Trying to predict what’s going to happen in 2010 is like throwing darts with a blindfold. There’s absolutely no way of knowing what’s going to occur over the next 12 months. It’s no different than playing the ponies, really. Both are fun, but both involve guesswork and faith.
A more profitable use of your time is looking at probabilities, and looking for potentialities, and positioning yourself against the risks and for the upside. And there are still, despite an historic stock market rally, significant risks out there.
“We have to get through the next 5-6 months, which is where we will at least begin to see the extent to which ’second wave’ credit risks materialize,” John Hussman of Hussman Funds writes. “We emphatically don’t need to work through all of the economy’s problems. What we do need, however, is for the latent problems to hatch, so we can have more clarity about what we’re dealing with.”
“We don’t have to deal with and correct all of these problems, but until it is clear that the markets are more aware of them, the range of potential market outcomes will be extremely wide – and in my estimation, tilted toward the downside.”
One downside risk is that the general thesis for growth — government stimulus spurring demand, which sparks an inventory rebound, which sparks a hiring spree, which sparks wage growth, which drives the economy forward — may get shot to pieces by midyear.
Calculated Risk expects the contribution to GDP from inventories is greatest in the first two quarters coming out of a recession (and if you hold that the recession ended this summer, that means the 3Q and 4Q this year.) That’s because the way GDP is calculated, inventory levels just need to reverse direction, not necessarily grow, to add to GDP.
The other big plank, stimulus, may have already seen its greatest impact. That would set the economy up for a rough second half, even possibly the dreaded double-dip. Sounds like a prediction, right?
But this is where the prediction game gets screwy. Because, like I said, you can’t know what’s going to happen. The administration has a second stimulus package (in everything but name) ready to go, and seems ready to do just about anything to keep the economy from sliding back into the muck. The Federal Reserve could extend its MBS program. Israel bombs Iran. Smartphones crash the grid.
But the biggest risk, to my mind, is this: where’s the spark going to come from? At some point, the economy is going to need something to drive growth that isn’t mathematical formulas or government spending. But it hasn’t appeared yet, and frankly, it doesn’t have much time to get here.
If jobs are going to start growing again at any appreciable rate, something is going to have to come along to spark the economy. It was the PC in the ’80s, and the Internet in the ’90s. But right now, at least, there’s nothing on the horizon that seems to have that kind of potential. “The fact that we’ve done diddly squat since 2000 but create a giant paper chase explains why job growth since then has been zero, real wage growth has been negative and American standards of living are falling,” Zero Hedge writes.
It’s all well and good to be optimistic, but it’s not smart to be foolhardy.
