Darla Moore On Wednesday, Dec. 3, in the Marriott, USC's Moore School of Business held its annual Economic Outlook Conference. Darla Moore, chair of the Palmetto Institute, spoke of the need for tax reform in South Carolina. Moore School economists Dr. Paulo Guimaraes and Dr. Douglas Woodward warned of the year ahead. And NYC- based Daniel Stern, founder and co- CEO of Reservoir Capital Group, tried to make sense of the investment world's current condition.

Guimaraes and Woodward expect a net loss of 22,000 jobs next year in South Carolina. The unemployment rate should rise to 8.6% from its current 8%. The two economists went on to predict single- family housing permits would drop 35.5% in the coming year. There was a similar drop in the number of such permits in 2008.

Personal income should climb by 3.3% in 2009, but that's down from 4.7% in 2008 and 5.4% in 2007.

Stern was the event's keynote speaker. Introduced by the Moore School's dean, Dr. Hildy Teegen, Stern addressed the crowd as they finished lunch. His presentation was structured into five parts: (1) Current conditions. (2) How did we get here? (3) What's different this time? (4) Implications. (5) Open questions.

Daniel Stern Currently, the Standard & Poor's 500 Index has- n't seen a higher peak- to- trough decline than any point since World War II. As of Nov. 20, 2008, it has fallen 52% since the March 2000 peak.

Credit spreads are at their worst levels. The 30- year municipal bond yield as a percentage of the 30- year Treasury yield is at an all- time high, 176% as of Dec. 2, 2008.

Everybody wants in on the TARP, Troubled Assets Recovery Program, which is the federal money going to Carolina First Bank, NBSC, and just about any bank that asks for it. As of Nov. 19, $221,039,000,000 was known to be awarded to dozens of financial institutions.

Meanwhile, the U.S. unemployment rate is rising rapidly.

With an itemized declaration of current conditions, Stern proceeded to recall the route to the here and now. To start, Stern suggested that over the past 50 years, there has been steady increase in leverage, as determined by bank loans as a percentage of the gross domestic product, particularly since 1995 when it was about 32%. Most recently in 2008, it was almost 50%. In 2008, the U.S. GDP was approaching $14 trillion.

Dr. Doug Woodward Another way to explain how the economy has moved to where it is: originate & hold became originate & sell. In other words, lenders were not holding on to their loans, but they were packaging them and selling them, which pulled them out from under any obligations, if and when the loans turned sour.

The credit rating agencies gave too many rosy predictions, which became another culprit behind too many bad loans.

What's different this time? Stern complained the risk in loans was so well distributed, the risk was opaque.

The federal government is going through the largest financial outlays in history. In World War II, there was a U.S. government outlay of about $3.5 trillion in expenses. The current crisis, albeit technically in loans, is up to $4.3 trillion in U.S. government outlays.

Implications include further de- leveraging taking place and continuing losses in house values. As the financial sector shrinks, credit remains tight and confidence spirals down.

So, are all values dropping? Are we in a deflationary period? Stern said the consumer price index was declining rapidly, and the personal savings rate appeared rebounding.

Stern concluded by suggesting the situation was getting so bad, there was logical optimism in expectations for a turn- around. Over the past two centuries, the 10- year annualized return for U.S. large cap stocks have historically troughed (bottomed out) at 2.5%. Stern estimates the last 10- year annualized return through Dec. 2, 2008, is - 0.4%, the worst ever and, thereby, the bottom.