Looking guardedly at the next six months The first half of 2008 was not a good one for the economy or most financial markets. The housing, stock and credit markets have continued to be under pressure. Economic statistics continue to deteriorate. Oil and other commodities continue to rise increasing costs across the board for consumers. Many questions remain about what will happen over the remaining months of 2008. I think it is a worthwhile exercise to sit back and think about things and isolate a few main themes that I feel will be key to understanding the rest of 2008. The important economic decisions are still ahead of us, not behind us. Therefore, I think what happens over the next six months will determine how well or how poorly things turn out for our economy in 2009. How big are financial risks right now? I think there are still large risks out there. I continue to stress that this economic environment is different than any we have experienced since the 1930s. Since World War II, our economy has gone through numerous economic and political crises. We have experienced many booms and busts, wars and terrorism on our shores, presidential assassinations, impeachments and resignations. It has been an incredible run of events. We have faced crisis and risks in the past, so why is this one different? Throughout all of these past events, the one thing that consumers, businesses and the markets could depend on was the strength of the U.S. financial system. The banks were strong, their balance sheets conservative, their lending practices stable, and most importantly, available. They were there to lend businesses and individuals money in a time of need. During national emergencies, the banks were there to step up and lend. And it was more than just the loan, it was the confidence they provided to American businesses. America prided itself on the strength and integrity of its financial institutions. Unfortunately, we cannot say that during this period. Confidence, strength and integrity have been lost. This is the key to understanding the crisis today and why the stock market is not flashing a green light. It is also why the economy will stay troubled, and why the housing market will continue to struggle. It is why the dollar is weak and inflation is surging. The troubled financial system relates to all markets. Not only are the loans not there, but the confidence in the system is not either. Banks have lost over $380 billion in risky financing that has sent chills through the world economy. The conservative image the financial sector has taken so long to rebuild since the Great Depression has been shattered in a matter of months. Until our financial system is in order, the economic and market risks remain substantial. What are the major economic issues and questions remaining in 2008? The world is poised between deflationary financial and housing price collapses in higher income economies and an inflationary global commodity price boom in lower income economies. And because of this unique polar economic event occurring at the same time, there are many questions and uncertainties that remain in 2008. Will the recent surge in commodity prices prove to be a short-term event or a longer lasting trend? Will U.S. households cut back on consumption which ran at 70 percent of gross domestic product between 2003 and 2007? Will the deleveraging of the U.S. and other high-income countries occur smoothly and without inflation? How much bad debt is still out there? Will emerging economies be able to survive massive inflationary pressures and, if not, will volatile international currency markets be the next source of major losses? What will interest rates do? Will emerging nations remain dependent on U.S. economic growth or will “decoupling” finally take place? What will stock markets do? Are equity markets adequately assessing the risks ahead? If stock markets continue to fall will the Fed be able to intervene as it has done over the last 25 years? Will earnings estimates be drastically cut over the rest of the year to put added pressure on stocks? When will housing prices bottom? If mortgage rates continue to climb, how will that affect this whole bottoming process? Will consumer credit card and auto loan debt start defaulting in a more serious way and put more pressure on banks and financial companies? Will GM, Ford or Chrysler or all three declare bankruptcy? The answers to these questions will determine where we are on New Years Day 2009. The new president’s economic policy will be shaped by the answers to these questions. Your company’s 2009 business plan as well as your family budget and investment portfolios will all be directly affected by the answers to these questions. The most important thing one can do for the next six months is to observe, think and act as answers reveal themselves and markets adjust to the new economic landscape. The next six months will reward the proactive thinker, and punish the lazy procrastinator. Remain informed. Discuss ideas with your partners and advisors; think and move. There will be many opportunities to make money in down markets and economies. But you need to be awake and active to do it. In the coming months, make it a goal to be awake and alive with your family, your business and your investments. David Nielsen is the owner and founder of Big Wave Advisors in Wheaton. He has been an independent money manager and trader for more than 25 years. Contact him at 630-682-5520 or via e-mail to dave@bigwaveadvisors.com. He welcomes all comments and feedback.

Posted on Monday, July 14, 2008 (Archive on Monday, July 21, 2008) Posted by jstoltz  Contributed by jstoltz

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