THE BLOG
11/22/2009 10:00 pm ET | Updated May 25, 2011

2010 Could Wreak Havoc Again

Maybe I'll toast in the new year with beer, not champagne. Why so? Read on.

First, seeing is believing, not hearing is believing. It's worth keeping that in mind since with less than seven weeks to go before we're in 2010, you'll soon be bombarded in print and on TV with Wall Street's annual new year's forecasts.

Given a respectable 2.8% economic growth rate in the third-quarter and a zippier stock market, with the Dow leaping to above 10,000 from its March low of about 6,550, you can be sure the predictions from the brokerage community will be decidedly rosy -- all designed to entice you to take more risk by pulling money out of low-yielding fixed income investments and pouring it into equities.

Expect to hear and read that we're definitely in the early stages of an unmistakable economic upturn and that 2010 will produce solid GDP growth, rising stock prices, a healthy rebound in housing and higher employment.

In fact, such happy talk is already making the rounds in initial 2010 forecasts. In an AOL interview, for example, officials of ING, the Dutch-based banking and insurance biggie, used many of these bullish arguments. In brief, it predicted about a 15% gain in stock prices next year on much peppier economic growth, with GDP gains of 2.8% in the first quarter, 3.4% in the second, 4% in the third and 4.4% in the fourth.

ING's exuberant message in a nutshell, which left no margin for error and went unchallenged by AOL: financially, 2010 will be a great year for America.

Hopefully so, but there are recurring and hellish signs out there that make it clear that the post recession recovery supposedly well under way is suspect and it may be way too soon to ring the all-clear bell.

On Manhattan's east side, for example, just a few blocks from the pricey Palm restaurant, a favorite dining spot for steak and lobster lovers, most of whom couldn't care less about the size of the bill, is a shoemaker's shop with a table just outside the entrance. On that table rests a bunch of new and reasonably new well shined men's shoes priced at $40 a pair that have been put up for sale since the previous owners apparently couldn't afford or wouldn't pay for the repairs.

This telling shoe experience about the financial vigor of the consumer is not what post-recession recoveries are all about. Nor, for that matter, are surging mortgage delinquencies, ballooning foreclosures, 53 straight weeks of unemployment claims above 500,000, non-stop layoffs and a slew of giant-sized discounts for holiday shoppers ranging from 25% to 75%.

It all provides a decidedly different and ominous perspective of the supposedly new post-recession recovery. What's more, it leads some skeptical pros to question whether the $14 trillion of household wealth that was lost in 17 months between October of 2007 and March of 2009 -- chiefly a reflection of a housing bust and the bloodbath in the stock market -- marked the end of the financial chaos. They say not.

One non-believer of the economic bull case is Madeline Schnapp, director of economics at West Coast liquidity tracker TrimTabs Research. Her basic view is 2010 will be a bummer, with unemployment shooting up to 11% in the summer and GDP for the year, if we're lucky, winding up between flat and up 1.5%. "And if we're not lucky," she says, maybe a decline of 1.5%."

Unfortunately, at this stage in the recovery cycle, private sector demand, she points out, should be increasing and slowly replacing government-stimulated demand. Instead, she notes, despite trillions of dollars spent on the recovery, wages and salaries are falling, actual job losses are running 250,000 to 300,000 every month, employment demand is at its lowest level in over a decade, mortgage delinquencies are rising rapidly, revolving credit and revolving home equity loans are falling at the fastest pace in our records dating back to 1973 and corporate and industrial loan growth is also falling at the fastest pace in our records since 1973. Without private sector demand, Schnapp observes, the current recovery is simply not sustainable.

Rather than debate the shape of the recovery, she says, market pundits instead should be debating the size of the liquidity-fueled asset bubble, its duration and eventual demise.

What got the economy into trouble the last time around, Schnapp notes, was private sector credit expansion based on wildly inflated assets. It's ironic, she says, that in crafting a cure, the Federal government is engaged in precisely the same activity, expanding credit at the fastest pace in history. "Is there a problem with this logic?" she asks. Her answer: "We certainly think so."

Martin Weiss, the head of Weiss Research in Jupiter, Fla., sees the 2010 economic recovery -- which he thinks will peter out after the first half -- as "the weakest and shortest in 100 years." Among the key reasons, he looks for a double-dip in housing, spurred by more foreclosures and another round of declines in home prices, say about 10%, and a continuing credit crunch, especially for consumers and small businesses.

Weiss also expects 2010 to produce a collapse in long term Treasury and corporate bonds, a further drop in the value of the dollar at a very rapid pace, continued money-printing by the Fed until it's forced to stop, more stock market pain as investors realize the U.S. economy is a sinking economy, a surge in interest rates and a rise in the price of gold to about $1,500 an ounce.

Internationally, Weiss looks for the economies of China, India and Brazil to grow four times faster than the U.S. economy. At the same, he also expects the stock markets of the three overseas nations to grow five times faster than the Dow.

The bottom line from our skeptics, as far as the U.S. populace goes: Watch your financial back in 2010. It's worth noting that a couple of legendary Western figures, Jesse James and Wild Bill Hickok, failed to watch their back, and it cost them their lives.

What do you think? Write me at DandorDan@aol.com