“What is your economic forecast for 2010?”

Forbes managing editor Carl Lavin asked members of the Forbes Bloggers Network,

Question:
September 15, 2009 marks the first anniversary of the fall of Lehman Brothers and the global financial meltdown.

What is your economic forecast for 2010? Are there specific economic markers that you find particularly useful and upon which you rely on in making your prediction?

When the Federal Reserve Bank doubled the monetary base to pump out the financial system, they essentially set us up for high inflation. At the time people were hoarding money so inflation was not immediate.

However, such a large influx of money will produce inflation unless it is pulled back. Presently the Fed is concerned that a fast pullback will worsen the recession.

In addition, the prospect of even higher taxes, such as cap and trade, investment taxes, the prospect of a healthcare bill that will increase the cost of doing business, and the fact that the Community Reinvestment Act is still law, does not bode well for the economy next year. The recession will continue, but not accelerate. Inflation, however, will increase.

I would keep an eye on inflation and unemployment numbers.

In 2010 equities will continue to rise as some of the excess money makes its way through the markets. Once the Fed gets serious about pulling back all the excess money stocks will go down again. Will it happen as early as 2010?

Not until after the mid-term elections.

Conservative investors should invest in government-protected securities (TIPS) or in a low-cost bond fund that invests in TIPS.

Investors looking at stocks should diversify into foreign markets in countries with positive GDP readings, keeping in mind that most stocks are still overvalued due to low earnings. Once earnings improve the P/E ratio will decrease and make stocks more attractive.