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Economy Will Crater in 09 with Loss of Consumer Confidence

By: Steve Johnson

1/2/2009 - 29 Comments

On Tuesday, a report showed that the US consumer confidence index fell to an all-time low in December.

I'm sorry to start the year off with such bad news, but this is important to understand the direction of the economy.  This is not a good sign for 2009. 

Remember 72% of the US economic activity comes from consumers, not manufacturing output or natural resources or exported IT or medical services – but US consumers. 

The CNN Money article had this to say.

A key measure of consumer confidence fell to an all-time low in December amid a dismal job market and uncertain outlook for the new year.

The Conference Board, a New York-based business research group, said Tuesday that its Consumer Confidence Index fell to 38 in December from the downwardly revised 44.7 in November.
Economists were expecting the index to increase to 45.5, according to a Briefing.com consensus survey of economists.

"The further erosion of the Consumer Confidence Index reflects the rapid and steep deterioration of economic conditions that occurred in the fourth quarter of 2008," said Lynn Franco, director of the Conference Board Consumer Research Center, in a statement.

It Took 25 Years to Recover From The Last Depression

It took the Dow 25 years to return to its position in 1929.

April 1, 1929 - Dow 343
Jun 1, 1954 - Dow 360

If we are at the beginning of another Great Depression (and I believe we are), I'm not willing to wait 25 years for the market to recover. There are plenty of other investment options - like gold, oil, China, etc.

Investing in the US market today is like throwing your money out the window. And keeping cash is not much better because of the major inflation that is about to hit the economy from the Fed's actions in flooding the world with dollars - and the growing threat of the world to sell their dollar reserves.

Will Markets Find a Bottom in 2009?

That is the million dollar question.  Central Banks around the world are doing everything they can to stop the global financial selloff. Interest rates have been dropped to near zero and new money is being poured into the global financial system. This is the plan to put a bottom on the US stock market. The more money they print, the more chances that some of it will end up invested in markets. But, during inflationary periods of time stock markets become a limited source of equity capital, making it more difficult for companies to raise money as investors move to other currencies and other markets.  The US stock market may be hit especially hard by inflation because of the huge role that foreign investors play.

The Market Will Come Back - So They Say

Many in the financial media and the personal finance bloggers have called a bottom month after month and have lost a lot of credibility for being consistently wrong. (like Jim Cramers)

We are far from the bottom. At this point stocks cannot adequately be priced because nobody knows how much the consumer is actually going to cut back, which will determine future earnings. Last quarter earnings cannot be trusted to price stocks, because future earnings may be much lower. So, when they say you should buy because the P/E (price per earnings) ratio is very good, they are talking about yesterdays P/E. Tomorrows P/E is likely to be much lower.  It may take a few quarters to adjust the P/E ratios before stocks can be accurately priced.

Mass Delusion

Many of the popular personal financial advisors are still drinking the Kool-Aid, caught up in mass delusion.

The party is over.  The age of prosperity in America propped up by borrowing money from the savers of every other nation is over.  Now is not a good time to invest in US stocks, which are likely to continue to lose value for years, followed by a cycle of inflation that will reduce their value even more.  Record drops in consumer confidence and rising unemployment can only led the US market in one direction - down.

Get out before your money is completely gone. "It will come back" they all say, but when will in come back and what will the value of the dollar be when it does are big questions - with a lot of downside risk.

If you get your money back after the dollar looses 80% of its value - then you have lost 80% of your money.

Only Hope

The only hope I have in the revival of the US economy, is our relentless spirit of entrepreneurship.  But in the best conditions, entrepreneurs cannot replace jobs at the rate that the economy is losing them.  And the government’s socialistic actions are making it harder for entrepreneurs to get capital, while reducing their incentives by increasing taxes and giving competitive advantages to government supported enterprises. 

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