Economy and Markets to Split in 2009

Yesterday, all my troubles seemed so far away
Now it looks as though they're here to stay
Oh, I believe in yesterday

-The Beatles

The above quote will most likely apply to the economy in 2009 as itdeteriorates further due to the reality of job losses and decreasedinvestor confidence. On the other hand, the markets could recoversignificantly as resolution to the current recession comes intoview.

In the first half of 2008 when the reality of the current recessionwas setting in, the U.S. economy lost just 461,000 jobs accordingto the Bureau of Labor Statistics. We were certain the good timeswere ending and most of us were hopeful the downturn wouldn't betoo prolonged. Though they faced much criticism, the Fed andTreasury approached economic challenges with an open and creativeattitude. Looking back, it seems they weren't creative enough,perhaps, but the reality of the downturn was in the windshield andnot yet under our tires.

In September, the government bravely allowed Lehman to fail,testing their prior support programs to see if enough had beendone. There is a fine line between bravery and stupidity and nomatter what your opinion, it is easy now to see that letting Lehmanfail was a mistake. (Perhaps rescuing Bear Stearns back in Marchwas the real mistake?)

The follow-on effects of a deteriorating economy included anadditional 2.1 million jobs lost in the second half of the yearwith momentum building into 2009. Many government "bailout"programs were announced and we elected a president promising "hope"and "change" - badly needed ideals even if ill-defined.

For the year, the economy lost 2.6 million jobs, the most since1945, with more to come in the first half of this year.Furthermore, the housing market - the spark to the current downturnthat has turned into a raging fire - will continue to be fed byfurther job losses. No matter how low rates go, or how "affordable"housing becomes, if individuals have no income the housing marketcannot stabilize.

As of the latest data release in November, existing home sales arerunning at an annual pace of 4.5 million. This is just below thelevel at which we bottomed during the 2000/2001 downturn when themortgage market continued to function. Given today's growing joblosses, the housing market can fall precipitously even from today'sabysmal levels. This would set off a further drop in consumer andinvestor confidence leading to, most likely, more stimulus packagesand support programs out of Washington.

As I wrote last week market pricing discounts future,expected events and, as such, could actually pick up in 2009without a currently visible economic recovery. All that would beneeded is a vision of how recovery could be acheived and asignificant level of confidence in that path. Markets do not waitfor troubles to be seen in the rear view mirror, but only aclearing in the road ahead.

What fantastic news given that our economic troubles seem to bebuilding, not dissipating, even at this point in the economiccycle.

Weekly Review

Treasury yields were mostly unchanged on the week, bound by zero onone side and held down by investor fright on the other. Marketparticipants focused on the Madoff case along with cominggovernment activity under the Obama administration.

Key developments:

Consumer borrowings dropped a record $7.9 billion in November asfear continues to drive the decision-making process and anextremely disappointing holiday season is assured. Total consumercredit according to the Federal Reserve stands at $2.57 trillionafter the first back-to-back monthly declines since 1992.

December's report on domestic car and light truck sales actuallyshowed an increase over November to an annualized rate of 7.8million. The stabilization comes as a small consolation to the autoindustry as sales remain down nearly 36% from the same month a yearago.

The unemployment rate jumped to 7.2 percent in December as thecountry lost 524,000 additional jobs bringing the year's total to2.6 million - the most since 1945. Job losses should continue into2009, affecting the housing market and consumer/investor confidencewell into the new year.