NEW YORK-2009 will continue the trend seen at the end of last year as the American economy speeds headlong into the trough of one of the nastiest recessions on record, according to one analyst's projections.
"Our message is pretty negative and we're extremely bearish both on the market and on macroeconomic risks," said John Olivio, VP at Goldman Sachs Asset Management. "No one can argue that we're not in a recession and that we have some pain to go through in the next 12 to 18 months before we experience a rebound."
Worst Working Environment
Specifically, Olivio believes that unemployment will not peak until early 2010, and will do so near or at 10%, making it the worst working environment since the Great Depression. GDP likely fell by at least 5% in Q4 2008, he added, with slight growth returning by mid-2009, but "nothing resembling trend growth" until 2010.
"Retail sales have essentially fallen off a cliff," Olivio continued.
Worrisome for both individual and institutional investors alike, the Goldman Sachs VP had little positive to say about the equity and bond markets as well, noting that the big players appear to be hoarding cash as the credit crunch cycles through and housing prices continue to decline across the country.
"We don't think the markets will begin improving until they get a sense that we've reached a bottom (in real estate)," Olivio said. "Fear is the overriding determinant of the market and Treasuries are in hot demand. Unless you can keep a lot of these distressed homeowners in their homes, keep their mortgages paid, you're not going to address this problem."
Offset Toxic Assets
Home equity lines will likely be impossible to come by for Americans who purchased their homes in the last five years as home prices have already fallen 17% nationwide; Olivio projects the peak to trough decline to settle somewhere between 25% and 28%. Though the Federal Reserve has slashed interest rates to the bone, with the effective rate approaching zero, and is likely to hold those rates throughout 2009, it is unlikely credit will become more available for big bank consumers as the institutions desperately try to cover their balance sheets to offset toxic assets.
Those who manage to stay employed with roofs over their heads should benefit from tax cuts and massive federal stimulus packages, Olivio projected, and those with cash should be able to take advantage of Fed-induced lower mortgage rates as well as greatly discounted home prices. The GS VP also maintained that America is not in danger of repeating Japan's "lost decade," where equity markets have consistently fallen for years and GDP growth has been nonexistent as the government repeatedly stepped in to save banks and other failing businesses to preserve jobs.
"I think we would view this as quite different to Japan," Olivio said. "Our central banks have been more proactive in terms of trying to address the root of the problem."
