4 Economic Scenarios You'd Better Hope Won't Materialize

[BlueStateSaint]

Got this from a link on James Wesley, Rawles' Survival Blog.  The link is to a blog called Seeking Alpha.

4 Economic Scenarios You'd Better Hope Won't Materialize

January 14, 2010

In the cast of corporate characters, Fannie Mae (FNM) and Freddie Mac (FRE) are A-list villains, thanks to the central role they played in the 2008 financial meltdown.  The two mortgage-finance firms failed as spectacularly as AIG, the poster child for finance-gone-wrong, with the combined Fannie-Freddie rescue totaling about $111 billion so far—the biggest bailout of all.  Both firms are effectively nationalized, and the government would probably wind them down except for one thing:  They underwrite about three quarters of all the mortgages issued in the United States.

You've probably heard that the economy is recovering, that consumers are more optimistic, and that companies might soon begin hiring more workers than they're firing.  Hooray.  We'll all be thrilled when the economy stops quivering.  The only problem with an upbeat prognosis is that large chunks of the U.S. economy remain addicted to financial painkillers or dependent upon dysfunctional institutions like Fannie and Freddie, and we've never gone through the kind of withdrawal that's set to take place this year.  If all goes well, we'll avoid messy complications, such as these:

Housing tanks all over again.  It's hard to believe the housing market could get any worse, with prices already down by more than 30 percent from their 2007 peak.  On the other hand, it's astounding that housing is as bad as it is, considering the massive amounts of government aid that have been transfused into this comatose market.  In addition to subsidizing the entire mortgage market via Fannie and Freddie, the government has also stepped in to buy billions in mortgage-backed securities—replacing private investors who are sitting on the sidelines—to keep money flowing to consumers.  Then there are the tax breaks meant to spur demand for homes and other programs to reduce foreclosures and arrest the plunge in prices.

The tax breaks expire this year, and the government probably can't afford to extend them (again).  The Federal Reserve and other agencies have also said they'll begin an orderly withdrawal from housing finance in 2010.  Most forecasts call for a spike in foreclosures and further price declines in the first half of the year, with a possible bottom and tepid recovery in the second half.  But it's far from clear what will happen when the government aid dissipates.  Will that remove one leg from the chair?  Two?  Three?  If the private markets don't fill the void left when the government backs out, it could trigger a fresh crisis that inflicts more collateral damage on the rest of the economy.

The rest is at:

http://seekingalpha.com/article/182477-4-economic-scenarios-you-d-better-hope-won-t-materialize

[bkg]

Good read. I think we'll hit all 4.

[Chris_]

I asked my oldest son, who is a senior analysist for Merrill Lynch, his opinion of this piece, and have included his comments below.......some of which are "tongue in cheek" you will notice.....

Good morning.  I hope all is going well.  I hope Rick Newman, I believe the author of that article, is wrong.  Wow, he forgot to mention conflicts with the Middle East, global warming, today’s election for Teddy’s old seat, and the earthquake in Haiti.  What he mentioned are all “real” issues but history shows they traditionally do not all go south at once.  I’ve attached a piece from Bob Doll of BlackRock.  His track record shows he’s right more than he’s wrong.  I love economist who don’t keep a score card – Bob Doll does.  I think he provides a good perspective to the markets, etc. in 2010.

The first issue he addressed – Housing – is a concern.  Prices have dropped 30+% in areas such as Central Florida.  Housing is a major part of our economy and has been since I’ve lived here (early ‘90’s).  I think the stats show 30+% of the job force in Central Florida is linked to the housing industry.  For example, Google – Taylor, Bean & Whitaker (an old client of mine) which is gone as of August of 2009 – employed 2,200 people in the USA and 1,800+ in Ocala, FL alone.  Housing starts since the early 1950’s through 1990 trended like this – 5 to 6 years up and then 1 to 2 years down.  1990 through 2006 we experienced almost no down years for housing starts.  This issue was driven by both political parties for a long time.  They all run campaigns w/ sayings like this, “It is the American Dream to own a home”.  B.S.  It’s the American Dream to own a home if you can afford it!!  We have a major over inventory issue and housing will only recover then the job market improves.   

The second issue – stocks crash.  Read Bob Doll’s piece.  He says it better than I could.  One note, the stock markets are pretty good at pricing in all of these types of issues in this article.  For example, the retail sector.  There were just too many retailers.  Many of them have gone away while the ones that have survived have experienced better than excepted earnings which have driven up their stock prices.  What a great idea – Capitalism!     

The third and fourth issues – US Debt Crisis and Consumers.  The author doesn’t focus on one of the keys to the US Debt Crisis – The US Gov’t.  The US Consumer will never (in my life time) become the Japan Consumer (very high savings rates), but our current administration has inherited some major issues and attempted to solve it with money and “no” plan.  On top of that trying to jam Health Care through the system.  I guess it’s also the American Dream and right to have government run health care.  His financial brain trust is going an okay job considering the circumstances.   

Two great books one on the recent financial meltdown “Too Big To Fail”, by Sorkin and one on global markets “When Markets Collide”, by El-Erian.

Off my soap box and back to work!

FYI......

doc

[Oceander]

You have a very wise son - you've done right proud by yourself, TVDOC.  I regret that his views are a little more optimistic than mine, but still a far cry from dismissing the original article out of hand.

[Chris_]

You have a very wise son - you've done right proud by yourself, TVDOC.  I regret that his views are a little more optimistic than mine, but still a far cry from dismissing the original article out of hand.

Yes....we are quite proud of him........BTW, I have the Bob Doll analysis that he sent me, but it is a (Quite large) .pdf file, so I can't link it here, and posting it would exceed the word limits by several times.

If anyone wants to read it, PM me your email addy, and I'll send it to you.

doc