Uncertainty Prevails

Everywhere I go virtually everyone says they have no idea where the economy goes from here, nor where real estate values go from here. On the positive side banks are in excellent shape, at least the big banks who have bulked up their capital and worked through their bad loan portfolios. Underwriting for everything is tougher so the chance there will be another rash of bad loans is low for the moment. Corporations are mostly sitting on a lot of cash, and profits are still good. Consumers are mostly reducing debt or banking their energy savings. Their balance sheets are stronger than they have been maybe for a couple of decades. There is enormous amounts of cash on the sidelines. Overall, the US is in good shape vs the rest of the world.

However, capital markets are very negative, nobody is sure what the Fed may do, but the dollar is already too high and another raise now would push it up further. There are several countries which are on the verge of default on their US dollar denominated debt, and serious economic collapse as a result of the rise of the dollar, and the falloff the price of oil. There is a real chance of serious economic dislocation in many areas of the world if the dollar were to rise more. China will continue to experience serious economic dislocation and slowdown. Many small and midsized companies there are in default to their lenders and there is little that is going to improve that situation for a long time. The yuan is overvalued, but the government is not going to let it fall if it can prevent it. While they have $3 trillion of reserves, that can get dissipated quickly if they have to defend the yuan and try to rebuild the economy all at the same time. China also has a major demographic problem of aging people, and no adequate social support system for the 400 million old people. China has a long way to go and it will take years. That means it will be a long road to see oil prices rise substantially, commodity prices will remain weak, and the chanced of sovereign defaults for countries living off supplying China will rise, especially if the dollar rises.