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WHAT DOES THE REST OF 2009 LOOK LIKE, ECONOMICALLY?

06/11/2009

    The latest sideways movement of the stock indexes points out investor resistance to continuing the stock market rally.  This resistance stems from 3 sources:

  • Higher crude oil prices. The doubling of crude oil prices from $35 to $70 over the past six months, portends continued weakness for our overall economy.
  •     Higher inflation in 2010: President Obama and Treasury Secretary Geitner cannot deny the law of gravity. Inflation will return, "big time" next year.
  • Real estate prices will continue to drop, especially in the commercial sector.
        It seems clear that financial speculators are bidding up the price of oil in advance of an economic rebound sometime next year.  The speculators can only be stopped by drastic action such as the President's opening of the strategic petroleum reserve.  In the absence of any action from Washington, the United States will see $100 crude oil prices in the next couple of months.  

        Such a development may even cause a double dip recession.  Oil prices need to be controlled.  

        The role that $150 oil (mid-2008), played in causing our recession has been virtually ignored by much of the media.  Those sky high prices last year caused many firms to close and many others to start laying off their employees.  If oil goes back to a 3 digit number, the same scenario will occur.  

        Obviously, the United States must undertake strong action to reduce its use of crude oil, Conservation has to be ingrained into the fabric of every business.  Incentives have to be provided for more oil drilling in more locations where they may be found.  Tarsands in Canada or elsewhere have to continue to be mined.

                     INFLATION

        Everyone needs to get ready for significantly higher inflation in 2010.  The introduction of trillions of dollars into the economic system in order to improve our economic fortunes will result in higher inflation.  This will happen sooner rather than later.  We will have to go back to Jimmy Carter's and Ronald Reagan's administrations for the last time we suffered significant inflation.  

        Companies that don't budget for the inflationary spiral that will happen next year will be caught "flat footed".  You can best prepare for this new period by executing the following moves:
  •    Lock in material costs wherever possible. Try to lock in for two years at minimum. Cut back salary levels, instead of cutting back on essential staff.
  •     New initiatives are more important now than ever. Try to take the market share away from your weaker competitors. Every industry has its share of companies that are teetering on the edge.
        The ramifications of a very tepid recovery sometime in 2010 deserves an entirely separate article.  I will return to discuss this new development in my next post, next week.        Edward E. Klein

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