2010 Economic Outlook: The Tipping Point

by: James Quinn

For the last week or two “experts” and pundits have been making their forecasts for 2010. I always take these forecasts with a grain of salt. The people making the forecasts generally have some skin in the game and will tailor their forecast to benefit their particular agenda or investment portfolio. I pride myself on dishing out punishment to both political parties and most investment shills. I will take on the thankless task of predicting the future. Below are my prognostications in the areas of the economy, domestic politics, global geopolitics, and the investment markets.

To date, the Federal Reserve has printed well over a trillion dollars in an attempt to evade a deflationary collapse, including a $700 billion bank bailout and a $787 billion stimulus package. And then there was $3 billion wasted on Cash for Clunkers ($24,000 per vehicle), $28 billion squandered on the $8,500 homebuyer tax credit, and an artificial suppressing of interest rates to 0 percent with $300 billion of mortgage-backed securities purchased by the Federal Reserve and Treasury. And all we’ve received is a 2.2 percent increase in GDP? The fourth quarter of 2009 will show a positive GDP as government spending and Federal Reserve quantitative easing have continued at a rapid clip. As the government stimulus winds down in the first half of 2010, the true weakness of the economy will reveal itself. I expect a double dip recession commencing by June of 2010.

With the economy sinking back into recession, the official unemployment rate will exceed 11 percent by late 2010. The true non-government manipulated figure will approach the Great Depression levels of 25 percent. Over 8 million Americans have lost their jobs since 2007. The side effects from this fact will ripple through the country for years. One quarter of all homeowners in the U.S. is underwater in their mortgages.

A tsunami of Alt-A and Option ARM mortgages will reset in 2010. These two developments will lead to another surge in foreclosures. Despite government attempts to interfere in the market, home prices will fall another 10 percent in 2010. The continued weakness in employment and housing will lead to a further drop in retail sales.

Developers of malls, office buildings, hotels, condos and apartments will pay the piper in 2010. Billions in debt related to projects built in 2005 will need to be refinanced. These properties have dropped 30 percent to 40 percent in value. The continued weakness in retail sales will lead to retail bankruptcies and store closings. Less tenants means less rental income for mall owners. There will be a record number of commercial real estate bankruptcies in 2010. The bulk of these losses will be borne by regional banks. There were 150 bank failures in 2009. The FDIC just announced they would add 1,600 employees in 2010, doubling their work force. There will be 500 bank failures in 2010.

The Federal Budget for 2010 anticipates a $1.5 trillion deficit. I believe the Obama administration will pull out all the stops to boost the economy before the 2010 elections. This means more spending. The 2010 deficit will be closer to $2 trillion. The bond market and foreign buyers will choke on this amount of debt. The result will be much higher interest rates. Ten year Treasuries will start the year at 3.8 percent. By year end, rates will exceed 5 percent. As the world loses confidence in the American economy and leadership, the dollar will fall to new all-time lows falling by another 15 percent. A falling dollar will result in a surge in gold and silver. Gold will break $1,500 an ounce, with silver breaking $20 an ounce. As world demand increases and peak oil becomes acknowledged, oil prices will exceed $100 a barrel further depressing the U.S. economy.

Congress will pass the Obama healthcare plan by the end of January. The outrage will be palpable. Obama will then announce another stimulus program and call it a “jobs program.” This will cost another $200 billion. In February, the government will formally take over Fannie Mae (FNM) and Freddie Mac (FRE). These unprecedented reckless interventions in our supposedly free markets will lead to huge Democratic losses in the 2010 Congressional elections. They will lose 50 seats in the House and 6 seats in the Senate. As the economy deteriorates the stock market will drop by 30 percent in the first half of 2010. After the Republicans regain power in Washington DC, the stock market will rally.

The biggest wildcards in 2010 will come from outside the U.S. The uprisings in Iran are likely to provoke the current leadership to stir up more trouble in Afghanistan and Iraq. The imposition of sanctions by the U.S. could also provoke Iran to lash out against Israel. This region is a powder keg with matches being lit every day. I expect Israel to attack Iran’s nuclear facilities before the end of 2010. Iran’s response will be to disrupt the flow of oil through the Strait of Hormuz. This will bring the U.S. Navy into conflict with Iran. Oil prices will soar when this conflict breaks out. The conflict in Afghanistan will worsen, with more American soldiers losing their lives. Tensions between Pakistan and India will increase as terrorists again attack within India.

Economically, Eastern Europe will crash with Greece, Latvia, and Hungary defaulting on their debt. This will plunge European banks into deeper losses and cause the next leg down in Europe. These foreign risks have the potential to spiral out of control.

You may have noticed that I’m not too optimistic about 2010. Let’s hope I’m wrong.

Disclosure: No Positions