All the signs I see point to a further deterioration in the economy. This will be confirmed by some key numbers coming this week.
On Friday we will see revision of the GDP for the 4Q of 2008. Almost certainly it will be revised downward from the initial estimate of an annual rate of decline of -3.8%, probably to the vicinity of -5.0%. Other reports on initial Jobless claims, both existing and new home sales, durable goods orders, and the Chicago Purchasing Managers Index, are all expected to show unrelenting weakness. Economists are now in process of revising 1Q GDP down further, with our favorite soothsayers estimating 1Q GDP is declining at a 5% to 5 1/2 % annual rate. If so, in my judgment we are probably now experiencing what later will be seen as the most rapid phase of deterioration of the downturn.
That said, I don’t think we are on the brink of seeing positive numbers. I see that happening in an anemic way in the 3Q or possibly even the 4Q as the massive monetary easing begins to provide some traction and the stimulus package begins to be felt.
Meanwhile some other problems are coming to the fore. Just as my friend Dwight Sipprelle warned in his comments to my February Musings, the economic mess in Eastern Europe is now obviously hitting European Banks and the Euro. Just how long or if the Euro can survive will be an increasingly asked question. For economies with distinctive problems and their own fiscal policies (think Ireland, Spain, Portugal on one hand, and Germany on the other), governing with a single monetary policy has always been potentially problematic. Just how does a unique, multi-national, major currency die? Or what’s involved in saving it? I simply don’t know what this might mean for markets, except that it cannot be good.
Domestically, we are still searching for an answer to the problems in the banking system. Nationalization? Maybe, but how do we decide what banks can be “saved” in only this way. Public-Private Bank? Will the private capital step up to the plate? How would a system that is partly nationalized and partly private operate? On what terms do the two compete?
Can we let a couple of the big banks go out of business? Let a healthy bank take over the deposits and good banking assets, leave the toxic assets behind to be worked out over time, perhaps by the acquiring bank in a separate, insulated module? And how do we taxpayers come out on all this? I don’t have the answers, and hope that the Obama team can come up with some…….and soon.
Until then, and until we can plumb the bottom of this economic slide, the stock markets of the world will be dangerous places.