Here’s my crack at Nostradamusian macroeconomic analysis.In my estimation the next three systemic shocks will come in the form of job loss, the foreclosure driven and fiscally irresponsible government bailout of Fannie and Freddie and a prolonged secular bear market meltdown of the stock market.
All of these events, if fully materialized, would likely combine to present the most significant test of Americans’ faith and confidence in their institutions and way of life seen in many generations.
First, although it has been generally the consensus opinion that the job market will hold up better during this recession as a result of the weak job growth seen during the last expansion (i.e. less jobs gained = less jobs to lose), I beg to differ.
My model (simple extrapolation of 90s recession with some tweaks) puts the unemployment rate at roughly 7% by next March and where we go from there will depend largely on the other two shoes.
I believe the real job loss from the 90s-era consumption boom and bust was simply postponed by the 2000s-era credit-debt boom.
Having no other alternative, Americans will now have to face the reality and own up to their personal fiscal irresponsibility and tighten belts causing business confidence to erode and inevitably leading to substantial job loss.
Next, in what has to be the worst fiscal policy blunder in our history, the federal government has now positioned itself directly in the line of fire of the largest financial meltdown of modern times.
Fannie and Freddie are insolvent and, having operated as an essentially absurd and fraudulent arbitrage scam in conjunction with sham co-conspirator mortgage originators like Countrywide Financial for over a decade, are essentially dead guarantors walking.
Foreclosures are on the verge of explosive growth as near-prime and prime underwater households relent to the weight of the current economic crisis.
Treasury Secretary Paulson’s promise of bailout of the GSEs will carry a tremendously high cost for taxpayers and further exacerbating the economic malaise and erosion of Americans’ confidence and sense of social fairness.
Finally, I believe that there is a good chance that the S&P 500 will re-test and drop below the lows set after the collapse of the dot-com era.
This would represent a logical, yet truly significant, failure of the private sector as the expansion of the 2000s fully gives way, blending into the dot-com meltdown forming a secular bear market trend the likes of which we have not ever seen.
This would, in a sense, be a GM-ization (NYSE:GM) of the broader stock market and result in a blaring spotlight being shined on the ludicrousness of constructing a multi-decade economic expansion based almost entirely on discretionary consumption and technological hysteria.
