Just about 10 years ago, America was obsessed with what Y2K was going to do computers, clocks, the power grid--and even Al Gore. Even in the backwash of Oval Office dalliance, it was a time of innocence. By March of 2000, a series of tumultuous events--the disputed election, dot-com crash, Sept. 11, the shoe bomber, wars in Iraq and Afghanistan, housing crash, financial meltdown, 2008 election, the lacy underwear bomber, and, yes, even Al Gore--made the '90s look like nirvana.

It hate to say it, this being the holidays and all, but 2010 looks like more of the same, if only for the simple reason that 2010 does not mark the beginning of a new decade but the end of the old one. But there are many other reasons.

Economic Uncertainty Continues

The first, of course, is the economy. The Commerce Department is reporting increases in GDP, which technically means the 2008-2009 recession is over, and most economists are predicting growth going into and through 2010, albeit anemic and jobless. Still, no one knows, or perhaps is willing to say, just how much of that growth is attributable to the unprecedented billions in borrowed dollars the federal government is plowing into its various stimulus programs, which will wind down in 2010. Any number of unforeseeable events--a not unlikely rapid run-up in oil prices due to political turmoil in the Mideast among them--could reverse the growth and touch off the dreaded double-dip recession.

Stocks on the Bubble

The stock markets have been, as Greenspan would put it, irrationally exuberant for much of 2009. Granted, they were coming off historic lows by some measures, and any sign of a pulse in the economy would be expected to drive stocks up. A big driver of the 2009 rally was the Federal Reserve's cheap money policy, which kept returns on safe-haven investments low, and, coupled with a falling dollar, drove investors into more risky asset classes, stocks among them. Wall St. & Maine has heard and read from several banking and investment sources that the Fed has been buying up stocks all year near market close and in the after-hours market to prop up the rally when it appeared to be on the verge of faltering. One thing is certain: Earnings do not support valuations as the year 2009 closes. The markets thus could be 2010's bursting bubble.

The Fannie/Freddie Factor

With little fanfare on a slow news day amid the Christmas holiday, Congress lifted the caps on how much the Treasury could pump into Fannie Mae and Freddie Mac. These two institutions thus could wind up costing the taxpayer untold billions, perhaps even a trillion, of dollars the taxpayer does not have. As one investment advisor put it this week, this action had the effect of providing "the end-game that accompanies the Federal Reserve's massive purchase of the securities of these agencies." In short, the action closed the loop on a giant Ponzi scheme in which the federal government funds the GSEs then buys back the securities they package. It was Fannie and Freddie that created the subprime mortgage, thus providing the mechanism that nearly brought down the global financial system. They could do it again.

The Housing Market

At this writing, there were conflicting signals as to which way the housing market was headed going into 2010. According to the October S&P/Case-Shiller Home Price Indices, the improvement in the value of existing homes sold stalled in October after five months of gains. Meantime, the most recent data on housing starts, while positive, came after an unexpected drop in October. Momentum going into 2010 seemed to hang on the question of whether the dips in these data were due to a temporary breather in between federal tax credit programs or to lingering structural weakness in the market. There will be headwinds in 2010, among them foreclosures on homes financed with mid-Aught vintage option ARMs, which begin resetting from low introductory rates in 2010. These foreclosures are likely to affect the higher ends of the housing market, although it is unclear whether as many underwater option ARM holders will walk away from their obligations as did their subprime counterparts. The good news is that increasing home sales through much of 2009 have drawn down unsold inventory, and if the foreclosure rate among these borrowers is modest, the market could likely absorb the new inventory. If housing continues its climb from the basement, the economy is likely to follow, at least until the Democrats come clean on just how much they intend to raise taxes.

Interest Rates

Rates are a big wild card. The Fed will certainly begin raising rates at some point in the near-term, though there will be substantial political pressure placed upon Fed Chairman Ben Bernanke to not do so before the 2010 Congressional elections. The global financial market at yearend, fearing that perhaps bubbles had developed in some equity markets, particularly in the BRIC nations, was again investing in dollars, driving the greenback up in an expression of confidence that the U.S. was still a safe place to park money. The quandary is that if Congress and the Administration really expect banks to start lending again, they are going to have to let rates rise. There also is the matter of inflation, which most economists have dismissed as a near-term threat due to the fragile economy and the excess capacity therein. The Fed took a step this week to keep the markets calm on this front by proposing a new Federal Reserve CD program with banks to soak up excess money floating around the economy. To boot, there is a school that believes the Fed will keep rates low long-term in a conscious effort to slowly inflate the nation out of its massive debt obligation. Still, mortgage rates are likely to continue their year-end rise as banks are, after all, in business to make money.

The Election

At yearend 2009, it appeared that whatever mandate Congress and the Administration thought they had at yearend 2008 had vanished. Yet both pressed on with an agenda that most polls indicated was not supported by a majority of voters. House-Senate negotiations over the final version of the Democrat health-care overhaul bill loomed for early 2010, and all indications at yearend 2009 that the Democrats intended to proceed full on to the Waxman energy bill, passed by the House but still pending in the Senate. That bill is likely to prove as divisive as the health overhaul. Democrats have 2/3rds of the $787 billion federal stimulus bill passed in early 2009 in their pockets for pre-election spending on all manner of goodies for their constituents, but it remains unclear whether they will be able to buy back the crucial independent voters who by yearend 2009 had wistfully concluded that their votes in 2008 were cast amid a haze of delusional Kumbaya. The result is that Democrats will likely suffer significant defeats at the ballot box and could lose control of the Senate, maybe even the House in the 2010 elections. That could enrage a political left that thought it was ascendant, perhaps leading to social unrest, but a Democratic loss would likely boost confidence in the economy.

If Murphy's Law holds, as usual, in 2010, one or more of the variables noted above, plus many more unmentioned and unimagined, could tip the economy and the housing business back into recession. If it doesn't, both could make it through the year in better shape than they are now, ready to face and even more challenging 2011. Wall St. & Maine earnestly hopes that Congress will repeal Murphy next year, and thus wishes its readers a happy, safe, productive and prosperous 2010.

Oh, and don't forget to check the clocks.