Bernanke’s crystal ball is seeing slow (but not negative) growth

If anyone were to say that 2008 started with a bang, they’d probably be referring to the sound of our stock market dropping like an anvil on the 1st.  Woo hoo.

However, the rationale behind the drop is not what the recessionistas of the world want to hear.  Fundamentals backing our economy are strong.  The upcoming general slowdown will force inflation back into check.  Many ask when the loss of wealth from the housing slump and high gas prices will affect the consumer on an appreciable scale.  So far, the answer is…no.  Not ever.  Never ever.  We like to spend money.  We like to trade in our ’05 Mercedes Benz because the ’08 model has a voice-activated MP3 player hook-up (and life wouldn’t be complete without that).  Holiday spending was pretty blasé, but not terrible.  A heaping helping of mediocrity.

A Limited Cure for RecessionBut mediocrity does not equate to a recession.

We have admittedly been spoiled over the past few years with rapid growth as capitalism spread its glorious wings across the world and investors found plenty of resources to exploit and profit from.  Globalized capitalism has also provided a strong buffer to any wild swings in our economy.  Most major economic indicators haven’t changed as dramatically as most would have expected, given the housing downturn and the subsequent credit crisis.  Unemployment did hop up to 5% which is an uncomfortable level for policy-makers, but that’s no reason to riot in the streets.  We knew this was coming, and most stocks have already priced the inevitable slowdown in.  So, beyond crimping consumer spending a tad more, it should not be viewed as a sign of the apocalypse.

Many question whether or not the Fed is staying ahead of the curve and stimulating commerce enough.  From an inflation-hawk point of view, thus far, I can’t complain about the Fed’s performance.

Oil prices continue to draw attention, though they’ve stabilized around $93 per barrel over the past few days.  We have had multiple trading days where crude oil went over $100 per barrel (which would translate to a national average of about $3.15-$3.25/gallon of gas).  This alongside a weak dollar and weak manufacturing data is bad news for inflation worriers.

But when you get to the heart of it, it’s geo-political events (thank you terrorists) that are jacking up our fuel costs.  The assassination of Benazir Bhutto, Pakistan’s former prime minister and opposition leader combined with unified attacks in Nigeria decreased the ability for producers to produce oil.  Now, every product needs to be shipped to the stores we consumers buy them in, so high gas prices can percolate down into about every cost we experience.  But, threats of an economic slowdown will force retailers to keep their price-hiking in check or lose business to someone who will, effectively counter-balancing the inflationary trend of high fuel costs.

Short version:  Global competition and anemic earnings growth will hold inflation in check, long-term.

Ben Bernanke spoke to the nation about our economic condition at 1 pm on January 10th.  He cited weaknesses in financial sectors, continued problems in housing, and a general worsening of the baseline outlook for ‘08.  But (interestingly enough) he also said that the Federal Reserve is not forecasting a recession.  “Substantive additional action” is being promised to “support growth” and “counter downside risks”.  “Further easing may be necessary” is good news for those homeowners looking to refinance in the nearby future. 

Recession worries, presidential elections, and geopolitical volatility, oh my!  Recession or not (and I am still in the “not” group) we are economically slowing down.  The Fed has drawn clear battle lines.  Mortgage rates will benefit from this cycle so long as inflation moderates.  As more geo-political tragedies rear their ugly faces around the world, an investor flight to quality should re-stimulate American markets.  Long-term investors are staring a lot of opportunity in the face.

It’s good to be back, friends.  Here’s to a successful ’08 for us all.

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