Prologue

Here we are in a new year and the beginning of a new decade. The year 2010 has arrived in spite of hell and high water. When I was a young lad my Father frequently used the expression “come hell or high water” whenever he spoke of something that he intended to do. Whether or not anything was actually accomplished was immaterial, but to state that you will accomplish something “come hell or high water” sounds good in the beginning, even if the goals are never reached at all.

That is what 2009 was, it was the Government’s ‘come hell or high water’ barrage of ‘we’ll fix everything so this never happens again’ , ‘the economy will thrive once again’, ‘anyone who wants a job will be able to get one’, and my personal favorite ‘the banking system is safe and sound’.  Like my Father spoke when I was a young child, hearing strong words is comforting and reassuring, but being a young child I was naïve and was easily manipulated into believing something was true.

As adults it is our Government leaders who we look to for comfort and reassurance that everything will be OK. But just like we did when we were children listening to our Fathers promise the world to us we have as adults been expecting our Government to come through for us, we have come to expect they will make everything better because they say it will be done “come hell or high water”.  As adults we should know better, we should know that promises are often broken or were simply too big to begin with. When we grew up we discovered that our parents sometimes lied to us when we were young just to make us feel better or stop crying.

The year 2009 was nothing more than the equivalent of our Father’s “come hell or high water” and our Mother’s “everything will be OK” combined.

American’s have been lied to, taken advantage of, robbed, and other egregious acts performed upon them all in the name of profits and the covering up of failed policies. Corporate America had reached so far into our lives that we have become dependent on them for our every need or want. And it was only through a rapid credit expansion that in turn fueled the housing price bubble that in turn enabled American’s to sustain or grow our lifestyles. And now that all of that has been taken away from us, we are once again like the little children we once were asking our parents for comfort that all will be well. Only this time it is our Government that we are seeking comfort and reassurances from that our way of life will return. We seek the easy credit to flow like it once did so that we can sustain our basic needs and expand our lifestyles. You see, had it not been for the credit expansion the nation would have experienced little or even negative growth for many of the past years.

Our Government has gone to great extremes to communicate to the American people that steps are being taken to address the problems. The building of confidence among the American people is the top priority of the Obama administration, not the actual fix to what led us to this financial meltdown. Oh sure, there have been Congressional hearings and investigations into how and why this all happened, and even some tough talk of reform. But at the end of the day (or in this case at the end of the year) not one thing has been done to actually fix the problems. Actually, some of the steps taken to date will have even greater consequences in the not so distant future should they be allowed to continue unchecked. Like a nuclear reactor that has run out of cooling water, the last thing one wants to do is add additional fuel rods (stimulus) to the core. This would lead to a china syndrome where stopping the damage becomes nearly impossible. What is needed is more cold water to cool off the system, allow de-leveraging to continue unobstructed, force the losses out into the open where they can be recognized and the damage be known. It is only then with a full cooling down of the entire system that we can begin to render repairs. Attempting to throw more and more dollars at the problem is akin to sending the nuclear technician into the core and juicing up the reaction when it has already reached critical mass. But the Government does not seem to care about what may happen if they continue adding more fuel, they only know that the lights are flickering and the people are demanding that the power be restored right away.

This is a situation where it is better to tell the American people that they will have to live with black outs for a period of time so as the system can be repaired properly. But you try telling that to the American people, they don’t care about later, they care only about the here and now. Besides, it would be very damaging to ones political party to allow the system to go cold while repairs are being rendered. Hell, Americans get bent out of shape if their cable TV goes out for even 10 minutes. How will they react if they are told that they won’t be able to get more credit, or have the companies they work for left to fail even if it was the fault of the company in the first place. None of that matters anymore, just have the Government throw more fuel into the fire and have the tax payers pay for it, and the ensuing damage that will result later.

The Government has thrown the ‘battle short’ switch.

Where Are We Now?

As the clock struck midnight and we moved into a new year many ask the question where are we now? What did 2009 do for our economy, markets, working class people, and our prospects that the problems will be fixed. Well the answer to those questions depends on what measurement stick is utilized to gauge the progress, or the lack thereof, of these issues being questioned.

If one were to assess the current state by simply examining stock prices and nothing else then one could take a view that the economy is doing much better, and that a road to recovery is well underway. If only Government statistics and talk were being utilized then you would find yourself in a conflict between the Washington rhetoric and reality. The rhetoric being the ‘everything will be OK’ and the reality that you or someone you know has lost their job, or have had your work hours reduced, lost a home, had your credit card interest rates rise to 30%, or are receiving assistance from food stamps. All of these situations have sky rocketed over the past year and is why there is such a strong contrast between the Washington talk and what you know to be reality.

I will share with you my view of where we stand as 2010 gets underway. The American people have been seated in the front row of the largest and most elaborate show on earth. The performers on stage are tugging at your inner desires to always be told that everything will be fine. They perform theatrical feats that inspire trust and confidence that the ending of the show will be a joyous and wonderful conclusion. We are mesmerized by their articulate understanding of our plight and anguish as they show sympathy to our despair and anger by talking tough, and we have even seen a few theatrical acts of murder on stage as the Government kills a few bad guys. We applaud when the bad guys go down and even give a standing ovation to the one that wielded the weapon, but remember it is all theatrics and the bullets were blanks.

The American people are angry and are financially wounded, and the Government is putting on the biggest post World War II USO show in history to make us feel better about our plight. But the people producing and directing the show are those who put us into this mess in the first place. The title of the show might as well be ‘Capitalism Gone Crazy”.

We have witnessed the financial markets stage a recovery from the March low only to end the decade in the red.  The past ten years for the average buy and hold investor has netted essentially nothing, and that is if they were lucky. If they invested heavily in the bubbles (technology, housing, and financial stocks) then they have lost a great deal more.

The rise in stock prices witnessed in 2009 is not a reflection of solid economic growth. No, the rise of the market is on the hope that solid economic growth will return very soon. As it has been said many times by many people, the stock market is a forward looking indicator and will lead actual economic activity by anywhere from six months to a year. But just like any indicator it can fail, like it failed to anticipate the collapse in 2007 when broad indices kept inching higher yet economic activity was already flashing danger signals which I warned about in late 2007.

The year 2009 came to an end much the same way we entered it, only difference is that we have a new performance on the stage as we gave the previous act the boot and elected a new cast of actors. And it is this new cast that is attempting to convince the American people that a new Sheriff is in town and he will clean up like no Sheriff has ever been able to before him. Again, it is easy to get so caught up in a well acted performance that we lose the ability to distinguish fact from fiction. The stock market right now is simply caught up in the act and when the curtain comes down it will only be then that we see that it was all fiction.

2010 and beyond

I will start with what may be the most controversial prediction of them all. The stock market will once again fall, and that fall may very well be as dramatic as the first fall of 2008. The lows reached in March 2009 will be retested and those levels holding the second time will be unlikely in my view. The rally from the March low is in my view still a bear market rally within the confines of a large secular bear market that began in 2000. That secular bear market will not end until around 2014 or 2015.

Secular bear markets very often suck in the unsuspecting and believe what is being witnessed is real.

The rapid credit expansion of the past decade, which fueled the stock market as well, has crashed. Although every effort is being made to put that unsustainable credit engine back into operation it simply can’t be done now. The deleveraging from the damage done to date has only just begun, and any attempt to stifle that de-leveraging process will only prolong the agony.

Tax receipts at all levels will continue to contract in 2010. Local and County governments will be hit the hardest in 2010 as state funding will dry up, leaving the local towns and communities to cut even more employees and services, or even raise taxes.

The 2010 federal and state tax return season will see a substantial increase in the amount of unpaid taxes, even when they are due. Perhaps even a new record of unpaid taxes will be achieved this year. The reasons are simple; more people are unemployed then have ever been in nearly 35 years, even more if we use the old methods of calculating the number of unemployed. American’s have been tapping their 401K and IRA savings in order to save their homes, pay for medical expenses, or even to pay for food as their other sources of income have dried up. Those withdraws come with heavy tax penalties and it only seems obvious that if families had to withdraw that money in the first place they won’t be able to pay the taxes on those withdraws either.

The housing market will sustain further damage and price declines as the foreclosures ramp up significantly in 2010. Delinquency reports from all major institutions clearly show that the situation is worsening and shows no sign of improvement in the foreseeable future. All attempts by the Government and banks to reverse the tide have failed. The action taken by Treasury Secretary Tim Geithner on Christmas Eve to remove the cap on losses the Government will cover from Fannie Mae and Freddie Mac is one of the most telling (and dangerous) clues we have about what is in store for us.

Backlashes from the poor and middle class will increase sharply in 2010 and beyond as the promises to fix the system fail. The rise in foreclosures will be what sets this into motion, followed by increased costs for many goods and services essential to supporting a basic quality of life. This will coincide with the continuation of stagnate wage growth.

The health care reform bill will be passed in some form before the President’s State of the Union address. It will be touted as the biggest event in American history. However, it is my view that the reforms will not have enough bite to make any significant improvement in the health care system. And in some instances will actually raise the cost of health costs in the years ahead.  This will add to the backlash discussed above.

Financial reform discussions will continue well into 2010, with the end result being a bill that is so diluted it will have no ability to prevent another, or curtail the current financial disaster. Bring back Glass-Steagall and then I will be impressed, anything less will be a bill that coddles the financial institutions and leaves the American people at the mercy yet again to the instigators that created the mess.

The Too Big To Fail institutions will grow even larger as they absorb more and more of the smaller financial institutions and failed banks. And the government will encourage this throughout the years ahead.

Final thoughts

The people who will be most impacted in the coming years will be the ‘credit’ generation. They are the ones who grew up in the era of easy credit where anything can be had with a swipe of plastic, or the application of one’s signature on a bank loan. They are the college age up to the late 30’s generation. Because these are the people who are just starting families and building a home it will hurt them the most, and the fallout will be great for the burden on the public support systems will be enormous. A new record of families receiving food stamps will be reached in 2010.

The past decade has been a lie. Growth was fueled by credit expansion on money that did not exist in the first place. In other words, growth was created on paper by leveraging money that had no significant value to begin with, and backed by assets that were and still are deteriorating in value. The Government wants to rekindle this artificial growth at any cost. Because without a return to that same level of credit expansion the economy will collapse. But, artificially inflating the system and forcing credit expansion to return will put the nation at great peril, as the only way to accomplish this will be through the continuation of massive Government backing of the financial system. And that action comes with great danger to the ability of the Government to pay its own debts. We can’t continue to expect china and other nations to keep bailing out the United States by purchasing our debt forever. A time will come when those nations grow strong enough without the United States that they will abandon our debt and leave us to our own devices.

Paying attention in 2010 will be more important than it has ever been. Complacency going forward can and will wipe out your life savings and your livelihood. The time to prepare for tough times has already arrived, but at least one can still limit their exposure to the additional fallout that is yet to come by doing whatever is necessary to get out of debt and then live on a cash basis, not credit going forward.

This is now a matter of survival for many Americans

On the lighter side of predictions for 2010 I foresee Goldman Sachs being granted ‘Church’ tax exempt status for their continuation of God’s work. This will coincide with their going private and then will no longer be required to pay taxes.

And the new airport full body screening technology will be combined with the health care reform bill that allows for people to obtain their yearly mammograms simply by taking a flight. The TSA will be trained to spot guns, explosives, knives, cancer cells, tumors, cardiac screening, HIV blood screens, and pregnancy testing. You will be offered to receive your screening results by email for free as part of the Obama administrations push for electronic records, or for a $20.00 handling fee you may elect to have them delivered to your home. The cost savings to the public will be considerable and both parties in Washington will jump at the claim it was their idea.