What Could Go Right in 2009 ... and Wrong

Superstrategist Ed Yardeni takes  a look at both sides of the economy:

Our wish has come true. We all wished that 2008 would end, expecting that 2009 has to be a better year. I am rooting for a better year this year than last, but there is still a long list of what could go wrong. Let’s start with what could go right:

(1) In the US, lower mortgage rates should fuel a refinancing boom which should lift consumer spending.
(2) Lower mortgage rates, if combined with more mortgage funding provided by the US Treasury, should increase home sales and stabilize home prices.
(3) Easier credit conditions thanks to government funding for auto loans should increase auto sales.
(4) The drop in fuel prices should also boost consumer spending. The unemployment rate should peak below 8%.
(5) Massive spending on infrastructure by the US government should offset weakness in such spending by state and local governments.
(6) The money supply is likely to grow rapidly. Indeed, M1 is up 16.5% y/y through the week of December 22, little changed from the prior week’s 17.9%, which was the fastest pace since 1987. M2 is up 9.6% y/y, the fastest since 2002.
(7) Stimulative monetary and fiscal policies overseas should revive global economic activity and US exports.
(8) Depleted inventories and improving sales could trigger a big jump in industrial production.
(9) Credit quality spreads should narrow significantly and rapidly as investors seek better returns than available in Treasury securities.
(10) Stock prices should rise 30%-40% in anticipation of better earnings during the second half of 2009 and in 2010.
(11) Inflation should remain subdued, as it typically does when productivity pops when the economy begins to recover.

Now let's review what could still go wrong this year:
(12) The credit crunch worsens. Corporations and municipal governments are unable to rollover their maturing debts. The jobless rate peaks between 10% and 15%.
(13) Home prices continue to fall in the US. Despite lower mortgage rates and more credit availability, would-be homebuyers are put off by mounting unemployment and falling home prices.
(14) Any windfalls from mortgage refinancing are saved rather than spent.
(15) Widespread deflation occurs and Treasury bill yields turn negative. The 10-year Treasury falls to 1.0%.
(16) Congress passes, and President Obama signs, the Card Check bill.
(17) The DJIA plunges down to 5000.

In the first scenario, a V-shaped recovery during the second half of the year is likely to be followed by lackluster growth in 2010. During Japan’s “lost decade” of the 1990s, Japan’s economy remained depressed despite near-zero interest rates. The US economy should respond much better to near-zero interest rates because mortgage refinancing is a bigger deal here than it was over there. The second scenario is a depression: We all have lots of time to think about the meaning of life, and I go to see more movies, hoping I can find a job as a movie reviewer. Call me an optimist, but my subjective odds are 70% for the first scenario and 30% for the second.