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If 2008 often felt like a nauseating but endurable ride, as government and banking authorities grappled with unseen forces that rocked the investment world, then 2009 will be the year that distress becomes so great that investors actually lose their stomachs.
The past year may have been about the loss of confidence, but the coming year will be about the loss of hope.
It's always tempting after a massive decline to look optimistically at the future and think about what might go right. And in this case, it's true that the next month might bring calm and higher prices to the stock market as investors gaze wistfully at a path ahead that the Federal Reserve, the Treasury and Congress have promised will be greased richly with public funds. Several prominent fund managers who have been bearish on stock valuations for years have reversed their views, going long the market.
Yet in time, all those promises of federal largesse will need to be transformed into enough high-paying jobs and high-quality earnings so that towers of individual and corporate debts can be repaid and balance sheets rebuilt, and that is where the trouble still lies. The concept of spending hundreds of billions of dollars on rebuilding roads, investing in renewable energy and strengthening hospitals sounds peppy on paper, but when you pencil out how many actual salaries it creates, it isn't much -- and history shows that government-funded gains rarely last.
Someone please tell me how many roads can be built by journalists thrown out of work at bankrupt newspapers or how many solar panels can be assembled by former accounts-payable managers for bankrupt retail chains. Unless you're a construction worker or bio-energy scientist, the Obama reconstruction will likely leave you cold.
By proposing massive borrowing to battle a problem created by an excess of debt, the government has essentially proposed fighting fire with gasoline. So, lit by a bonfire of the inanities, I propose to you 11 fearless forecasts for 2009:
No. 1: Infrastructure spending plans will bog down in Congress.
The president-elect has asked Congress to send him a bill to sign in his first week in office. This is already a bad idea, as haste makes waste in lawmaking. But the disbursement of $500 billion-plus would also generate an unseemly, partisan free-for-all in the Capitol, with powerful Democrats on the coasts hogging the best programs for their states and Republicans complaining about being shut out.
In short, passage of this noble yet spendthrift job-creation bill will drag out, blunting its effectiveness.
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No. 2: The unemployment rate will approach 10%.
Even if an infrastructure spending law dashes through Congress, it will be months before the money is spent and jobs are created. In the meantime, companies will see their borrowing costs rise even faster than their revenue shrinks -- a toxic cocktail that leads to layoffs.
By the end of the year, the U.S. unemployment rate will rise from its current 6.7% to about 8.5%, en route to 10%-plus in 2010. The broadest measure of unemployment, which includes part-timers and discouraged job seekers, which is now at 12.5%, will approach 17% by 2010. In the spring, a single month will record a loss of 1 million jobs.
No. 3: Weak second-quarter earnings will dash hopes.
Prayers for a swift end to the U.S. recession will go unanswered as investors come to realize that America can't spend its way out of a hole by itself. That will be clear in anemic corporate profits during the first half of next year.
The driving force in 2009 will continue to be a forced reduction of leverage for all developed economies' big companies and elites combined with the relentless bursting of a global property and commodity bubble. The U.S. fiscal stimulus will soften the blow of the recession, but it will remain painful. By the time the recession ends, possibly in late 2009 or early 2010, it will eclipse the 1980 and 1973-75 recessions and be viewed as the second-worst of the past 100 years, after 1929-33.
No. 4: Synchronized swoon will become an Olympic event.
No economic slowdown of the past 80 years has been so viciously coordinated among regions of the world and various industries that normally operate on different cycles. Past recessions have ended once one region's strength pulled up others, but Europe, Asia, the United States and Latin America will continue to pull each other down as monetary and fiscal stimuli fail to significantly erode debt loads.
The longer the recession, the more likely earnings will drop more than managements can handle, leading to accelerating bankruptcies and unemployment. Big companies will see earnings-per-share drops of 25%-plus.
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This isn't the Great DepressionDon't let the Depression comparisons in the news send you into a panic. MSN Money's Jim Jubak lays out 5 reasons why we're not headed for a replay of the 1930s.
No. 5: Markets will reach lower lows.
The first bottom in 2008 was made on the failure of Bear Stearns in March at the 1,255 level of the S&P 500 Index ($INX). The second was made on the failure of Fannie Mae (FMN, news, msgs) and Freddie Mac (FRE, news, msgs) at 1,200 in July. The third was made on the failure of Lehman Bros. (LEHMQ, news, msgs) and stress in related bank funding at 840 in October. The fourth was made around the near failure of Citigroup (C, news, msgs) and in recognition of a plunge in the rate of fundamental business deterioration in November at 750.
In 2009, final lows will come at 550 to 700 as the absolute level of earnings estimates plunges amid despair over the lack of progress from federal stimulus efforts.
Continued: Big trouble in China
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