably inflationary and others, including Zandi, believe inflation can be reined in.
“That debate will be settled,” said Zandi.
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