We may be in the middle of a pre-Christmas rally, but Andrew Gordon says next year’s economic outlook is dire. Job losses are soaring and consumer spending is drying up. And the great unwinding of the credit cycle is not done yet. Andrew says the Dow is due another swoon, perhaps all the way down to 6,000.

This from Investor’s Daily Edge:

It’s a bullish sign when the market turns its back on horrible economic news. How the market could ignore an historical loss of jobs and go up 259 points like it did last Friday is beyond me … unless the market has bottomed.

Maybe it has. Maybe my colleague Mr. Rick Pendergraft is right. He usually is.

But every fiber of my being is telling me, “Don’t believe it.”

When the dotcom fantasy caused the market to crash, Greenspan quickly lowered rates and gave the mortgage industry the green light to loan to everybody with a heartbeat. Even your pet dog could have gotten a loan.

Once again the economy was off to the races.

So what’s going to kick-start the economy this time?

The prevailing opinion is that looser credit and lower interest rates could do the trick. IF ONLY IT WERE THAT SIMPLE.

There are two “minor” flaws to this thinking…

1. Massive amounts of government handouts have already gone to the banks with disappointing results.

Banks have written off almost a trillion bucks. And they could have another trillion to go. OUCH!

Thirteen months into the credit crunch, it’s still not clear which are the “good” banks and which are the “bad” banks. There’s still a lot more septic debt that needs flushing out.

By the way, I haven’t recommended an American bank in my INCOME stock portfolio since September 2006, and I don’t plan on recommending one soon.

2. Lower interest rates? What good is that if credit card companies will be cutting your credit lines in half? It’s not a done deal yet, but that is where the credit industry is heading, “Banking on an Early Recovery? Think Again” (I wrote about banks not lending in May 2008).

Can the economy really rebound when households are getting poorer? What’s going to happen when the two-thirds of consumer spending which propels this economy gets cut back to one-half?

This fourth quarter has been one nasty ride. President-elect Obama is coming into a very difficult situation. I wish him luck. He’ll need it. Far from a let-up, next year the economy will get worse as in…

More jobs lost … housing prices slipping further … and a banking sector that unbelievably will continue to spin out of control while soaking up tens of billions of government dollars…

It won’t be pretty. And the government will do the one thing it always does: Throw loads of money at the multiplying problems.

It hasn’t worked so far. I see no reason why any of this money will stick to the wall next year. So how will some sectors do next year?

• Oil. Oil broke the $50 barrier decisively last week. $40 is next. Do you doubt that it will be broken? I don’t. $30 is another barrel of fish. If Russia and Mexico join OPEC in effectively reducing output, prices won’t go lower than $30-35. If not… be prepared for a new era of cheap gas and more SUVs on the road.

• Banks. The big money-earning days of banks are over. The price of getting government hand-outs will be much greater government supervision.

But before banks figure out their new business model, they have to stop writing down billions of dollars and closing down investment funds whose returns are negative.

Plus the banks are still on the hook for $50 trillion (this is basically insurance on the mortgages banks sliced and diced into groups with different levels of risk attached to them). If 40 percent of these exotic derivatives default, that’s $20 trillion that banks will have to pay the holders of the insurance contracts.

Where is that money coming from?

For those of you who think that losing 50-80 percent of your market cap is enough, think again. It ain’t over yet.

• Autos. Auto companies will probably get a lifeline from the government. But even with a new labor agreement in place, they still have to figure out how to be profitable with a 10-15 percent share of the market, “Is It Worth Saving the U.S. Auto Industry?”. Those days of supplying 30 percent of the market are gone.And how about this for irony. As the Big Three make the painful transition to smaller and more fuel-efficient cars, cheap gas will slow our hankering for such cars.Once again, American car companies will be out of touch with what Americans want.

  Home-grown companies have a place in this country. They can survive as a pared down but stronger industry. But getting from here to there won’t be easy – especially when demand is falling so fast.

I’ll leave it to my colleagues to find the silver (or gold) linings for next year. I hope it won’t be as tough a year as I think it will. The Dow is definitely heading into another swoon. 6,000 seems far away … but it’s only as far as 2009.

Source: Can It Really Get Worse Than This?