In congressional testimony, Ben Bernanke stated that the economy was poised to begin recovery by the end of 2009. This claim is supported by a survey of industry professionals released by the National Association of Business Economists, which pointed to the second half of 2009 for recovery, with growth resuming in 2010.
On a traditional timeframe, this would mean the market is set to begin recovery any day now, although employment may continue to get worse through the summer, ultimately improving in the spring of 2010. This would make 2008-’09, the longest recession since World War II, as well as the largest credit crisis to touch our shores since then.
In the midst of so much turmoil in the markets, nothing lifts the spirits like vindication. For years we have shouted that inflation was coming, and after this financial crisis, we touted inflation as the most-likely method for economic recovery. And finally, after a long wait, it is finally materializing.
Labor Department numbers confirm that January saw the largest jump in wholesale prices since July, due mostly to rising energy costs. We have long argued, and maintain that crude oil simply cannot, and will not, stay at current levels. Admittedly, oil was too high at $140/barrel, but it is simply too cheap under $40. We believe the appropriate price, given current conditions, is somewhere in the neighborhood of $70-$80 per barrel.
In light of recent news, here is the way we see events playing out over the next year or so:
1. The Dow finds it bottom within the next month. While a rally may not be explosive, it should come comfortably off its bottom.
2. With energy costs leading the way, inflation is going to rip through this economy like a hot knife through butter. Any investors without inflation hedges are going to experience a massive erosion of purchasing power.
3. The economy will stagnate through spring and begin recovery sometime mid-year although real growth won’t begin until late fall or winter.
4. Employment will continue to worsen through summer, ultimately recovering in spring or summer of 2010.
Some other good news: it appears that someone in the Obama Administration must be a reader of this blog. Finally this new group seems to be learning the lesson that when it comes to the financial markets, talk is cheap. Unlike campaigns, this crisis is no popularity contest and rhetoric simply doesn’t work. Hopefully with this lesson learned, the administration will replace speechwriters with economists and quit throwing wrenches in the workings of global markets.