2/26/2008

Recession? Inflation? No Country for Old Muni Bond Insurers.

"There is an inverse relationship between reliance on the state and self-reliance."
-- William F. Buckley, Jr. (who died today at 82)

Gasoline prices, which for months lagged the big run-up in the price of oil, are suddenly rising fast. Some experts say they could hit $4 a gallon by spring. Diesel is hitting new records daily and oil closed at an all-time high on Tuesday of $100.88 a barrel. I may have been a year early in my predictions, but my views have not changed. I drive to work in a Toyota Corolla that gets 37MPG. But that's not what I'm worried about.

"The effect of high oil prices today could be the difference between having a recession and not having a recession," says Kenneth Rogoff, a Harvard University economist. Wrong, Mr. Rogoff. The effect of high oil prices today could be the difference between the recession we are already in, and a depression of mind-boggling proportions. It's not just oil prices, or real estate down the toilet - its about the entire credit underpinnings of our economy about ready to go to Hell in a handbasket. Don't believe me? If AMBAC and MBIA don't get bailed out fast from the reckless endeavors they are guilty of, we gonna have some serious financial fit hittin' the shan -- very soon.

I see support on the Dow Industrials (if you just draw yourself a nice long - term support trendline across all the lows) somewhere around 10,000 on the Dow. This recession won't be over until investors throw in the towel and say "Get me out - I can't take it anymore". That hasn't happened yet - It could take some months until we get there.

Compared with a year ago, producer prices were up 7.4 percent. That's the worst producer price inflation in the United States since 1981. I UnBlogged about inflationary recession over a year ago. Now you are seeing the clear signs of - exactly that.

Home prices around the country are falling at an accelerating pace, suggesting no end is in sight for the housing meltdown. You like real estate? Wait awhile - you'll like it a lot better a year from now, when price deflation really kicks in.

It's probably too late to buy either gold or oil at these prices, but I suppose if you dollar cost average, it might make you feel better.

When the dust settles in a year or so, the whole landscape is gonna look a lot different. I'm an ex-Merrill Lynch broker, I studied economics data and statistics for years -- and I know the signs, having been through a couple of these before, including the crash of '87.

What will Happen?

If you want to know what will happen as we come out of a recession, it's necessary to understand the concept of industry group relative strength.  Industry groups that show the highest relative strength (price performance compared to the universe of all groups) are the ones that will lead out of the recession and be the best performers in the following bull market expansion cycle. You can get a lot of information about this stuff on the various financial web sites like MSN Money, Yahoo Finance, and many others. By carefully studying this information as it relates to your personal financial and job situation, you can gain a lot of insight into how to plan your career and your financial future.

If your job seems secure, better thank your lucky stars. And keep your resume polished up nice, just in case.

If you want a little history, see what I was saying in 2006.