First In, Last Out

First In, Last Out

Florida was one of the first states to get hit hard by the recession and will be one of the last to come out because of the housing bust. But the Fed will come to the rescue by buying mortgages, says economist David Jones.

We're in a recession.

Now what?

You might consider what David Jones has to say about current economic conditions and the eventual recovery. The author of four books on the Federal Reserve and the chairman of Investors' Security Trust in Fort Myers, Jones doesn't expect a national economic recovery until the second half of 2009. "It's not going to happen quickly," he says, forecasting zero growth for the year.

Florida's recovery will lag the national economy by one year, putting the state's rebound in the latter part of 2010. In the past, Florida was among the first states to reemerge from downturns. "We'll be last out because we were the poster boys of the housing bust," Jones says. "That will be the difference this time."

But Jones says housing will eventually recover because he believes the Federal Reserve will aggressively buy mortgage-backed securities and debt issued by Fannie Mae and Freddie Mac. Federal Reserve Chairman Ben Bernanke signaled that on Nov. 25, sending mortgage rates down. "That was the big announcement," Jones says.

Jones says the Fed will use its unlimited power to print money to provide a floor for the housing market and the economy. "[Bernanke] has basically said he's going for broke," he says. "He can spend as much as he needs to."

If you believe in the plan for economic recovery, Jones says corporate bonds appear to be the most attractive investment now and real estate later. The high yields of top-rated corporations such as General Electric may be a good bet, for example. Goldman Sachs' recent bond issue guaranteed by the federal government also looks tempting, he says.

There may be opportunities in stocks, too, such as those of banks the federal government has picked as "winners" in the bailout. But once the recovery takes hold, real estate could once again be a good bet, Jones says.

Jones is keeping a close eye on real estate statistics to tell him that a recovery is gaining traction. A three-month flattening of new- and existing-home sales and an increase in housing starts will be the first solid indicators. "That'll be the key," he says.

Until that happens, it may be early to buy real estate. That sector may still decline until government action creates a bottom with easy money.

For now, though, the numbers are grim. Jones is forecasting a 5% drop in the nation's gross domestic product in the fourth quarter of this year. "The hell we're going through, that path was changed dramatically for the worse by [the demise of] Lehman Brothers," Jones says.

The first quarter of 2009 won't be much better either; Jones is forecasting a 3% fall in GDP. The second quarter looks slightly positive with 0.5% growth, he says.

Jones isn't too worried about inflation. He points out that neither is the U.S. Treasury bond market, judging by the ultra-low yields. Inflation is the biggest risk to investing in Treasuries. "It depends on how fast [the Fed] contract the balance sheet," he says. In other words, inflation may not be a problem in a recovery if the Federal Reserve can mop up all the money it's pumped into the monetary system by raising short-term rates, among other methods.

More worrisome is what Democrats in Congress may do to harm the economy.

Will they raise taxes as promised? Will unions become more powerful? Will they erect trade barriers and strangle the financial markets with regulations? "I'm pleasantly surprised by [President-Elect Obama's] choice of a middle-of-the-road economic team," he says, adding, "He hasn't mentioned tax increases."

Still, Jones says Obama and the Democrats will have to come up with a plan to boost the economy further. "He has to hit the ground running with a stimulus package," Jones says.

-Jean Gruss