The Business of Life

Cover Up 'Cause the Storm is Coming!

The other night a friend of mine asked for my opinion on the current recession and when it might end. We had a lively discussion and ultimately found out that he is a true Pollyanna optimist and I tend more toward Scrooge. Basically, I think the saying "in for a penny, in for a pound" applies here... and we are going to get pounded. Here's what I think is coming up in America.

I think this recession will persist through 2010. Yes, 2010! Maybe even early 2011... We have yet to feel the impact of the 2nd wave of mortgage defaults (ARMs and "exotics" reset early next year) nor the 3rd wave anticipated to begin in Q3 2009 (good people with good credit and no jobs, deflated housing value, and no further access to capital). Housing prices will remain low, inhibiting many consumers' ability to refinance or reinvest. Consumer credit will remain tight to non-existent for all but the very best "risks."

Small businesses are failing at a rapid rate due to lack of access to credit, and the ones that survive will experience the "deflation" of pricing (and therefore profits) caused by too much money (thank the bailouts and economic stimulus packages) flooding the markets. Layoffs will extend into previously "safe" occupations (law firms, hospitals, schools, local government and non-profits among others). Employees who are "left alone" will see wage stagnation or even cuts, as employers won't need to pay as much when available talent is everywhere.

The dollar will become weaker against foreign currencies (again due to flooding the economy with bailout / stimulus money) and our trade deficit will grow. As our money becomes "less attractive" in foreign markets, we will see hard assets (office buildings, shopping malls, real estate, apartment complexes and entire companies) purchased by foreign investors... often at fire sale prices. The NYSE will likely not exceed 10,000 during this period. City and state governments will be forced to cut services and employees, and some may even vanish in a cloud of bad debt and lower tax revenues. The intertwined systems of the world's economies will prevent any one nation (i.e the U.S.) from dragging the rest of the world out of this mess early.

Sorry to be pessimistic but this is the natural extension of the failure of "good sense" in our financial markets and then an ill-advised "rush to triage" those failed businesses that perpetrated this fraud. The survivors will find that "Depression-era" economics and disciplines (savings as a foundation, limited consumer debt, delayed gratification) as well as "keeping your powder dry" so as to capitalize on bargains and opportunities are those things that will create prosperity after this recession fades. Of course I'll be completely wrong if we have some kind of really dramatic "stimulus" like a big, big war that allows Ford and GM to make plenty of tanks ( the kind that shoot AND guzzle fuel). As bleak as my outlook may be... that would be far worse.

Labels: business failures, credit crunch, layoffs, mortgage defaults, recession, trade deficit

posted by Tom Hagerty @ 9:10 AM