July 1, 2008 - There will come a point when the stock market stops going down. Hard to believe as we muck through the mire of the mortgage mess, oil spikes, and housing hardships. But it will happen. At some point the last mortgage will be written off, oil will at least stabilize, and houses will sell again. Having said that, don't expect any sharp rebound when the recovery starts. In fact, don't expect the recovery to begin any time soon.

As for oil, it's hard to see how it can come down. Even if we shift to electrical or hydrogen as main sources of power, that still leaves China, India and Brazil to fight over whatever oil we don't use. And even if we are able to shift many of our cars onto alternative fuels, our need for oil will still be there. Our economy is built on engines that use gas, on manufacturing processes that use oil, on products that need oil. If we're lucky, oil will come down somewhat as economic cycles run their courses in every country that is booming now. But to think that oil will trade below $100 is unrealistic given the demand globally.

As for the housing market, that's a combination of real and psychological factors. The real part has to do with physical houses standing. If there are fewer of them waiting to be sold, prices will stabilize as demand matches inventory levels. That's basic economics. Right now there are still too many houses sitting empty, new and used. People are not buying them for any number of reasons: they don't have a job; banks won't lend money on reasonable terms; they think prices will go lower.

It's that last part that is the psychological part of the equation. When buyers perceive a bottom is approaching, that things are getting better in the economy, they will buy houses again. Houses are a long, long term commitment. You can't buy and sell them like a stock. Expenses are too high to do that. If someone is going to buy a house for living (as opposed to flipping), he or she needs to feel secure in the job market, knowing that his or her job is not going to be cut in the next downsizing. The psychology currently is that everyone is vulnerable. That makes long term purchases extremely difficult to make.

But all of these events will play out over time, and then we'll see another part of an economic cycle, the recovery. Only don't expect a RECOVERY!!!. It will be more like a recovery. There won't be much exuberance, and things won't change dramatically positive in a hurry. Not only does it take time for people to switch perceptions from negative to positive, it also takes time for all of the damage to be cleared from bad loans. It may happen that one quarter banks show very few losses only to announce more of them in the following quarter as new mortgage defaults occur. It isn't going to be simple and straightforward.

And there's one more element that may keep the recovery very moderate: interest rates. The Fed is already talking about raising rates because of a concern over inflation. Even with the economy stalling, there's inflation in food and energy prices. If a recovery ignites too quickly, all other products will show inflation as inventories are depleted, unable to keep up with renewed demand. It will take a while for manufacturers to catch up, employ workers, to buy raw materials.

The Fed's number 1 enemy is inflation. It doesn't like it, in fact loathes it. So if a recovery starts too quickly and prices jump, expect the Fed to do the same: move fast to raise rates so inflation can't get a foothold. If that happens, the recovery will take even longer and at a more measured pace.

A recovery will happen. When is unknown. But it won't be a jubilant, exuberant recovery with quick upward moves. While normal adjustments to the economy occur, making people change their perspectives to positive, the Fed will also be monitoring all the data. If numbers are going up too fast, expect higher interest rates to slow them down. With higher rates, comes a slower recovery. That means stocks won't be bouncing back strongly. They will go higher, but don't expect irrational exuberance to abound.

- Ted Allrich