Ed Hyman on the Economy

We're lowering our 4Q real GDP estimate from -4.0% to -5.0% due to 1) weaker than expected Oct data for employment, the PMIs, and retail sales, 2) the continued weakness in ISI's company surveys in Nov, 3) the uncertainty surrounding the Big 3 automakers (bad for car sales), and 4) the reduced visibility of an immediate stimulus package. Policy is in a bit of a transition vacuum. We're lowering our 1Q and 2Q real GDP estimates to -3.0% and -1.0% due to negative global momentum and the lagged effects of the credit strains still creating recession conditions, eg, junk bond yields hit a record 19.25% last week. We then have just 1% to 2% growth for the rest of 2009. These estimates suggest the unemployment rate moves up to 9.0% by the end of 2009 or early 2010 (another jobless recovery).

What's Needed to Stop the GDP Decline
There's a feeling the plunge in GDP must be arrested -- and not in two years. These are 7 things that would probably do it, although it will take time:
1. A $500 billion fiscal stimulus package.
2. Gasoline prices stay around $2.00.
3. Global short rates, which have come down almost -50 bp over the past three months, keep declining -50 bp every three months.
4. The Fed 's balance sheet expanding to $3 trillion and M2 growth of 10%.
5. Mtg rates, latest 6.08%, declining to 5.00%.
6. More streamlining of mortgages in favor of homeowners.
7. LIBOR declining to 1.25%.
In our view, none of these 7 is farfetched.

Personal reflection on Ed Hyman's comments:

It has been my view for some time that things will get much worse before they get better. Hyman's comments reinforce that view. However everyone except maybe Larry Kudlow has come to that realization that the economy is in serious trouble. Panic is widespread. The question before the house... Is the suffering ahead of us priced into the equity markets?

I was lucky to put 40% of my portfolio in cash while the DOW was at 1150. I think it might be time to begin taking advantage for the long run....