Stocks STILL 30% OVERVALUED even with the 512 point drop

This is NOT for the weak of heart, it is for the pragmatist who will evaluate more dispassionately then those who invest on hope.

The DOW dropped 512 this past Thursday.

And that’s on top of the several hundred points it dropped last week.

The S&P 500, a broader market measure, is now down more than 12% off its recent peak.

So what does that mean?

Is it a “buying opportunity”?

Over the short-term, who knows? If this carnage keeps up, a panicked Ben Bernanke will probably rush to announce some huge new quantitative easing program. Or Congress will quickly rethink its recent commitment to “austerity” and announce trillions of new spending. And those initiatives might boost stocks for a while.

The bigger picture, however, is less encouraging. Even after the recent plunge, stocks are still about 30% overvalued when measured on “normalized” earnings–which is one of the only valuation measures that works.

Specifically, even after the crash, stocks are still trading at 21X cyclically adjusted earnings, as we can see in the following chart from Professor Robert Shiller from Yale. Over the past century, stocks have averaged about 16X those earnings. So we’re still about 30% above “normal.”

In recent months, eager to suggest that stocks are “cheap,” most analysts have talked about the market P/E ratio relative to next year’s projected earnings. And relative to those earnings, stocks do seem modestly “cheap” (12X, or something).

Unfortunately, measuring stock values against next year’s projected earnings has a couple of flaws. First, no one knows whether those projections will materialize. Second, and more important, those projected earnings assume that today’s near-record-high profit margins will persist.

Over history, corporate profit margins have been one of the most reliably “mean-reverting” metrics in the economy. When margins get extended to super-high (today) or super low (2009) levels, they generally revert toward the mean. This radically changes the PE ratio.

And measured on average profit margins, not today’s super-high margins, the stock market is still expensive.

Sadly, this doesn’t tell you anything about what the market will do next.

What this PE ratio does tell you is that stocks still have lots of room to fall–30%, just to get back to normal, much more than 30% if they “overshoot.”

And it also tells you that long-term returns are still likely to be sub-par.

Through history, one of the most reliable predictors of next-10-year returns is the valuation level at the beginning of the period. Today’s valuation level is not as high as yesterday’s. But it’s still higher than average.

fundamentals?

Prices and earnings.

Stocks appear reasonably priced when measured against this year’s expected earnings, but this year’s expected earnings aren’t normal earnings. They’re earnings inflated to near-record high profit margins.

In the past, whenever we’ve had unusually high profit margins, we’ve eventually returned to normal profit margins (and below). This mean-reversion has hammered earnings growth–and, with it, the stock market.

Is that absolutely for certain going to happen this time?

Of course not. Nothing’s ever certain.

But the only reason it won’t happen this time is if “it’s different this time.”

Those of you who have had the misfortune to live through the last three stock-market crashes–and any of the stock-market crashes before that–know why “it’s different this time” are described as the “four most expensive words in the English language.”

Now, bulls will argue vociferously (in a variety of ways) that it IS different this time. And you should always be happy to listen to those arguments. But given that, with respect to profit margins, it has NEVER been different this time, you should view all such arguments with serious skepticism.

Importantly, of course, profit margins and price-earnings ratios tell us NOTHING about what the stock market will do this week, this month, this year, or even next year. They’re just not good short-term market indicators.

What profit margins and price-earnings ratios have told us in the past, however, is what the stock market’s long-term returns are likely to be. And today’s combination of near-record high profit margins, combined with high P/E multiples (on normalized earnings), suggest that long-term stock returns are likely to be lousy.

Does that mean you just just dump all your stocks tomorrow? No.

Doing anything to an extreme with respect to portfolio management is almost always a recipe for disaster, especially when you’re managing your own money (as opposed to someone else’s money, which is what most money managers manage).

And in the current environment, when a decade or more of high inflation seems a distinct possibility, the last thing you want to do is get caught holding only cash or bonds.

So, as ever, you should maintain a diversified portfolio of multiple asset classes, including stocks, bonds, cash, and real-estate. If the stock portion of that portfolio has inflated massively in the past two years, however, you might want to consider rebalancing.

And, for planning purposes, you shouldn’t expect the stock market to deliver anything close to its long-term average return of 10% a year.

Note that only 5 times in the past 60 years have corporate profit margins approached the levels they’re at today. And note what happened each time thereafter. (They regressed to–or below–the mean.)

When corporate profit margins are expanding, profits grow faster than revenue, and stock multiples usually expand (stocks track profits over the long haul).

When corporate profit margins are shrinking, profits grow more slowly than revenue, and stock multiples usually contract.

there is always a possibility that we’re in a “new normal” in which profit margins will keep expanding for years, if not forever. (Well, okay, not forever. Even the biggest bull would be forced to agree that, at some point, profit margins have to stop expanding, or profits will get bigger than revenue.)

Based on the history of the past 60 years, however, this seems unlikely. At several points in the past 60 years, it looked like profit margins had hit a new normal, only to see them collapse to the mean. And the odds are that the same thing will happen this time.

What could bring profit margins down?

Any of a number of things:

• Increasing commodity prices, which companies might not be able to pass through to end users

• Higher taxes, as federal and local governments try to balance their budgets

• Higher labor costs, as weak-dollar policies raise the cost of foreign manufacturing

• Deflation, as companies are forced to compete by cutting prices because consumer demand remains weak

• Recession. No one’s talking about a double-dip now, but that doesn’t mean we won’t eventually get one. And have a look at what corporate profit margins have done in past recessions.

If corporate profit margins stay at today’s high level for the next several years, the only way the stock market will deliver strong returns is if the market’s P/E ratio continues to expand. Again, it’s possible that the PE ratio will do this, but very unlikely.

It’s also  possible that the market’s PE will stay elevated (or get even more elevated).  But it’s more likely that the PE ratio will also regress to the mean.

In today’s market, in other words, we have both extremely high profit margins and abnormally high PE ratios. In all previous history, both measures have tended to regress to–and beyond–the mean.

2009 Economic Predictions by Craig Eisele

2009 Economic projections by Craig Eisele

Note: the following is MY opinion and how I see the economy… it should not be considered investment advice or factual as to the actual performance of the US and Global Economies in 2009.

If you do not want to hear bad news I strongly suggest you stop reading at this point and read a good fiction book….or watch Kudlow on CNBC who is more of a cheerleader then as realist…. Although a caution as to the rest of the CNBC team as they seem to realize more the current economic realities.

One of the greatest threats we face is Deflation during this recession… WHY?? Because the economic definition of a DEPRESSION is Recession accompanied by Deflation… BUT do not expect the government to say we are in a Depression until it is either over or is so evident that denying it would be fruitless. The government is afraid to start any panic as to the true severity of this crisis we are in and as such will try to protect the citizens as long as possible from the hard realities.

Before this economic crises is over I believe that we will see history actually show that we have or will have had entered into a Depression…. The only question is: for how long.

In the United States approximately 70 percent of our economy is based upon Consumer spending…  as such Particular attention will be paid to that segment of the economy.

Estimates so far are that at least 70,000 retail locations are expected to close in 2009. Personally I see that number even higher and expect over 100,000. Thus higher unemployment will occur.

Personal savings rate will continue to be negative throughout the year with rare occurrence of it turning positive.

Over all the consumer is being hit with rising prices from the Summer 08 Oil Prices and those prices have not come down in tandem with Oil. Corporations are struggling to meet cash flow needs and turn profits for their shareholders and as such are reluctant to lower prices.

Credit will not loosen very much in 2009… Credit card companies will continue to reduce credit limits (2 Trillion dollars so far) and will raise interest rates on balances even for the slightest blemish or down grading of your credit. Keeping your credit cards in the back of a drawer and NOT canceling them is advisable.

Expect Congress to address these issues in Credit Card operations and policies in 2009 in an attempt to protect consumers a bit better… but high expectations for relief should be discouraged because of the powerful lobbying teams of Banks and other financial institutions. Result Consumers will and should pay down more of their debt and spend less thus creating Consumer slow down in spending in 2009.

Oil Prices will NOT stay low for long. Oil Producing Countries need the revenue for their own countries economies…. Demand may be down globally but the minimum necessary price is 45 dollars a barrel while countries like Venezuela, Iran, Russia etc require upwards of 70 dollars a barrel to keep their domestic programs going and to maintain their economies. Expect Oil close to or above 100 dollars a barrel by the end of 2009 based upon the needs of the Oil Producing Countries.

Job Loss and fear of Job Loss with hamper Consumer Spending even farther. This includes areas like housing and Auto sales as well.

Credit availability for Housing will be tight for many years to come. Impeccable credit and a hefty down payment  of 20 percent or more,will be required as it was over a decade ago. The result will be a continuing deflation in Housing prices and no bottom expected until mid 2010. These expectations of losing money on a new home purchase will also keep many buyers on the sidelines.

Credit will also suffer because of continued required write-downs by Mortgage holders and those holding the Mortgage backed securities. Expect the Foreclosure rate to keep high thus flooding the market with additional homes. This credit problem will be further exacerbated by rises in Commercial Mortgage defaults. Particularly in Retail Commercial properties.

The measure of companies with retail locations in terms of profitability will be changed. MOST leases no Commercial Property like retail are triple net… meaning that the tenants are responsible to paying a pro rated share based upon occupancy of leased space for Utilities, Taxes and maintenance. The additional burden placed upon them buy the loss of other retailers coupled by decreasing sales will cause more stores to close. Currently the VACANCY rate in retail locations is at 8.2%. That will continue to rise throughout 2009.

Commercial Mortgages are often done with long amortization rates meaning 10 to 30 years mortgage payment rates, with a balloon payment (the full balance of the Loan) due after 5 years. As properties increased in value and occupancy rates were high and credit was readily available this was not a concern. Today, however, those criteria for refinancing can no longer be met by most mall operators or owners of other retail properties. Even the Commercial office space Market will be effected.

Loss of retail also usually has a negative effect in Commercial Office space… and even the A class properties are now feeing the potential problems growing. Expect an increase in “services” oriented companies across the USA and several hundred thousand jobs lost as a result, many of which do not and will not qualify for unemployment compensation to help them.

The stock markets will continue to act in a volatile and irrational way. Over reaction to perceived good news and bad news will move the market in triple digits and randomly. If you are brave and can wait 10 years or more for profits then now is the time to buy select companies that may recover faster as the economy bottoms and flattens in 2010.

Federal funds rate will not be increased for the first half of 2009, but may have a slight increase of 0.25 to0.50 in the second half of 2009 and into 2010 as the dollar weakens and the need to strengthen the dollar increases.

The need to have safety for cash will continue to hold the Treasury Bonds yield down to hover at or near zero as banks are not considered safe enough and consumers are fearful.

Bank Write offs will continue and the biggest shocks to the market will be in Commercial backed mortgages as well as increased Credit Card default rate as climbing interest rates and lack of credit availability will force consumers into decisions that will not factor most creditors.

Housing prices will continue to decline throughout 2009. Lack of demand and increased inventories by those underwater on their mortgages and those foreclosed upon homes, and the lack of credit and the return to the requirements of old with 20 percent or more down and verifiable rations of income to mortgage payments as well as HIGH credit scores… all combined will be a continued drag in the housing market and will even affect places like New York City on 2009 through at least the first half of 1020.

Retirees will delay their retirement and the “equity” they thought they had in their homes and the devastation to their retirement funds will be so bad as to force more people to work longer and will contribute to the lack of available jobs for younger people.

Unemployment will rise to double digits…. Most likely to around 11 percent official and 17 percent unofficial Unemployed people will number more than 18 million people.  Currently the Unemployment are has gone over 7.2%. I expect that before we flatten out that number will grow to close to 11 percent. Currently the number of those unemployed is over 6 million…. but those numbers a skewed to those who qualified for unemployment and or are seeking employment actively.  The REAL number of unemployed is substantially higher if the number of those underemployed, working only part time, or who have given up looking for work are included. The number of long-term unemployed (those jobless for 27 weeks or more) rose to 2.6 million in December and was up by 1.3 million in 2008.

Bankruptcies will hit all time highs both for individuals and Businesses.

The Auto Industry: This is the hardest to predict in some ways. BUT… Knowing that credit is hard to get to purchase an automobile, and that demand is down because individual consumers are feeling the economic pinch and are concerned about their declining home and retirement values, and compounded by job uncertainty will make any recover of the Auto Industry in general almost impossible in 2009. While most of us abhor the idea that the “Big Three” in Detroit may declare bankruptcy. I see no choice especially given the legacy costs of pensions and health care that hurts their price competitiveness. Premium prices for things like the Chevy VOLT or other fuel-efficient cars will not me tolerated by a price sensitive consumer market in these economic times. Therefore the demand that Auto Makes produce these cars, while admirable, is not productive to the automotive industry recovery at this time.

The result of the above will be continued declines and flattening of the Auto sales, which of course, contributes considerably to the GDP of the United States. A downward spiral that cannot be stopped without bankruptcy to protect those companies and jobs till the economy flattens out and hopefully and gradually raises enough to spur more automobile sales.  Bottom line…. expect one or more of the Detroit 3 to declare bankruptcy in 2009.

GDP Contraction 5 % or more: I hope this is self evident given what I have already written…. the ONLY way this will not happen in 2009 is if we devalue our dollar by printing more money…. but that results in hyper inflation and higher prices which would artificially make our GDP that much higher.

Federal budget deficit of 1 trillion and growing to possibly 2 TRILLION as the need for spending like the years of Roosevelt in the New Deal Era increases and as the concession to business for tax rates being the same or even lower taxes are made and the revenue for the US Government continues to decline from Lower profit, less payroll tax income and growing social programs to assist the impoverished. The NATIONAL DEBT will run higher than 12 trillion dollars UNLESS the government prints more money…. but that will further weaken the value of the US dollar. A delicate trade off that has to be dealt with in 2009.

LOWER corporate taxes and/or Capital Gains in a declining economy will NOT spur employment or Investment in Pant or equipment. The only people who will possibly benefit are those who own stocks in those companies. And even then the benefits will be minimal. Worse the Down side is lower revenue for the government in a time when spending must be increased to spur economic recovery.

Globally expect more instability in under-developed countries. Poverty, starvation and generally declining conditions in these countries will give rise to radical idealists who will create chaos and instability in those countries. Antagonistic behavior towards those industrialized countries that are seen as culprits in this economic crisis will be the most villianized. Terrorism abroad will increase in response to the frustration and need to blame someone increases.

Currency fluctuations will be as common as weather changes during 2009. 30-day moves can exceed 15 percent and daily moves may be as much as 5 percent. Thus this will make international business more volatile and difficult to conduct.

Parity with Euro and British Pound is possible given the currency fluctuation at this time only a 10 percent difference exists between the 2 currencies. Briton will continue to decline as the full effects of their new economy that was built on the financial sector and debt continues to play out.  France and Germany have yet to feel the real impact of what is happening globally and as such have been the prop to the Euro over the last year. The EU’s efforts to prop up Eastern European Counties with bailouts will have little effect on the full impact of the global recession. Ultimately the Euro will have to decline in value.

Weaken of the dollar … then strengthen and weakening. The Japanese Yen, the Euro, and the British Pound with fluctuate so much that any stability for the dollar will have to come from the USA itself. However that appears unlikely until the USA takes drastic steps to stem the bleeding and ultimately devalues the dollar.

EU predictions Italy and possibly Spain: I expect al least Italy to go back to the Lira and to try an peg the Lira to the Euro to allow it to re-enter the EU Euro denomination Currency in a few years. This will be necessary as the Italian economy and the EU regulations are in conflict and Italy cannot meet the EU demands for economic reform to satisfy the EU regulations. Spain faces the same situation.

France and German Social programs will be the downfall of these economies. With a global recession and decline in local economies the demand for these generous programs will go to an all time high and will send them into a deeper recession as they struggle to balance budgets and stem spending.

China will see continued decline in growth based upon the global economy. It is unclear if their domestic consumption can make up for the downturn. It may now feel the effect of the lack of a substantial Middle class and sustainable consumer base

India is just now feeling the effects, and as global outsourcing to India shrinks, and the allegations that the financial accounting is being doctored by some to keep showing profits surface. The “middle class” is mostly dependent on the global outsourcing in areas of IT and calling centers, which are declining rapidly. India will experience a recession that is severe and has potentially serious consequences on its economic stability.

It seems inevitable that the United States Government will be forced in 2009 or early 2010 to print more Dollars, to buy its own debt and to pay for spending programs as debt is not being bought by most companies or countries or even individuals. Hence a devaluation of the dollar… expect Euro and Pound to follow and a period of hyper inflation accompanied by higher interest rates when that happens.

I was reluctant to write this piece as I hoed to see more indications that things would improve…. However, that has not happened and the result is a significant delay in my predictions.

I hope I am just a pessimist.. however at this time I think I am more of a realist in how things are at this point in time. Things CAN change.. and my predictions can be totally wrong. But for that to happen requires political will and individual determination….And I see no signs of that at this time.

Regardless of whether you agree or disagree with my assessments made her.. YOU must decide for your self what you need to do if this scenario does take place… or if it does not. These are things the way I see them and should NOT be taken as factual or advice to anyone.

Craig Eisele

2009 Economic projections by Craig Eisele

Note: the following is MY opinion and how I see the economy… it should not be considered investment advice or factual as to the actual performance of the US and Global Economies in 2009.

If you do not want to hear bad news I strongly suggest you stop reading at this point and read a good fiction book….or watch Kudlow on CNBC who is more of a cheerleader then as realist…. Although a caution as to the rest of the CNBC team as they seem to realize more the current economic realities.

One of the greatest threats we face is Deflation during this recession… WHY?? Because the economic definition of a DEPRESSION is Recession accompanied by Deflation… BUT do not expect the government to say we are in a Depression until it is either over or is so evident that denying it would be fruitless. The government is afraid to start any panic as to the true severity of this crisis we are in and as such will try to protect the citizens as long as possible from the hard realities.

Before this economic crises is over I believe that we will see history actually show that we have or will have had entered into a Depression…. The only question is: for how long.

In the United States approximately 70 percent of our economy is based upon Consumer spending…  as such Particular attention will be paid to that segment of the economy.

Estimates so far are that at least 70,000 retail locations are expected to close in 2009. Personally I see that number even higher and expect over 100,000. Thus higher unemployment will occur.

Personal savings rate will continue to be negative throughout the year with rare occurrence of it turning positive.

Over all the consumer is being hit with rising prices from the Summer 08 Oil Prices and those prices have not come down in tandem with Oil. Corporations are struggling to meet cash flow needs and turn profits for their shareholders and as such are reluctant to lower prices.

Credit will not loosen very much in 2009… Credit card companies will continue to reduce credit limits (2 Trillion dollars so far) and will raise interest rates on balances even for the slightest blemish or down grading of your credit. Keeping your credit cards in the back of a drawer and NOT canceling them is advisable.

Expect Congress to address these issues in Credit Card operations and policies in 2009 in an attempt to protect consumers a bit better… but high expectations for relief should be discouraged because of the powerful lobbying teams of Banks and other financial institutions. Result Consumers will and should pay down more of their debt and spend less thus creating Consumer slow down in spending in 2009.

Oil Prices will NOT stay low for long. Oil Producing Countries need the revenue for their own countries economies…. Demand may be down globally but the minimum necessary price is 45 dollars a barrel while countries like Venezuela, Iran, Russia etc require upwards of 70 dollars a barrel to keep their domestic programs going and to maintain their economies. Expect Oil close to or above 100 dollars a barrel by the end of 2009 based upon the needs of the Oil Producing Countries.

Job Loss and fear of Job Loss with hamper Consumer Spending even farther. This includes areas like housing and Auto sales as well

Credit availability for Housing will be tight for many years to come. Impeccable credit and a hefty down payment opf 20% or more, will be required as it was over a decade ago. The result will be a continuing deflation in Housing prices and no bottom expected until mid 2010. These expectations of losing money on a new home purchase will also keep many buyers on the sidelines.

Credit will also suffer because of continued required write-downs by Mortgage holders and those holding the Mortgage backed securities. Expect the Foreclosure rate to keep high thus flooding the market with additional homes. This credit problem will be further exacerbated by rises in Commercial Mortgage defaults. Particularly in Retail Commercial properties.

The measure of companies with retail locations in terms of profitability will be changed. MOST leases no Commercial Property like retail are triple net… meaning that the tenants are responsible to paying a pro rated share based upon occupancy of leased space for Utilities, Taxes and maintenance. The additional burden placed upon them buy the loss of other retailers coupled by decreasing sales will cause more stores to close. Currently the VACANCY rate in retail locations is at 8.2%. That will continue to rise throughout 2009.

Commercial Mortgages are often done with long amortization rates meaning 10 to 30 years mortgage payment rates, with a balloon payment (the full balance of the Loan) due after 5 years. As properties increased in value and occupancy rates were high and credit was readily available this was not a concern. Today, however, those criteria for refinancing can no longer be met by most mall operators or owners of other retail properties. Even the Commercial office space Market will be effected.

Loss of retail also usually has a negative effect in Commercial Office space… and even the A class properties are now feeing the potential problems growing. Expect an increase in “services” oriented companies across the USA and several hundred thousand jobs lost as a result, many of which do not and will not qualify for unemployment compensation to help them.

The stock markets will continue to act in a volatile and irrational way. Over reaction to perceived good news and bad news will move the market in triple digits and randomly. If you are brave and can wait 10 years or more for profits then now is the time to buy select companies that may recover faster as the economy bottoms and flattens in 2010.

Federal funds rate will not be increased for the first half of 2009, but may have a slight increase of 0.25 to 0.50 in the second half of 2009 and into 2010 as the dollar weakens and the need to strengthen the dollar increases.

The need to have safety for cash will continue to hold the Treasury Bonds yield down to hover at or near zero as banks are not considered safe enough and consumers are fearful.

Bank Write offs will continue and the biggest shocks to the market will be in Commercial backed mortgages as well as increased Credit Card default rate as climbing interest rates and lack of credit availability will force consumers into decisions that will not factor most creditors.

Housing prices will continue to decline throughout 2009. Lack of demand and increased inventories by those underwater on their mortgages and those foreclosed upon homes, and the lack of credit and the return to the requirements of old with 20 percent or more down and verifiable rations of income to mortgage payments as well as HIGH credit scores… all combined will be a continued drag in the housing market and will even affect places like New York City on 2009 through at least the first half of 1020.

Retirees will delay their retirement and the “equity” they thought they had in their homes and the devastation to their retirement funds will be so bad as to force more people to work longer and will contribute to the lack of available jobs for younger people.

Unemployment will rise to double digits…. Most likely to around 11 percent official and 17 percent unofficial Unemployed people will number more than 18 million people.  Currently the Unemployment are has gone over 7.2%. I expect that before we flatten out that number will grow to close to 11 percent. Currently the number of those unemployed is over 6 million…. but those numbers a skewed to those who qualified for unemployment and or are seeking employment actively.  The REAL number of unemployed is substantially higher if the number of those underemployed, working only part time, or who have given up looking for work are included. The number of long-term unemployed (those jobless for 27 weeks or more) rose to 2.6 million in December and was up by 1.3 million in 2008.

Bankruptcies will hit all time highs both for individuals and Businesses.

The Auto Industry: This is the hardest to predict in some ways. BUT… Knowing that credit is hard to get to purchase an automobile, and that demand is down because individual consumers are feeling the economic pinch and are concerned about their declining home and retirement values, and compounded by job uncertainty will make any recover of the Auto Industry in general almost impossible in 2009. While most of us abhor the idea that the “Big Three” in Detroit may declare bankruptcy. I see no choice especially given the legacy costs of pensions and health care that hurts their price competitiveness. Premium prices for things like the Chevy VOLT or other fuel-efficient cars will not me tolerated by a price sensitive consumer market in these economic times. Therefore the demand that Auto Makes produce these cars, while admirable, is not productive to the automotive industry recovery at this time.

The result of the above will be continued declines and flattening of the Auto sales, which of course, contributes considerably to the GDP of the United States. A downward spiral that cannot be stopped without bankruptcy to protect those companies and jobs till the economy flattens out and hopefully and gradually raises enough to spur more automobile sales.  Bottom line…. expect one or more of the Detroit 3 to declare bankruptcy in 2009.

GDP Contraction 5 % or more: I hope this is self evident given what I have already written…. the ONLY way this will not happen in 2009 is if we devalue our dollar by printing more money…. but that results in hyper inflation and higher prices which would artificially make our GDP that much higher.

Federal budget deficit of 1 trillion and growing to possibly 2 TRILLION as the need for spending like the years of Roosevelt in the New Deal Era increases and as the concession to business for tax rates being the same or even lower taxes are made and the revenue for the US Government continues to decline from Lower profit, less payroll tax income and growing social programs to assist the impoverished. The NATIONAL DEBT will run higher than 12 trillion dollars UNLESS the government prints more money…. but that will further weaken the value of the US dollar. A delicate trade off that has to be dealt with in 2009.

LOWER corporate taxes and/or Capital Gains in a declining economy will NOT spur employment or Investment in Pant or equipment. The only people who will possibly benefit are those who own stocks in those companies. And even then the benefits will be minimal. Worse the Down side is lower revenue for the government in a time when spending must be increased to spur economic recovery.

Globally expect more instability in under-developed countries. Poverty, starvation and generally declining conditions in these countries will give rise to radical idealists who will create chaos and instability in those countries. Antagonistic behavior towards those industrialized countries that are seen as culprits in this economic crisis will be the most villianized. Terrorism abroad will increase in response to the frustration and need to blame someone increases.

Currency fluctuations will be as common as weather changes during 2009. 30-day moves can exceed 15 percent and daily moves may be as much as 5 percent. Thus this will make international business more volatile and difficult to conduct.

Parity with Euro and British Pound is possible given the currency fluctuation at this time only a 10 percent difference exists between the 2 currencies. Briton will continue to decline as the full effects of their new economy that was built on the financial sector and debt continues to play out.  France and Germany have yet to feel the real impact of what is happening globally and as such have been the prop to the Euro over the last year. The EU’s efforts to prop up Eastern European Counties with bailouts will have little effect on the full impact of the global recession. Ultimately the Euro will have to decline in value.

Weaken of the dollar … then strengthen and weakening. The Japanese Yen, the Euro, and the British Pound with fluctuate so much that any stability for the dollar will have to come from the USA itself. However that appears unlikely until the USA takes drastic steps to stem the bleeding and ultimately devalues the dollar.

EU predictions Italy and possibly Spain: I expect al least Italy to go back to the Lira and to try an peg the Lira to the Euro to allow it to re-enter the EU Euro denomination Currency in a few years. This will be necessary as the Italian economy and the EU regulations are in conflict and Italy cannot meet the EU demands for economic reform to satisfy the EU regulations. Spain faces the same situation.

France and German Social programs will be the downfall of these economies. With a global recession and decline in local economies the demand for these generous programs will go to an all time high and will send them into a deeper recession as they struggle to balance budgets and stem spending.

China will see continued decline in growth based upon the global economy. It is unclear if their domestic consumption can make up for the downturn. It may now feel the effect of the lack of a substantial Middle class and sustainable consumer base

India is just now feeling the effects, and as global outsourcing to India shrinks, and the allegations that the financial accounting is being doctored by some to keep showing profits surface. The “middle class” is mostly dependent on the global outsourcing in areas of IT and calling centers, which are declining rapidly. India will experience a recession that is severe and has potentially serious consequences on its economic stability.

It seems inevitable that the United States Government will be forced in 2009 or early 2010 to print more Dollars, to buy its own debt and to pay for spending programs as debt is not being bought by most companies or countries or even individuals. Hence a devaluation of the dollar… expect Euro and Pound to follow and a period of hyper inflation accompanied by higher interest rates when that happens.

I was reluctant to write this piece as I hoed to see more indications that things would improve…. However, that has not happened and the result is a significant delay in my predictions.

I hope I am just a pessimist.. however at this time I think I am more of a realist in how things are at this point in time. Things CAN change.. and my predictions can be totally wrong. But for that to happen requires political will and individual determination….And I see no signs of that at this time.

Regardless of whether you agree or disagree with my assessments made her.. YOU must decide for your self what you need to do if this scenario does take place… or if it does not. These are things the way I see them and should NOT be taken as factual or advice to anyone.

Craig Eisele