Warning: I'm venturing out of my area of expertise here. I'm not an economist. I did get A's in Macroeconomics at UC Berkeley's MBA program. I follow the economy and stock market while keeping my money mostly in mutual funds. I'm a passionate amateur is all. With that caveat, let's talk about the economy and its prospects.
Nice to see oil dropping precipitously from its lofty heights of around $150 per barrel. It amazes me that people can come to the conclusion that oil is just going to go up and up now. Of course, we've known for years that we could have a problem with oil. After all, it is non-renewable. It will run out eventually. And the experts say that a lot of the easy to get to oil fields are getting pretty thin. But it still doesn't make sense to see a rise of almost 100% in the price of oil in 6 months. That's a bubble folks!
Watch out for bubbles. That's what I'm taking away from the Tech bubble of 1997-2001 and the real estate bubble of 2002-2005. And try to remember reversion to the mean. That means if real estate, tech stocks or oil rise incredibly fast compared to their historical rates of increase, they are likely to fall back later to their historical mean growth rates. Further, if your property value grows 50% this year, you are going to have to pay a lot of that 50% back in reduced future growth rates or declines. Gravity takes over at some point.
The process of a bubble is that (1) for one reason or another prices start rising for a particular thing and (2) that rise attracts the attention of others who start wanting to get in on the increase. So their buying fuels the flame. From there, (3) even more people start thinking they want to get in on this good thing. Then come the "this is a sure thing" stage which is stage 4 before the fall.
The ordinary person, not paying much attention, comes in at this point while the pros are starting to balance their portfolios and prepare for the crash. The well-advised big boys tend to make money going up and then shift gears faster than the so called *wise* crowd and make money while it goes down. The down is also pronounced because people start getting scared and selling and more people sell and then more people get scared and it gets worse before it gets better. Meanwhile the bottom-feader professionals bankrolled by the big boys buy up the undervalued stuff in preparation for the inevitable recovery. Same old, same old.
How am I doing so far? Where are we in all this now? Well, there's been a brief but pronounced oil bubble that seems to now be on its way back down. Other commodities are bubbling to a lesser extent. These things are more volatile due to unrestricted betting and margin calls that are being allowed on the various exchanges. I hope we see more reigning in here soon.
But, what's going to happen? We are in an economic downturn currently driven by the real estate, mortgage-backed securiities crash and aided and abetted by inflation in China and the oil price spike. We've already lowered interest rates a lot and given out tax rebates to try to soften the fall.
What's next? Oil down will help the 2nd half. Dollar is strengthening, that's nice and helps drive oil down. The dollar is still down so exports should be good. Unemployment is still rising and should continue to be a problem for the next year at least since employment tends to be a lagging phenomenon relative to recessions. I don't really care whether they call this a recession but it sure is a major slow down and is not fun.
My Predictions. There are only three big negatives we have to worry about right now: foreclosures, banks going under or giant bail outs, and unemployment. People who were struggling during the *good times* of 2004-2006 are really having a hard time. People who have never had a really hard time are suffering now in many cases. These three factors are going to hurt a lot of people short term. People will die in worst case scenarios due to lack of good medical and housing (homeless) and even lack of food or transportation.
The Depression lasted 10 years. That was probably 5x worse than this downturn is likely to get. We don't know, maybe we'll get the worst of the worst. But, chances are pretty good that we'll bounce back. We have Japan's 10+ year economic mess of the 90's to learn from and we don't have a lot of the ingredients that kept that downturn going as long as it went.
Oh, one last downside before I wrap up. We do have the aging of the population thrown in on top of this. That should start kicking in more strongly around 2010. It would be nice if we could get our growth back into the mean zone by then so that we don't have the demographics weighing down on us when we are still down. That's a joker in the deck which you can worry about if you like.
Saving for a Rainy Day is something to get better at. Don't worry be happy? Not quite. Americans have gotten into a major consumption habit that does need to be reigned in. We will be reigned in forcibly if we don't do it ourselves sensibly. I'm actually viewing this downturn as a great lesson and good jolt of reality to those of us who were on automatic pilot with the credit card out and savings plans on the back burner.
Oops. The Middle Class is eroding rapidly. Statistics and experts are beginning to reach a consensus that the global economy that got started in the early 90's under Clinton is a more volatile and beastly creation that the economy of old. In the global economy there are winners and losers and not a whole lot of people in the middle. In the US we've long been proud of our large middle class. That middle class is now eroding. I'm all in favor of smart, non-pork-barrel Democratic initiatives to compensate and help save the remnants of a middle class in this country and elsewhere.
Don't worry, but keep on your toes. Try to keep negativity in check. Enjoy the wonders of life. For all we know trends beyond our imagination will take us in directions we can't yet foresee. Don't assume you know what is going to happen. That's a good place to stand.
Life is short so don't waste it worrying. Realism + Action = Good. It often takes bad things happening to wake people up out of their apathy and motivate them to do something that needs doing.