— “The Financial World According to Inya” Column,
by Inya Ivkovic, MA
Forecasting is an ungrateful job that has forced many of us to eat our fair share of humble pies, particularly concerning the past two years. Not to excuse forecasters coming up with more misses than hits, but people should still bear in mind that forecasts are only forecasts that do not guarantee certain events will transpire in any shape or form. No doubt about it, the past two years have been humbling for most of us whose job involves economic forecasting. One possible explanation, which, again, is not to be confused with an excuse, is that the economic events of the past two years did not follow the usual recession/recovery pattern.
No one can say that economists have done a splendid job forecasting the chain of disastrous events that brought the U.S. economy to its knees. This is perhaps why, going into 2010, forecasters are careful not to fall again into the old complacency trap that landed us unprepared for two years of an intense recession. This time around, the focus is on collecting all the data and having an open mind when analyzing it in order to make responsible, educated guesstimates. Why an open mind? Simply, the Great Recession had little in common, if anything at all, with the other recessions occurring since World War II.
In the New Year, I expect the recovery to revolve around jobs, or huge lack thereof. I expect the labor market to remain depressed in 2010 and beyond, hovering next year around 10%. Since the current recovery is a jobless recovery, it will likely produce only a slow and modest economic growth rate, the pace of which is likely to slow down to a range between 2.1% and 2.3% on average for all of 2010.
Government indebtedness remains a huge concern. I do not see this Mount Everest moving without serious pain that no one appears to be in any kind of condition to take on now; which, nonetheless, has to be endured. Although Washington and the Fed have promised to start unwinding the balance sheet in 2010, I do not see any real evidence of preparation for any such dramatic exit strategies. So, I believe budget deficits and huge national debt will continue to plague the economy for year to come, not the next 12 months.
What made the Great Recession so different was the bursting of the credit bubble on a global scale and what makes this recovery so different is that it is occurring in a jobless environment and amidst continuing credit collapse. But because things are not as dire as they were in the 1930s, we are calling this the Great Recession, despite it having quite a few “hallmarks” of a bona fide depression.
Don’t forget, a depression is in essence a credit event that’s really, really bad. Since 2007, as hard as it may be to believe, we have actually lived through one. This downturn is also far from over; at least until household debt/credit versus disposable income reverts to some mode of a sustainable equilibrium.
On the interest rate front, I expect the Fed will start implementing restrictive monetary measures, including rising interest rates, in the second half of 2010. However, I do not expect this to be a dominant factor next year, because the key lending rate’s starting point is at near-zero.
As for the fate of the U.S. dollar, although it gained 16% from January 1, 2008, to March 5, 2009 — during which period global risk aversion has mutated into a paradox whereby the currency of a country largely responsible for starting the credit avalanche was perceived as the “safe haven” — I do not see this concept renewed in 2010. Actually, I believe the road ahead for the greenback will be rocky, as it loses its place at the top of the food chain.
In the past year, Lombardi Financial editors and analysts have written extensively about price levels, debating deflation, stagflation, inflation, hyperinflation, etc. To cut this very long story short, I believe price levels are likely to remain deflated during 2010, having in mind the magnitude of the credit and asset bubbles and the ripple effect of their bursting at the end of 2008. However, I insist on keeping the government’s balance sheet in the equation, which I believe is likely to bring about inflation, if not hyperinflation, into our lives in the longer term.
Finally, I believe China and India’s appetite for basic materials and precious metals is not likely to subside in 2010, which will help sustain the positive momentum in commodities and will help the manufacturing sector deal with its excess capacities and inventories. However, the domestic demand is still expected to remain low, driving profit margins in many sectors, particularly consumer goods and services.
In conclusion, I believe that overall recovery will be a slow and painful one, because the U.S. economy is still short about seven million jobs since the recession began, but I do not believe the risk of a double-dip is likely either. Year 2010 will focus on safeguarding capital and on generating income. Our focus will be on defensive investment strategies and weighing carefully how much risk we are willing to take in exchange for excess returns. Additionally, we advise our readers to be better diversifiers, focusing more on how to leverage more appropriately exposure to commodities and equities versus fixed income securities and cash.