The Fed has no room to move in either direction; inflation is high and growth is slow. Unemployment remains stubbornly high while at the same time, despite the correction in commodities, inflation is also a great concern. The amount of money (debt) creation the Federal Reserve and Treasury must engage in to prevent the credit bubble from catastrophically failing will have deleterious effects on the US dollar and put increasing pressure on the consumer to remain afloat.
Home foreclosures are bound to continue increasing as home prices continue lower amidst tighter credit standards for mortgages restricting potential buyers and up ticks in adjustable rate mortgages increasing monthly payments to unaffordable levels. In addition, the price increases for agriculture and energy have yet to hit the consumer fully. Some increases are still being passed on and will be for some time.
The credit bubble, which started as a subprime crisis, has spread to affect assets of all classes and created great uncertainty in the fixed income markets. Many question the fundamental underpinnings of the debt driven US economy given that the consumer is under the aforementioned pressures, the Fed is tied down and the dollar, while strong lately, has still weakened nearly 40% in the last six years.
In my estimate, we are about one third of the way through navigating this crisis, and thus far too much ammunition from the Fed and Treasury has been expended. I am looking for the S&P in the triple digits by years’ end and home prices down another 15-20%.