Weather Report: The Economy — Life Ain’t Mark-To-Model, Next Time

THE ECONOMY—LIFE AIN’T MARK-TO MODEL : ‘Picked’ up an interesting article from Fortune Magazine (via survivalblog.com) thru CNNMoney (money.cnn.com) of 12/13/08, entitled “8 really, really scary predictions”.

The article references eight predictions concerning the economic future from some very (deservedly) well respected individuals. Some of these are folks whose opinions we’ve referenced in the past (based more to their track records in prediction than their status/standing within the economic/financial communities) and three bear serious consideration now:

First, NYU professor Nouriel Roubini. Professor Roubini predicts, “Things are going to be awful for everyday people. U.S. GDP growth is going to be negative through the end of 2009. And the recovery in 2010 and 2011, if there is one, is going to be so weak…that it’s going to feel like a recession.”

Second, Bill Gross, founder of the giant PIMCO bond fund, says: The future must be one, following huge government spending and bailouts, wherein …”Lenders and investors alike must begin to assume risk…the process will take time…twelve months will not be sufficient to heal the damage of a half-century’s excessive leverage.” The future “…will result in reduced profit margins and a slower rate of earnings growth after the bottom is reached.”

Third, Oppenheimer & Co. analyst Meredith Whitney, whose predictions of big problems in some of America’s big banks led those of both Wall Street and Washington analysts, notes that “ … TARP … has stemmed the bleeding, but what it hasn’t done is fundamentally alter the landscape… my concern is that it’s just going to plug the holes. It’s not going to create new liquidity.”

She continues, “…the companies cannot raise the capital they need, which means that the default provider of capital has to be the federal government.”, and “…I expect all these banks to be back in the market looking for more capital.”

Ms. Whitney concludes, “I think the overall economy will be worse than people expect. The biggest issue will be consumer spending.”

The foregoing predictions are from some of the very best individuals in business and academia but all analysis is limited by assumptions. None of the eight predictions appear to have included the news that Iran has apparently signed a deal with Russia for a more advanced air-defense missile system that the Israeli’s have said they won’t stand for. The predictions seem to have excluded the effects of a massive and successful Mumbai-style terrorist attack within the U.S. during an economic and social recession/depression. Also excluded was the bird-flu reprise in India recently and the current lack of resolution of the Pakistan-India friction resulting from the Mumbai terrorist attacks. Not mentioned was the effects of climate change and geo-political considerations on world food stocks.

You get the point: there’s no model that can give us an accurate picture of our future by just considering economics and finance. The future is looking grim right now but there’s a lot more to consider than just the economy.

NEXT TIME: We will be putting off a consideration of some actions that individual families might take to address the foregoing predictions until the end of the week as we want to give it some more thought.

Until the end of the week then, keep your eyes on the horizon.