Monday, September 24, 2007

A recession is imminent

Here's how I came to this conclusion.

The Federal Reserve cut interest rates a bit earlier in the month. Now, if you know nothing about economics, you would say that the actions taken by the Federal Reserve to slash the fund rate by 50 basis points is good. However, I believe the Federal Reserve has actually taken a position of favoring the growth of the Dow Jones, an index representative only of 30 public equity stocks, over real economic growth. I don't even know that Woodrow Wilson himself thought anything like this could happen to such an inherently flawed system.

Now, the reason the Federal Reserve decided to cut interest rates is debatable. We know for sure that the subprime lending meltdown played a role in the cut. We know, too, that the sudden decline in jobs — simply indicating that the economy has reached full employment — played a role in the cut.

Now, bring to mind the fact that the Reserve had to inject larger-than-normal liquidity into the system back in August, and you have the makings of a full-scale recession that is looming, if it hasn't already started. We are still in a bear market, and we shall remain in a bear market until the Dow Jones reaches the 14,000 level once again. Not to say that will happen...I think we will be lucky to get there, and lucky to remain stable once we reach it.

What I believe, though, is that jobs will continue to decline, because, again, we have reached full employment, thanks in part to the rise in the minimum wage, the credit crunch will become a full-scale global fiscal crisis, and inflation will rise because of the fall in the funds rate.

And your Dow Jones, in all its glory, will be glorious no more. I foresee that we will fall to the lows back during the last correction (12,517.94), and then we shall proceed to the lows during the smaller-scale correction before it (11,939.61). I don't know that we would fall any more than that, but if we do, it's all because of the same reasons I have just given you.

My predictions for the major indices as we enter this recession:

Dow Jones: 11670-11940
Russell 2000: 730-735
Nasdaq: 2330-2360
S&P 500: 1255-1280
Dow Jones Wilshire: 12750-12990

Hopefully we do not have a large correction like this, but I will tell you I don't analyze emotionally, but logically.

*I am not an economist, so I strongly advise you consult with a broker or financial advisor before executing trades or cursing him/her out.

No comments: