Headwind Problems for 2011

 Guest Author:   Ted Kavadas writes at Seeking Alpha and his own blog,  EconomicGreenfield.  A bio is available at a previous article.

Here are 10 “Problem Areas” that I believe pose significant threats to the national and, in many cases, global economic situation. Of course, many others exist, especially when viewed on a longer-term basis. However, I view these 10 problems as currently being “front and center”:

1.  Asset bubbles: I have written extensively about the current existence of asset bubbles and the threats they pose to any type of quality, sustainable economic recovery. While many people would argue against a widespread existence of asset bubbles, my analysis indicates that very large asset bubbles exist across a variety of asset classes. What is disconcerting is that few appear concerned about the eventual resolution of these bubbles, despite the immense problems we, as a nation, are continually encountering in dealing with the housing bubble. The collective market assumption appears to be that “dealing with” deflating or bursting asset bubbles is not something to be unduly concerned about.

2.  European debt crisis: This situation appears to be unresolved in many respects. In fact, it almost appears to be a slow-spreading contagion. One interpretation of this overall situation is that it may signal a repudiation of (sovereign) debt. Should this interpretation prove accurate, it would not bode well for our highly-indebted global economy.

3.  “Frothy” stock market action: By many measures, the stock market appears to be trading in a “frothy” manner. Sentiment measures are indicating continually abnormally high bullish sentiment. While I have written, since my June 2 article, of my expectations for a rising stock market, I believe that although further gains will occur, the bull run since March 2009 is heading toward a conclusion.

4.  Real estate: Many believe that residential real estate prices have either bottomed, or will do so with an additional 5-10% drop. I don’t believe that to be the case. While the fundamental case for a larger drop is complex, the technical case appears somewhat more straightforward, as I wrote in my October 24 post.

5.  State finances: Various problematical issues are evident, and I have commented about these in numerous posts. As I wrote in the August 25 post, “There is a lot that can be written about the efforts to conceal the true nature of states’ financial conditions.  By “sweeping (financial) problems under the rug” instead of truly solving the deficit problems, it almost seems as if states are inherently betting (in a big way) that current economic hardship is transitory, and that better future economic conditions will “save the day.”  In effect, there is little need to solve structural budget/financial problems because a strengthening economy will alleviate or eliminate such issues.

6.  Vulnerability of the US Dollar to a substantial decline: I have written extensively about this issue. While the U.S. Dollar Index has yet to fall precipitously, Euro weakness appears to be significantly buoying it, for now. While many believe a lower U.S. Dollar would be beneficial to the U.S. economy, I think that on “all things considered” basis one needs to “be careful what you wish for.” A strong argument can be made, both on technical and fundamental grounds, for a steep Dollar decline which would, on a net basis, be highly problematical for the U.S. economy.

7.  Unemployment:  As I have previously written, this is a severe issue in many respects. While many have sought to minimize its signficance, I believe it to be highly problematical and pernicious.

8.  Fiscal and Monetary Policy:   I feel that an argument can be made that both fiscal and monetary policy seem to be impaired or broken. This is supported by an array of indicators and measures, some of which are shown in this article from September 23. This issue lacks recognition but nonetheless is very important.

9.  The Next “Crash”:   Have we, as a nation, taken appropriate steps to avoid further financial and economic “crashes”? I would argue we have not, unfortunately. In fact, I see a lot of trends indicating such a “crash” is likely sooner rather than later. While predicting the timing and magnitude of such crashes will likely prove exceedingly difficult, nonetheless this is a very important topic. As I wrote in the October 13 post, “In the past I have commented that I view a future crash as certain….However, this next crash should be accorded great importance as it is likely to be severe, i.e. outsized by historical standards.

10.  Ben Bernanke’s demeanor:   While this isn’t a “problem area” per se, I feel it is nonetheless important. In his December 5 “60 Minutes” interview, he seemed relatively downbeat. More importantly, many people noted that he seemed nervous – which I view as disconcerting. Furthermore, as I wrote in a December 6 article, I didn’t agree with many of his comments.

In aggregate, these 10 “Problem Areas” indicate there is far more risk than generally acknowledged both in the markets and economic situation. While no one likes to contemplate an economic future rife with adversity, I continue to believe the future economic scenario will play out as I wrote on August 16, which included this statement: “What separates this period of economic weakness from those that have preceded it is its complexity. Absent a rather profound and rapid change in the effectiveness of our economic policies, we should not expect our economic predicament to improve in a sustainable manner.”