With the strong caveat that I am neither an economist nor a financial advisor, I have weighed in with both long term and short term predictions. This column will focus on the probable short term developments of the next 24 months. The next column will look at the longer range ramifications of this extraordinary crisis.
First, as I have written here, I believe that this financial crisis and consequent economic downturn is part of a transition between two ages. We are leaving the Information Age and entering the Shift Age. There is always great disruption during such transitions. Second, I wrote in my last column about the coming collapse of the unparalleled consumerism of the past three decades. These are the macro forces that will trigger the specific predictions that follow.
The key socioeconomic trend in the U.S for the next two years is that thrift will become not only an acceptable economic behavior in households and businesses across the country, it will become cool and socially chic. Thrift will show extravagance the door. Thrift will be the new extravagance. It will be cool to drive the car another year or two rather than going into debt for the new Beemer. Even young media moguls who have been driving a Mercedes for a few years will decide that, hey, it’s a Mercedes, I can drive it for a few more years. Thrift will dominate the culture.
Here are some specific forecasts:
We will see the collapse of many hedge funds. Too many relatively inexperienced fund managers used too much debt to create returns based upon marketplace assumptions that have evaporated. While this may bring joy to those who blame Wall Street hotshots for their loss of life savings, it will nevertheless add downward pressure on financial markets.
Debt will become the new four letter word around the world. People will move away from debt.
We will witness one of the worst holiday retail seasons in history on a year to year comparison basis. People who feel that they have no control over the performance of their investments will realize that the only control they have is in the area of spending which they will greatly curtail. Auto sales have fallen off the cliff and will continue to plummet. Sales of durable goods will also plummet. Consumers will only spend on the replacement of broken appliances, not on upgrades. Electronics, the darling of recent holiday seasons, will be flat to down, and while there will continue to be the giving of gift cards, amounts will drop dramatically.
The good news is that this holiday season will be about getting together with family and loved ones and not about consumerism. The value of relationships will supersede the value of new shiny objects. If it isn’t on sale, consumers won’t buy.
As far as consumers are concerned the beginning of the Shift Age will be living the Thrift Age. Resale stores, barter exchanges and discount chains will do well.
In January and February there will be a number of retail chain bankruptcies, particularly in the apparel sector and the middle market of department stores. Many chains will avoid bankruptcy but will close stores and retrench to survive. Retail relies on debt financing which is not readily available, and a robust holiday season, which will not occur.
These bankruptcies will contribute to an unemployment rate that will certainly rise to the high single digits in the U.S., and perhaps higher elsewhere in the developed nations of the world. Vacancy rates will rise in both shopping centers and office buildings and complexes. This will put a strain on commercial real estate, resulting in defaults, fire sales and consolidation.
Some media companies, given the loss of retail advertising and a contraction in ad spending will either declare bankruptcies, greatly downsize or seek acquirers or merger partners. Even media companies not reliant upon advertising will see some contraction. There will be no price increases in any sector of entertainment such as cable, movie tickets, DVDs as consumers evaluate what provides the most value. Discount pricing will emerge in this sector in a variety of ways.
Culturally there will be the resurrection of such things as cocooning, comfort food, barter and garage sales. People will focus their budgets for the big priorities such as mortgages, college education and retirement. Discretionary spending will be based upon need and will largely occur only when items are deeply discounted. Postponement of purchases will be a common theme. This of course will further contract the economy.
While I do not like to use the word recession as it is an outmoded word, it will be announced officially that the U.S. and many countries of the world entered a recession in the fourth quarter of 2008 and the first quarter of 2009. It is quite possible that the entire 2009 will be officially a recession of 4 quarters of negative growth.
The stock market will remain volatile. History will look back on the period of late 2008 to mid 2009 as the bottom of the fear based equity market we are now in.
Governments, rather than markets and economic institutions will play the largest role in economics they have ever played. This will be both unsettling and encouraging depending on the country. While government intervention in the U.S. may be viewed as a good thing, government intervention and consolidation in Russia may be viewed as a bad thing.
A key component of the mood in the U.S., and around the world will be the amount of optimism that President Obama can generate in his first 3 months in office. People are scared, nervous and fearful of what may lie ahead. This translates into an unusual amount of hope being placed in the new president. For the first time in a decade expertise, intelligence and vision will become important values in government. If the people see that, they will embrace it. We are now in a negative emotional environment that can only be offset by confidence and hope.
If the government bailout of the banking and mortgage industry can produce results with intelligent execution during the next year then the spring of 2010 may see the end of the bottom of the residential real estate market in the U.S. By that time foreclosures will have been absorbed, there will have been three years of huge declines in housing starts, so the housing stock will have come back in line with the market. Since interest rates will have remained low, the perception of buying at the bottom affordably will restart housing on a very slow route to recovery.
New strategic alliances will emerge on the geopolitical front. Countries will realize that we are entering a new age and that old legacy allegiances must give way to new alliances that reflect a rapidly changing geopolitical world that will increasingly be viewed as moving toward a global integration that is unprecedented.
In summary, the next 24 months will be economically unpleasant, disruptive and about jettisoning the old and preparing for the new. We are in the process of leaving the past behind. This past, built during the last century, is giving way to the future of this new century.