This is the truth, nothing but the truth, and the whole truth, with a waterboard as my witness!

Thursday, January 1, 2009

New Year Day! Some insights into 2009

You have to look back to make comparison and contrast assrtions, what will change or what will be new.

First let me say: That I think that the FED by and large was succesful in avoiding systemic collapse. I have held this belief for some time. I advocated strongly that there be an intervention. Is there surprise that the congress took the FED to the woodshed and made them the whipping boy for the economy? No. But I feel that if no action had been taken, no let me sate this: I'm CERTAIN if no policy had been taken, that we could have had full scale systemic default.

That said above, looking forward I agree with some of these predictions, they are consistent with what I have sated here for quite some time.

The economy will not recover in 2009. Job loss will continue through the year and unemployment will reach 8% in the "headline" statistic by the end of the year. U-6 (broad unemployment, or the closest to "real" unemployment without government "cooking") will top 15%. All the "talking heads" are predicting a turnaround in the second half of 2009. They will be wrong. Look at their records for 2008 - all of them were predicting closes at or above 1500 for the S&P 500. Why does CNBC continue to put people on the air who, if you listened to them, cost you 40% or more of your money?

Deflation, not inflation, will become evident well beyond housing. Other capital goods beyond housing will see real price declines for the first time since the 1930s. Debt is inherently deflationary; the "hyperinflationists" will once again be shown to be wrong (how many years running will it be now?)
Housing prices will continue to decline. I believe we're about halfway done with the price correction. Those who think we will turn this in 2009 are wrong - unless we get an all-on collapse in prices in early 2009, which I do not believe will occur. I've heard several claims we will have positive year-over-year home price changes in 2009. I'll take the other side of that bet.

The Fed's attempt to "pump liquidity" will be shown to be an abject failure. We will see either a Treasury Market selloff or worse, severe instability in the dollar at some point in 2009.

GDP will post a 12-month negative number and there is a decent shot that we will actually see an official depression print before the end of 2009, defined as a 10% decline peak-to-trough.

The Stock Market has not bottomed although you may think it has for a few months. The annual range will be quite extreme; I would not be surprised at all to see 1,000 touched on the SPX in the first part of the year. I believe the SPX will at least touch 500 in the next 12-24 months and the current bottom will not hold. It is possible that we could see a crash to SPX 300 and DOW 3,000 some time this year, probably after the spring (when the "Obama Halo" wears off - if it isn't blown off by economic events first.) Yes, this means I am predicting a fifty percent swing in the SPX in 2009. Lots of money to be made as a trader if you're quick and good, but an absolute minefield if you're a long-term investor.

Precious metals will not be a safe haven. The callers for $1600 and above on gold will be wrong, unless there is a major military conflict. I do not rate that probability as particularly high, but it is an event (along with a major terrorism incident - nuclear or biochemical - that would cause a rocket shot in Gold prices), so I am hedging that call. The risk of this sort of "response" to the economic crisis is, however, real, and will rise significantly going into 2010 and beyond. We'll revisit this one (a major war) next year.

The Dollar will not collapse. This is not because we're in great shape or will truly recover, it is because the rest of the world is in worse shape than we are. Last year pundits were all calling for the dollar to collapse to 40 - it didn't happen. Now they're calling the dollar's strength a "Bear market rally." Nonsense; the simple truth is that while we're in bad shape the rest of the world is literally on the precipice of a full-on collapse. European banks are more-levered and less-transparent than our banks as just one example.

The pound or euro - and perhaps both - will likely be where the FX dislocation initiates if it occurs. I see the potential for the pound and euro to both reach par with the dollar, although I'm not going to go that far out on the tree limb and predict it - yet. Needless to say that would rocket the Dollar Index but it won't be our strength that does it - it will be their weakness.

The US Consumer will go from a negative savings rate to a seriously-positive one. I am predicting 4% in 2009 but it could go as high as 10%. The math on this is simple - the "consumerist legion of more" has run its course and all that's left is debt. It hurts and bad; expecting the American Consumer to cut off his other arm is just plain dumb. By the way this is a good thing in the longer term for America once the excess debt is forced out and defaulted through the system.

Commercial Real Estate will effectively collapse and most commercial Real Estate REITs will be either insolvent or limping on life support. There will be calls for bailouts (which may be attempted; the calls are already starting to be heard) but it won't matter - a failed business is a failed business, bailout or no, and overcapacity must go away before sustainable business conditions can return.

Along with the above, expect 10% of all retail stores to close, and that number could go as high as 20%. That's not going to be fun; there will be hundreds of malls that wind up literally shuttered across America. Stay away from most retailers and property groups as investments. Firms like SPG and VNO are levitating on the strength of their dividends (7-10% yields at present); I believe this is a sucker play; if retailer defaults force dividend cuts (and I believe they will) the commercial REITs will go straight into the toilet.

Several states will get in serious financial trouble and outright default of one or more is possible in 2009. California leads this parade. But even if there is a default on a state basis, the effect will be highly localized, as county and municipal governments vary in their wisdom and budget process. The real pain comes in state-wide social and educational programs. Be very careful if you are in municipal bonds or thinking of getting back into them (I recommended they be dumped in 2007 - look at what has happened to the closed-end funds in 08! Aieeee!) as the default risk is VERY REAL. If you're buying individual issues and do the work to determine not only the risk of default but also the likely recovery if they do default there are some good deals out there - but only if you're doing the work. "Trust me" (as in buying funds, whether mutual funds or closed-end stuff) is very dangerous.

Mortgages are not done. The story last year was "Subprime." This year's will be "ALT-A", "Option ARMs" and so-called "Prime". The Fed and Treasury know this, which is why they are playing games with "agency" debt in a desperate attempt to clear this market before the ticking nuclear devices go off. The amount of debt involved in these "bad deals" is vastly higher than that in the "subprime" space and if they fail to contain it (a near certainty) Round #2 of severe bank instability gets served up on us in the second half of 2009.

If you want to refinance a mortgage you may get one brief shot at it with long rates around 4%. You're nuts to buy outright unless you intend to die in the home, but if you have a solid reason to be obtaining a mortgage or wish to refinance you will probably get the opportunity. This assumes the "buydown game" gets going before Treasuries dislocate; if you get the opportunity take it as it is likely to be fleeting. The few places in this country where homes wind up selling for 2.5x incomes (on average) and you have an opportunity to finance at 4% and change will be decent buying opportunities - if you're sure you can cash flow the note (e.g. your job and/or income stream is not in any danger of collapsing.)

Those who have said that the corporate bond market is being "unreasonable" in its expectation for defaults will start to look like the jackasses they are. Actual default rates (not projections) on non-investment-grade debt will skyrocket starting in 2009 and there will be no sign of it turning around this year. If you're playing in this area of the market thinking that "the worst is behind us", I hope you like walking around bald as the haircuts handed out to folks like you will be especially severe and delivered with a straight razor.

The calls for "more lending" to consumers and businesses will go exactly nowhere. The problem isn't credit availability - there's plenty of money available to lend if you are credit-worthy. Those who are being turned down now simply aren't credit-worthy when one looks at what they want to do with the money and what they're backing their repayment capacity with. The more "credit stimulus" is thrown into the economy (and there will be more) the worse the downturn will get.

General Motors and Chrysler will fail to meet their targets and it will be labor that sinks the deal. At least one and probably both will wind up in some form of bankruptcy in 2009. The UAW is insane; Gettlefinger needs to be strung up by his genitals and pelted with rotten tomatoes by his union "brothers", and if they had a lick of sense they'd have already done it. They obviously don't. I give this mess six months tops, with Ford as the only possible survivor. The recent GMAC games show exactly how desperate they are; 0% 5 year loans to people with 620 FICO scores are flat-out insane and the default rates on those loans are going to wind up in economics textbooks five years hence.

Protectionism and currency manipulation will rear their ugly heads in 2009, originating not here but in Asia as their economies go straight into the toilet. China and Japan are at severe risk here.

Commodities will appear to be headed for a new bull market but this will turn out to be a false hope as demand continues to collapse. Attempts to manage oil output to prop up the price will fail. Several oil-producing nations will find themselves in
serious economic trouble, with Russia being in the lead but by no means alone.

Sovereign debt defaults will number at least three with many other nations on "watch" for same; we had one last year (Iceland.) Noise about a US "AAA" downgrade will continue. Highest on the list for probables are Russia, which needs oil at roughly double its current price - and stable - to be financially viable. Not going to happen in the near term.

China will have its first large-scale rumbling of civil unrest as a consequence of collapsing export demand and thus employment. They'll manage to tamp it down - this year. Don't take a bet on that holding together longer-term. Those who think China will be "ok" are deluded; they have a horrifying overcapacity problem (debt-financed, of course) and there is no way for them to get out of it. They are truly going to "take it in both holes" down the road, but the worst of it won't be in 2009 - that is still a year or two in the future.

Foreign uptake of Treasuries will be choked off - by necessity. It won't be because they want to screw the US (although they should have a long time ago, given our profligate and unsustainable habits), it will be because they will be forced to redirect their resources inward as their own economies collapse.

"The City" (London to be precise, Britain generally) will be recognized as getting it "worse than we are" (in America.) This will be the first of many validations of my thesis "we're screwed, they're gang-raped."

Things will get "revolting" in a number of nations. Not here in America. Yet. If we're lucky the American Sheep will wake up and stage some of that peaceful protest stuff I outlined above. If we're not so fortunate 2010 could be really bad.

The reason why I posted was that the FED cannot be blamed for things beyond their control, their efforts are correctly focused on preventing social unrest as alluded to above as a consequence of systemic default. That is why I started with and reiterated this point.

To read the above you think that the dollar is toilet loaf and a refuge. Let me be succint about this. Let this be the one item I drive home if you take nothing away from this blog this year, that there will be continued rotations (not cyclical markets) but rotations in equity as unwinding of positions occur in a deflationary market occurs. WHEN IT IS ALL OVER you will want to be in US dollars. Deflation destroys dollars, it does not create them.

All told, about $7 trillion of shareholders’ wealth — the gains of the last six years — was wiped out in a year of violent market swings.

If the fed can avert the loss of TRILLIONS more, avert full systemic default, then they should intervene even as I hold my nose with news of Madoff and other excess and abuse.

What the Fed cannot do is return that 7 trillion as it really never existed but instead was a reported cash positions of unrealized gains in mortgage returns.

Nobody wants the Fed to state that this unreal money exists, what we want is the FED to facilitate orderly and functioning markets.

The argument that the FED's actions are inflationary are laughable in a deflationary downdraft.

Similar to Chemo Therapy the trick is to kill the cancer without killing the patient.

We are in the end of a Kondratieff Cycle last completed in the great depression. Will there be another "great depression" in 2009? I think not as the FED has succesfully to date disallowed systemic defaults.

Be careful in taking advice from the TV stock market pimps, accountants, tax preparers, insiders, etc. in 2009. Even if these people work in finance keep the one item I stated above as an axiom, stick to the US dollar.

I currently work in portfolio systems management (I write the code to track and report them) and I'm always surprised at how many of these "accountants" are not economists.

And laughingly.. when I worked at the IMF I was equally surprised how these economists didn't understand a budget. (I wrote code there as well.)

And finally, it was only as a consequence of being a broker, stomping the OEX naked in the 90's can I make the statements above.

The person who imparts the advice has to be fluent in ledgers, exchange, and settlement. Equally at ease with NPL's as ETF's.

No matter what the market schills tell you, no matter what the blame america first crowd says, remember that no matter how fvcked up the USA economy might be, the rest of the world is worse, despite Mr. Madoff included. Stay long the dollar and happy New Year.

Worst New Years Prediction for 2009???

THE day before a powerful blast sent his headless body flying out of his Gaza home, senior Hamas leader Nizar Rayan predicted that the Islamist movement would defeat Israel. "God willing, Hamas will win,"

Yes 2009 will have it's challenges, but it is nothing to lose your head over.

I missed a comment:

I skipped pretty much everything after "so you think money is the root of all evil?" If people are going to quote the Bible, they need to finally get it right. Money isn't the root of all evil, LOVE of money is the root of all evil. 1 Timoty 6:10 - "For THE LOVE of money is the root of all kinds of evil."

And candidly when it comes to I being ascribed the quote from Ayn Rand, I cannot be held accountable.

In as Much as the New Testament was quoted let me reply that in respect to Madoff I think Matthew 25:14-30 is appropriate.

I think Proverbs 15:6 is applicable as well.

If you skipped the Money Speech then I suggest you revisit it.

"Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you virtue and it will not redeem your vices. Money will not give you the unearned, neither in matter nor in spirit.

For a good list of Biblical Quotes on Money read this.

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