New Year, New Economy?

Here it is the first business day of the new year. On CNBC the market is up and everyone seems to believe the economy in 2009 will be much better, at least according to the CNBC polls. When asked, most of the talking heads like to point out that the market historically turns up about 6 months prior to the bottom of a recession. So the market is up because the market beleives the economy will bottom in 6 months? In June-ish? Why? As I see things, I don't see anything to think that the economy will be better in six months. So far, house prices are still falling like a rock, economic activity and consumer confidence are at historic lowes, and each new release of economic data shows things are worse than before. Today the ISM Manufacturing index, for example, came in at about 32, which is the lowest since 1948. Before we can safely predict a bottom, I think we first need to navigate around several large rocks: 1) A new round of foreclosures and continuing house price declines will lead to more bank loan losses. This will require further government bailouts or financial bankruptcies. 2) The States of California and New Jersey have severe budget problems and could declare bankruptcy or need to get bailed out from the federal government. 3) Bernanke and the Fed's quantitative easing policy will spark a dollar collapse. With treasuries already at zero or near zero yields, it's hard to see why any foreigner would want to buy treasuries.

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