by JDH on December 13, 2008

I am torn. I am torn between two competing views on how the world will unfold over the next year (which is why next week I will post the link to allow each of you to record your predictions for next year, even though we all realize that predictions and blind-folded darts have about the same chance of hitting their target in these volatile times).

On the one hand, the world is in a mess.

Domestic auto sales are at their lowest level in over 40 years (I can’t find data going back farther than that). The “Detroit Three” are on the verge of bankruptcy, and as I write this on Saturday morning, December 13, there is no bailout or rescue agreement. I am not optimistic about the short term future of the auto industry.

(As I drove to work on Friday morning, I listened to GM workers at the plant in Oshawa, Ontario, being asked the question “would you take a pay cut to save your job?”. The most common answer was “No, we already gave up a week’s vacation in our last contract; we’ve given enough; the cuts have to start from the top; we aren’t going to give up anything else.” While it’s obvious that the cuts must come from everywhere, that level of inflexibility guarantees massive job losses next year).

The U.S. government, by some estimates, is spending $1 out of every $4 spent in the economy right now, higher than spending during WWII. I don’t know if those numbers are accurate, but we all know the numbers are very high. How can that level of spending not be followed by massive inflation and a depressed U.S. dollar? It hasn’t happened yet, but isn’t it inevitable?

We had the sub-prime crisis, and the real estate crisis, but we have not yet had the credit card crisis. Consumer debt fueled the boom of the last decade; I can only assume there is lots of debt out there that won’t be paid, which will drive loans losses higher in 2009. Presumably a government bailout of the credit card industry is next.

However, there are positive signs.

The most positive sign is that the markets are down huge this year (yeah, I know, you were already aware of that). It’s unlikely that the DOW will fall to zero. At some point it will turn back up. It’s possible that the new president will make everyone feel good, at least for a while, and that may stimulate spending, which will help the markets.

We all also know that the markets are a leading indicator. They started falling long before the government admitted we were in a recession, and they will start to rise before the recession is over. The big question, of course, is when?

The markets crashed in 1929 and didn’t bottom until 1932. Does that mean that the crash of 2008 will be followed by a final bottom in 2011?

I don’t think so. The world moves much faster today. I personally don’t believe we have seen the bottom yet. I believe there is a chance we see a bounce into the 10,000 or even 12,000 level on the DOW before we fall back to the final bottom. However, I believe that bottom will come in 2009, not in 2011.

Once the bottom is in, up we go from there, so there is reason for optimism as we go forward.

The timing will depend entirely on the government. If they allowed the car makers to restructure through bankruptcy protection, we are out of this mess by the end of 2009. If they just give them money and don’t allow any meaningful restructuring, we are in this mess for a few more years to come. Time will tell.

On a final note, gold did well this week, closing around the $820 level. That’s above the 50 day moving average, but below the 200 day moving average, which is good but not great. I think we are in for a long slow increase, not an explosive rise, so a pullback this week would not surprise me. The big run won’t happen until we have a month above the 200 day moving average. That being said, I’m holding my gold shares.

My tech people upgraded the Forum this week, so hopefully it will work faster; they have installed a new anti-spam filter, so new users can once again register; we’ll see how it works, and we will talk again next week.

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