Economics 2009 – What to expect
Within the first quarter we will inaugurate the first African American President. He gets to jump right in to a brewing pit of fire snakes. The biggest economic shake up of the first quarter of ’09 will be the bankruptcies of many major retailers; this will have a ripple effect on the lower middle class who depend on such service jobs. Christmas sales were not a savior as they are normally.
I have been sickened to my stomach at the rapid pace of retail outlet openings over the past 3 years. We as Americans have only received a maximum of 5% per annum salary increases, yet Target, Walmart, Bed Bath and Beyond and entire strip malls pop up like mushrooms on my lawn. They increased as the housing boom took hold. Now that housing has slumped, thus too shall they follow. How did they expect us to spend more money to sustain their growing overhead cost? As homeownership was increasing the percentage of household income that was earmarked from rents to mortgage increased. This leaves less for retail expenses. Yet refinancing gave households a boost of “spendable cash” that transferred to revenue for retailers. The long term effect is a further increase in the percentage of household income to go to mortgages in the long run. In addition to refinancing, credit cards made it possible for households making $40,000 net income to actually spend $55,000. This also contributed to the first industry collapse, banks. Shit flows downstream and now retailers must pay the piper.
As a business manager, you must first understand your consumer, a part of which is to understand the source of the wealth that you are targeting. If the source is temporary, don’t build long term plans around that source. A better business decision would have been to take advantage of internet sales and by marketing technological advances in internet shopping. So when the market corrected itself, businesses wouldn’t be so heavily invested in a long term position. They would only have to layoff a small force of shipping and delivery personnel.
In the second quarter of 2009 it will be deja’vu, with the auto industry banging on the door again. I feel Congress and President Obama will force two of the big three American auto makers to merge. That will leave either Ford or Chrysler to fend for self or collapse. The surviving company(ies) will be forced by the Government to stop production on cars that are not ever going to sell above cost. He will then order the 18 month re-education of the entire company. GM University will eventually become the top producer of hybrid and alternative transportation fuel efficient and environmentally friendly technologies on the planet.
In quarter 3, President Obama, State governments and thousands of grass roots organization will 
begin the largest campaign in the history of the human race. This campaign will usher in a new way of thinking regarding our Earth and our priorities in the preservation of life and the pursuit of liberty for most people across the globe. Obama will enlist many countries to this crusade as it will continue to grow in mass, scope and effectiveness. Global warming will be reversed and world hunger will be addressed in a way that is closer to efficient then ever before.
In quarter 4 we will begin to reap the last of the bad seeds that have already been sown. We will see a sudden and drastic drop in the value of the dollar. Unlike the economics of today where if you don’t have a sub-prime mortgage and you are not in danger of loosing your job, you are relatively safe. Q4 will see an onslaught of hyper-inflation that only homeless hobos will dodge. If you have cash in your pocket, you will be affected. You should put your money into oil for the near run. For long run investing you should buy gold, energy stocks and fixed rate real estate. 2010 will be the humbling of the U.S., we may or may not hold the title of the worlds super power, this is why we need to make new friends as fast as we can.
This is just a mouth full of my own predictions. Who really knows? Good luck…
Hi Jermaine, I agree this will be a challenging and unique year and of course have my own opinions regarding this.
I keep thinking of the phoenix rising from the ashes of our automotive industry if they are allowed to fail. In fact I believe the term, “allowed to fail” is misleading. Unlike Bear Stearns or Lehman Brothers the automotive industry has valuable physical capital that can be shifted to different ownership. I cannot believe there are not numerous foreign manufacturers waiting for the opportunity to buy the production lines of GM, Ford or Chrysler, lay the $1,500-$2,000/unit legacy costs off on the PBGC and/or the health care market/government and begin to produce the same vehicles profitably. This doesn’t even consider changes in labor costs, management direction and employee investment. In my less experienced mind it seems like this could be a much better outcome mid-term for the whole of the United States. Workers may keep or get similar jobs back, although they won’t appreciate it, consumers get the same value for less cost, taxes continue to be generated on U.S. produced goods and if you subscribe to the pent up demand theory the automotive industry it would allow sales volume to increase for these lower cost producers. (just some of the rambling thoughts in my head)
One of the many valuable lessons I took from your economics class was a better understanding of the foreign exchange and the causes of inflation. When I view the inflationary policies we seem to be pursuing I used to get lost. Today it causes me to see more opportunities. Generally speaking, 2009 may hold good investment opportunities in emerging/developing markets and diversified U.S. companies with significant portions of their revenues coming from non-U.S. operations. Historically many people recommend gold as a hedge against inflation but I’ve never really been able to get my head around that trade. In the 2nd quarter of 2008 I found myself mostly in treasuries simply from a lack of personal confidence in other options, certainly not from some great insight, and in mid October began reallocating more to the equity markets. Perhaps you can share some of your opinions as to why gold is a good position and whether this means buying metal, the miners or how to have this exposure.
On a more personal note I greatly enjoyed your economics class, it will help me make decisions throughout life. Based on my observations you are passionate about helping people understand the world around them and how to navigate this landscape, you are a great value to your community and it is an honor to know you.
First and foremost, thank you Patrick for your kind words, they are what I work for, money is truly secondary. Regarding your economic comments, the last thing I wrote and probably the most important is the questioning of the U.S.’s super power status. As long as Islamist groups pose an eminent threat to the U.S. ideology we will need to cleave to as much power as possible. We just need a fresh preservation strategy. By allowing one of our top 3 advancement industries to slip through our fingers we will leave us with a hand full of nails for our own coffin. We must maintain control of the auto industry assets and all the intellectual capital that I hope we have in a locked safe.
The additional tax dollars and premium increases to cover the taxpayers and the PBGC (http://www.pbgc.gov/) bailout of auto workers benefits will add to the strain to maintain our position in the world.
I believe in the pent up demand theory regarding the upswing in auto sales in the future due to people waiting to replace their buckets. However, they have the option to purchase cars from any corner of the globe. So the U.S. may not benefit from that extra demand; especially as the Government gives auto makers funds to build 2009 model cars and the demand will not return until 2010 or later. Brand new 2009 models in August of 2010 will equal discounts.
Gold vs. Inflation. To understand the relation we look at historical trends. The US dollar went off of the gold standard (each dollar is no longer backed by stored gold) in 1971. So we only need to study 1971 forward. There were four years since then that inflation was over 10%, 1974, 1979, 1980, 1981. Since then the average rate of inflation has been 3%. From 1997 to 2007 inflation has been 2.6%. However, December has not been released; my estimate for inflation for all of 2008 is 4.2%. The reason why we will see such crazy inflation is due to the Treasury printing so much money and flooding the economy with it through multiple stimulus packages. The more money in the system, the less value it has. It goes from diamonds (rare) to dirt (plentiful).
Gold (http://www.finfacts.ie/Private/curency/goldmarketprice.htm) on the other hand is a commodity that is traded by all countries, unlike a stock that is sold only on limited exchanges and has a limited amount of demanders. As well as the fact that stocks are ownership stakes in companies that are ran by greedy flawed men with marketing schemes. Gold is a fixed asset with a limited growth of supply. During the prior mentioned 1974, 1979, 1980, 1981 gold shot upward during the beginning of these high inflationary times, and coasted downward slowly. So we need to get in now and have a watchful eye on the prices. When you buy at a price, tell your broker to sell if the price drops 20% below your purchase price. That way you’ll have a stop loss of -20%. When the price increases 20% above the price that you purchased it, move your sell order to your original sell price. That will ensure that you do not loose any money. Keep a sell order in at approximately 20% below the current price, so that you know your risk.
My disclosers are:
Gold prices are very high at this time. They have been steadily increasing over the past 4 years. Normally it is not a great time to purchases gold. Yet there is nothing normal about this times we live in.
I do not currently hold an active stockbrokers license and this is not meant to be your sole source of investment advice.
Only invest money after securing separate adequate liquid emergency funds
Only invest money that you are willing to loose.
Good luck, we all need some
please address the current credit card issues.
Credit card issuers have been milking the public dry for many years. The public’s ignorance and thirst for material affirmation has created a market for banks to charge extremely high rates to balance out the high risk of default. The late charges and annual fees are exorbitant. But if you can find an Eskimo stupid enough to buy ice cubes, you wouldn’t be the stupid one for feeding your family from it.
The American people should know how to manage there credit better by now. Yet the lack of discipline leads to this very crisis. The banks are now pulling back due to their reduction of risks. If they had the right to rip us off all these years, they have the right to pull back on that activity.
When one of my clients is paying a over the limit fee due to the credit card company reducing his limit below his outstanding balance, that’s when it is just wrong. I’m advising him not to pay and to fight those charges. Yet if he listened to me to begin with, none of his cards would ever be over 50% outstanding. My credit philosophy is to only use a maximum of 60% of any credit limit, and to manage your total outstanding of all cards to a maximum of 50%. If he’d done that, he’d be alright. This maximizes your credit score, provides liquidity as well as emergency funds. We have to stop letting our robbers dictate our credit worthiness and become more proactive in driving our financial destiny.
Just because they won’t give us credit doesn’t mean we don’t deserve it. Just because they give us credit doesn’t mean we deserve it. Just because they charge us 25% doesn’t mean we should accept it. That makes you an accessory to a crime against yourself… not too smart. Everyone is talking about regulation, how about self-regulation???