September 15, 2009 marks the first anniversary of the fall of Lehman Brothers and the global financial meltdown.Â The DJIA closed on Friday the 12th at 11, 421.99.Â Over the next three days it would shed almost 1,000 points.Â Breaking the July 15th low of 10,827, set the stage for a six-month plunge to the March 2009 lows of 6.500.Â We’ve enjoyed a great rally, up 3,000 points.Â What happens next?
It appears that the economy is bottoming as we get ready for back to school.Â A lot of money has been spent on bailouts and stimulus programs.Â The CBO estimates our national debt over the next ten years will increase by $9 Billion.Â I have doubts that the Treasury will find it easy to raise the money needed in the world without interest rates going up.Â That means the Federal Reserve will continue purchasing Treasuries, monetizing the debt, and that’s inflationary.Â On the other hand the FED will also find it tough to soak up the excess liquidity which will make bubbles anew, without raising interest rates too soon.Â Consequently, I don’t see a robust recovery.
If the new phrase for 2009-2010 is Frugality, I would expect to see consumers pay down debt and save.Â It’s hard to refloat a consumer dominated economy, when the shopper can’t qualify for a loan or doesn’t want to borrow to buy a new TV or sofa.
Perhaps John Mauldin and GaveKal are right that the Keynesian way of stimulating an economy is passe.Â They suggest an emphasis on the classical economists is the new way:
…corporate profitability is the cause, not the consequence, of economic growth. Thus, Schumpeter would see the current cycle as the destruction phase in the creative-destruction processes that propel the economic cycle. Capital and labor are currently moving from the sectors in decline (e.g., McMansions) to the sectors in expansion (e.g., tech, alternative-energy infrastructure, etc.). Once momentum in the growth sectors overwhelm the decaying ones, then macro growth resumes.
Wouldn’t it be like Nixon Going To China to have the leftist Obama see his political chances improve by embracing Capitalism.Â I suggest that many who expected a miracle will not be happy with him in 2010 if unemployment is high and inflation is soaring and the government continues to apply the medicine that got us into trouble.Â More of the same will just bring us more of the same.
I think monetarily there is a real risk in the US Dollar in 2010.Â It is not in the government’s interest to see Gold and Silver go up in price.Â It appears that our government has capped Gold under $1,000 and yet as Professor Antal E. Fekete has written, the 30-year trend of diminishing basis in gold and gold futures is approaching backwardation.Â We are very close!Â If that happens no amount of money will buy an ounce of gold and the USD will essentially be worthless.
Is there one thing I watch to get an idea of what’s going to happen next.Â You know, I watch everything I can.Â I try to understand some of the arcane, the economic, the political, the culture, I talk to people and I listen, I ask questions.Â Much of any conclusion can be easily upset, by another terrorist attack, an expanding war in the middle east or a Black Swan.Â To attempt to predict the future is more an acknowledgement of what we don’t know and as Donald Rumsfeld would continue, “What we don’t know that we don’t know.”