Last year, in my article "Markets, The Economy, And The Future"  I saw the world in the following way...

"...for the record, my views on the economy have been the same for some time. They are as follows: I believe economic recovery will come in the second half of 2009. The reason is not the government stimulus plan, but the healing of the credit markets. The majority of government spending has not even begun yet. The vast amount of new stimulus dollars will be spent between October 2009 and September 2010. Because much of the money will be borrowed from abroad, which represents new money entering the economy, I think that the economy will show positive growth well into 2010. Unlike the fed's injection of funds which shored up bank's balance sheets, the new money being borrowed and spent by government will go directly into consumption and make-work projects. The results, however, will be short lived.

The Federal Reserve will confront higher interest rates as federal and private borrowing increase. At the same time they will be faced with reducing the excess reserves from the banking system, as promised. The Fed will probably be intentionally tardy, erring on the side of allowing recovery "to take hold", and choosing to fight inflation in earnest, not at first, -- but only at last. Therefore, I think we will see prices rise to the 2 to 4% range. This amount of inflation is no small matter in today's context. We have come off a year where purchasing power has increased by 1.5%. Our money has bought more home for the buck, more car, more electronic devices, more apparel, more telecommunications, etc. Soon, we will be looking at a reduction in purchasing power. Add to this higher taxes, and the lack of money left over for goods, and this will reduce our purchasing power even more and therefore our standard of living.

I believe the recovery will be cut short as the artificial government stimulation ends, which could only be temporary at best by any economic theory anyway. This together with higher taxes, inflation, and interest rates, will lead to a double dip recession in my view. The economy will fall once more, and no serious amount of money will be available to prop it up this time. I have for some time envisioned a double dip in both the stock market and the economy where both turn up, then turn down again and then simply level off. The market is going up now in anticipation of a recovery. It will probably fall in earnest early next year in anticipation of higher interest rates, higher taxes, increased inflation, and reduced growth. The economy should follow downward later in 2010.

At best we should be left with an L shaped recovery for as far as the eye can see. Whether we have a double dip recession or an L shaped economy, there is no getting around the fact that we are about to hit a mountain of debt accumulation that will serve as a wall against any return to the robust growth of the last 25 years. That era is over.

I expect gold to move gradually higher over the years as the economy stagnates, inflation increases (albeit at "low" levels) and foreign governments continue to diversify into gold and other strategic commodities at an attempt at monetary prudence and independence. I would not be surprised to see gold fall near term when the realization sets in that the nature of our future is not runaway inflation, or robust world growth, or the dumping of dollars, but a more stagnant future of unfunded liabilities, higher taxes, greater borrowing, and greater control and regulation over the economy."  End Quote.

I have no reason to change this view.  I think the GDP will initially do very well in 2010 but eventually fall back to trend between zero and a positive 2% growth for years. 2010 will be a year of transition.  It will mark the end of the disinflation/deflationary trend accompanied by low interest rates.  And as the artificial stimulus comes to an end so will the artificial spurt of growth.  To expect the government to come up with another stimulus package of any consequence, try as they may, would be wishful thinking.  The government would have to increase spending more than the last spending program to get a new economic boost and that's not going to happen.  The government is out of money.

The question is "when will the markets begin to discount the end of the artificial recovery and start discounting the new world we are entering"?  As we move through the first quarter of 2010 things are probably going to look better than most people expect today.  For one thing only one third of the stimulus money has been spent to date.  Most of the rest will be spent in the months directly ahead.  The economy is like a booster rocket.  It is surging higher on the thrust of it's booster engines.  But once the fuel is exhausted the rocket ( the markets) will separate and return to earth.  It will be then that I will want to be in mostly cash and/or outright short many markets.  My guess is that will begin late spring early summer.  While the economy may continue to grow until the end of the year the booster rocket, the markets, will simply run out of gas.  This could include the commodity markets and gold.

Aside from those inevitable events that are unforeseen, there are plenty of foreseeable events on the horizon -- most of them ominous.  Commercial real estate is falling and bankruptcy and foreclosures are sure to follow as will the failure of many regional banks as the year progresses.  Then there is the "shadow foreclosure inventories" i.e., the homes held in bank inventories that they did not want to sell into a falling market.  Those homes, and there are plenty of them, should start to show up soon.  This together with adjustable mortgages that will need to be re-set at much higher rates has the potential to lead to another round of further foreclosures and falling home prices.
Then there is the debt crisis.  Not the one we had, the one yet to come.  Portugal, Ireland, Greece, and Spain, known as the PIGS, all have mounting debt, so much so that a default by any or all of them is not out of the question. 

Add to this the debt problems of the developed nations like Europe and Japan who is running in excess of 200% debt to GDP and you end up with a lot of ticking debt bombs and the potential of new crises.  And let us not forget about Illinois, California, and New York.  Add them to the debt melting pot and one can see why there is more than just a little concern going forward.  And let us not ignore the Iran factor and other possible geo-political events that could lead to an oil shock and gas prices at 4 to 5 dollars a gallon.
Any or all of these potential time bombs could explode at any time and torpedo the economy. 

But before you slash your wrists, keep in mind that for every explosion their will be an immediate and concerted reaction of governments around the world.  Debt is tied together by derivatives in every corner of the earth.  What happens in Dubai nowadays, affects us in the US as well as nations everywhere.  The likely blowups of debt bombs will surely be met by a world wide concerted effort to contain the damage.  Hence, we will no doubt be dealing with volatile markets for some time to come, perfect for traders I might add, with lots of potential profits for the nimble.

Even as investors are ducking throughout most of 2010, I expect the economy to grow faster than the 2.5% GDP consensus. The rate may be more like 3 to 5%.  One reason is that twice the amount of stimulus money spent in the last 6 months will be spent in the next 6 months.  At the same time credit markets are easing.  The amount of consumer debt has fallen over 2% as savings have risen.  And the net household wealth has increased to 53.4 trillion dollars, near all time highs.  The stock market profits to investors over the last year has added nearly 5 trillion dollars to people's accounts and that dwarfs the government stimulus by far, so there's a lot of money around. Also due to the falling dollar we are experiencing a spurt in exports.  With all of these factors at play we have the makings of a nice little boomlet.

To summarize then: growth will probably be better than expected well into 2010 running at rates above 3-5%.  Inflation should rise from the present 1% rate to 2 to 4%.  I expect corrections , which are now occurring in both gold and the dollar.  I'd buy both gold and gold stocks on dips.  I expect the stock market to continue to run well into spring or even perhaps summer.  But as interest rates rise, (the 10 year bond rate will probably move into the 4 to 5% range), and as inflation rises and taxes rise and the stimulus disappears, I think that almost all markets by the end of the year will be falling.  Remember it is not just the federal government that will be taking your money, so will the States.  The burden to the economy will increase in the future not decrease.

I envision growth to eventually fall to the zero to 2% range and even become negative at times as we return to a non-stimulated world with all the burdens of debt, taxation, regulation, and government controls and onerous government programs, weighing on the economy for years to come.

Like I have said before, these are the good times.  These are the times to sell unwanted real estate, to make money in a rising stock market and sell stocks that have good profits; to increase physical gold purchases into any correction, and increase savings; to in effect  get liquid -- because the bad times are coming.  2011 will not be pretty.  2010 will be an opportunity to get ones house in order.
 
A few stocks that may be of interest are RBY, AZK, and TBT.  The first is a gold exploration company that is showing good relative strength into this decline and has stellar prospects for the future regardless of any decline in the price of gold.  AZK is a new mine with great prospects. And TBT is a bet on higher interest rates that tracks the long end of the curve at twice the rate of change.  Also the ETF's GDX and GDXJ are worth looking at for gold stock diversification.  And do not forget that you can short gold via the GLL ETF.  This can provide both protection as a hedging device plus a pure short play.

Paul Nathan
Paulnathan.biz