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Why 2011 Will Be A Bummer

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Forget about that champagne toast on New Year's eve. A bottle of Budweiser might be far more appropriate.

Why beer instead of Don Perignon? Because it won't be a happy 2011 as the economic mess promises to get messier.

Likewise, we'll all feel more financial aches and pains from Uncle Sam's heftier tax grab, which will assuredly depress economic growth.

This dreary year-ahead outlook comes from Madeline Schnapp, a sharp, perceptive economist who boasts a number of excellent calls on the economic front, especially as it relates to the critical job and housing markets. As such, she's no stranger in my writings.

Her view, it should be noted, is a contrary view. The general expectation is that the recovery will continue to hum in 2011, following a pickup in 2010, as the economy shifts from slippers to sneakers.

Schnapp, the economics chief at West Coast liquidity tracker TrimTabs Research, which is partially owned by Goldman Sachs, is convinced the timing is wrong to think about a jitterbug economy next year. A slow fox trot, she believes, is much more in line, based on her work which shows we're in for a disappointing 2011 economy and a limping stock market to boot.

Schnapp figures you don't really need the IQ of an Albert Einstein to recognize that the 2011 economy will be riddled with a number of significant land mines, which strongly suggests the general expectation of 3% to 3.5% GDP growth next year is overblown.

Our economic worrier, by the way, is not looking for a double-dip recession next year, but rather anemic growth (on the order of 2%-2.5%), which reminds her of her favorite quote pertaining to exaggerated economic expectations. It comes from none other than Warren Buffett, who said: "You can't produce a baby in one month by getting nine women pregnant. It just doesn't work that way."

It means, Schnapp says, no matter how hard you try or what rabbit you try to pull out of your hat, the recovery process is just going to take a long time. Credit crises that lead to banking crises, she observes, take a lot longer to recover than say a business cycle characterized by bloated inventory.

Speaking of economic land mines, Schnapp takes particular note of a bigger tax bite. Noting that the Bush tax cuts expire at the end of this year, she points out that if they all expire en masse, that would translate into tax increases approximating half a trillion dollars. Since that would be political suicide, she says, tax hikes will probably come in at $200-$250 billion, mostly on the shoulders of those individuals earning $200,000 a year. That, she believes, will shave 1%-2% off GDP growth next year.

Among the most prominent tax boosts slated to go into effect on January 1, 2011, the top capital gains tax will rise to 20% from 15%, the top dividend tax rate will go up to 39.6% from 15%, the top personal income tax rate will climb to 39.6% from 35%, and the lowest person income tax rate will increase to 15% from 10%.

As a result, Schnapp points out, many investors will probably be selling assets in the fourth quarter to avoid paying higher taxes next year.

Aside from a larger tax bite, Schnapp takes note of several other developments that will stifle economic growth next year. In brief:

--Loss of stimulus measures, such as income tax refunds, cash for clunkers and the homeowner's tax credit.

--Ongoing high unemployment, likely in the 9.5%-10% range, with additional job losses of 900,000 to one million. Adding to labor woes will be more than a million new entrants into the labor force.

--A darker housing picture, what with another 7-8 million new mortgage delinquencies projected over the next couple of years on top of the current population of 7.2 million delinquencies. It means, says Schnapp, a bigger inventory overhang and a further decline in housing prices.

--De-leveraging cycle here and in European countries--which is a deflationary event and will take many more years to unwind. This will result in less private and government sector growth, huge deficits, higher unemployment, reduced consumer spending and it all adds up to a dismal economic outlook.

What about all those expectations of a fast recovery? Schnapp figures they're strictly a pipe dream. "You'll have to wait a long time before we see robust GDP growth again of 3% to 3.5%, and that won't happen," she believes, "until 2013 or 2014 when the housing market finally gets back on solid footing."

As far as investors go, Schnapp's advice is "don't get sucked into a bullish stock market scenario because it's not real."

What do you think? E-mail me at Dandordan@aol.com.