Here is my attempt for 2009. In 2007, I was fairly certain of my predictions as we were looking at a credit and housing bubble of historic proportions. There was no doubt it had to burst. In 2008, I was less sure but it was pretty clear that straight down was still the direction we were headed.
In January 2009, we look at world of unprecedented turmoil and infinite possibilities so I am far more uncertain than in the past.
However I am not going to let doubt and ignorance keep me from sticking my head out again. When exactly zero dollars are stake, I am a bold man. Please jump in and correct me where I am wrong.
Of course, this is a parlor game and is not investment advice. If you take your macro-economic guidance from the blog of someone for whom domain names constitute a significant asset class, then I respectfully submit that passive index funds might be a better choice for you.
World Economy 1) The consensus Wall Street forecast that the US will have a 2nd half of 2009 recovery is some kind of bad joke. Full year recession in the -2% to -3% range for the US in 2009. I can’t see any recovery before middle 2010 at the earliest and even that is optimistic. There will be weakness for years.
The key issue is that consumers have had massive wealth destruction (stocks, homes) and have to delever (too much debt, negative savings rates). That is going to be a huge drag on consumption for a very long time and why the government is stepping into the breach with unprecedented fiscal stimulus.
Real unemployment will be above 10% for sure but since the current numbers are carefully massaged to exclude large numbers of people that are unemployed by any common sense definition (e.g. they are of working age and do not have a job), that might not be the official figure.
2) Euro-zone growth will be -2% and could be worse. It will be worse in Spain and Ireland for sure.
3) UK growth will be -2% to -3% range and could conceivably be worse. The UK is a basket case; it has all the problems of the US, but more so.
4) China will be in the 5% to 7% range which is basically a recession for them. They can’t absorb their labor force at that rate of growth. The figure could be lower but I suspect they will apply as much fiscal stimulus as they can to avoid that.
5) Eastern Europe (Romania, Hungary, Bulgaria) and the Baltics are going to have a generally tough year. I don’t know enough about their economies to know specifics.
6) Icelanders will consume more herring and fewer Range Rovers in 2009. I am recruiting for volunteers to go collect this year-on-year data since I am not sure we will find it in the back of the WSJ.
Central Banks
1) Fed Reserve will keep rates at or about zero for the year
2) Bank of England and ECB will both end up at or below 100bps by year end, probably by mid-year realistically.
Residential Real Estate
1) Continues to fall in 2009 but at a reduced rate.
2) Still looking at a 30% overall decline (far side of my 2008 predictions), maybe a little bit more.
3) This is the year Manhattan will feel the pain too. 15-20% decline vs. peak in 2007 and more to come in 2010.
Commercial Real Estate
1) This is the year the bottom falls out, particularly in retail and office. I thought it would be last year that this happened but I was early.
2) A large part of the commercial real estate problem in on the credit side where assets where bought at silly prices supported by silly lending supported by silly assumptions on occupancy and rental rates…so lots of folks will default.
3) While there is a capacity problem, it is not the insane overcapacity of the 1980s
4) The CRE folks are asking for a bailout but I can’t figure out why it is an issue of federal importance if X real estate equity investor or the related debt-holders earn the cash flows from any particular building. The building will still be there generating cash flow and housing tenants…
Your Tax-Dollars at Work
1) The government will spend phenomenal amounts of your money on bailing out financial institutions and get little in return. They should just get on with nationalizing the weakest players, write down the assets to realistic levels and then refloat them once the junk has been written down so that people will believe the balance sheets.
2) Instead, they are going through extreme convolutions (TARP, guarantees, ABS guarantees, and on and on) to support inflated asset values and pouring money into the banks that is slipping back out to shareholders, creditors and management.
Painful to watch since it will just be a more expensive way to get to exactly the same place. It is the worst of all worlds: all the costs of nationalization and much less of the cleanup. Many major financial institutions are insolvent not illiquid, so we might as well get on with the clean-up, not drag it out over a decade like Japan did.
3) I have great sympathy for the fact that Paulsen et al had to make very important decisions very fast without a playbook. But a year later, there is still not an intellectually coherent framework of who gets bailed out how much nor any transparency about it.
Given that, you can be assured that much money will be wasted.
4) There will be massive (this is the word of the day!) fiscal stimulus by the Obama administration as long as the world will finance it.
5) Overall, the government has spent or guaranteed a staggering $7T-$8T so far and is going to add a few $T more. If you count the guarantees, we doubled the size of the federal obligations in 1 year.
I think lawmakers have gone numb at this stage. $30B plus $100B of guarantees for BoA raised barely an eyebrow last week. That would have been a huge event a year ago; now, what’s another $xxB to our tab?
6) The USA is in uncharted financial waters in terms of how much it is expanding its obligations on a run-rate basis (historical context: the federal govt had a higher overall debt load after WWII relative to GDP, though the overall country debt load is at record high, relative to GDP).
If the US can maintain the world’s confidence long enough to recapitalize the financial system and stimulate the economy through the upcoming consumer economy, then it is a testament to the remarkable reserve “brand” of the US economy.
But it is in a position where it is vulnerable to its external lenders and if a lender (hint: China) eventually is forced to cut and run, the options get much tougher and painful for the US.
It will either soft-default through devaluation or strangle the economy through higher interest rates (to attract capital) and fiscal restraint.
Dangerous and interesting times, watching financial common sense go against the fact that for the last 100 years, the US economy always somehow recovers faster and stronger.
Currency Under regular circumstances, the fact that the US is printing money left, right and center would be terrible for the dollar and in the long-term we can probably expect the dollar to devalue.
But in the short-to-medium term, I have a hard timing thinking about which currency the dollar would devalue against.
The UK is in worse shape than the US and GBP is not a reserve currency. Large parts of the EMU are in terrible shape and the euro has never been tested in a crisis (will Germany support Club Med in a crunch?). Also, qualitatively on a personal level, the Euro feels overvalued in PPP terms coming from the US. Even the less affluent parts of Europe are expensive in dollar terms for basic items and that does not quite make sense.
1) Dollar will stay stable or strengthen against the Euro. I would expect 1.15 to 1.35 to be the trading range this year
2) China will not let the yuan rise against the dollar nor will it radically devalue. Stable.
3) I have no opinion about the GBP. It has already collapsed against the Euro and fallen hard against the dollar.
Web 2.0 or whatever it is called 1) Lots of silly ‘social’ companies will die this year
2) Lots of entertainment oriented video-viewing companies will die this year, but video is here to stay in a big way online
3) But overall VCs have been more sensible than in ‘97-’01 so it won’t be the vast value destruction of the .com bust.
This time, it is their financial brethren in NY & London who have shown the world what type of value destruction real Masters of the Universe can achieve. The VCs never came close to shutting down the whole global economic and trading system and breaking every single financial market.
4) Good time to invest as competition for deals, market spaces, teams and opportunities is about to go way down. You can actually focus on building a company without a dozen clones a week.
PE
1) As predicted, 2009-2010 will be years of destruction for the companies purchased based on “everything going right forever” valuation models.
Some might drag on longer due to weak covenants but it is not going to be pretty for 2005-2007 vintage investments.
The “it’s all about the velocity of investing” nonsense is hopefully dead and buried.
2) PE will return more to its historical roots in terms of buying solid companies, though for now, re-caps and investing through the debt side appears to be more feasible.
3) How good you feel as a GP in private equity probably has a lot to do with where you are in the fund-raising cycle…some folks are going to really struggle as LPs reduce their allocation to the field.
Probably we are looking a similar situation as the last down-turn where 30-40% of firms will either wind down or become substantially less prominent over the next 5-7 years.
4) In any case, PE heads seem to have suffered from the curse of being declared Masters of the Universe in mainstream publications and lauded, applauded and feared. Like naming a stadium, it is probably the perfect contrarian indicator.
Hedge Funds 1) Good luck to the quants. They got killed in 2008 and I doubt 2009 will be much better. Their models require some predictability in markets and I am not sure they are going to get it this year.
2) Needless to say many hedge funds will fail this year, deservedly so.
The thought that there could be 8,000 to 9,000 funds capable of beating the market on a post-fee, risk-adjusted basis was idiotic. 90% of them probably should go; maybe 50% will.
Investing These are not market timing predictions. Just things that I would consider if I had a portfolio to rebalance:
1) Long dated TIPS seem pretty attractive as they are basically pricing in no inflation forever and inflation will come back eventually given all the liquidity being created. I think this is great protection for someone who is otherwise preparing for a super-recession.
2) Treasuries are overbought. While they won’t collapse this year, there is really no upside from here
3) High grade corporate debt at 500bps+ above Treasuries seems like a good buy if you / your manager is a picker
4) High-Yield at 1500bps above Treasuries is certainly a far better deal than the exact same High-Yield was at 200-300bps above Treasuries 18 months ago.
This would be a risky bet for the bold since many of these companies will fail, but if you are bold, now is the time to buy high yield when you are actually getting paid for the risk.
As with #3, probably good deals here for the person who get deep in the financials. But I have no idea; maybe all these firms will fail.
5) I have no opinion on US equities except that they will be volatile all year. It seems like we could go through a prolonged period of uncertainty, multiple compression, and general distaste with stocks like in the 1970s.
On the other hand, Buffett made one of his very rare market calls and it was a Buy and he is the undisputed master of this domain.
So listen to him, not me. And some more qualitative thoughts
1) Pakistan is the most important battleground in the world right now and the Islamicists are having great success. Islamabad is losing control of the NWFP; Swat is getting overrun and Peshawar is endangered. All of this is happening 100 miles from Islamabad.
2) The West feels like it is at an inflection point. The economic system has failed to a significant degree, there are powerful though immature competitors emerging in Asia, and peoples’ expectations of their future well-being will not be met. The riots in Greece and Latvia are fundamentally about economic opportunity and expectations.
These types of events have lead to political, social and geopolitical re-orderings in the past.
It could happen again or we could muddle through. But there is definitely the possibility for big change in the air, in a way that there hasn’t been since the fall of the Communist bloc.
3) There will be hearings and there will be indictments.
We have only seen the beginning because the crash just happened and we had a pro-Wall Street administration.
I will be very surprised if Washington does not deliver some heads on a stick from Wall Street by 2009-2010. As with the Pujol and Pecora Hearings, Wall Street will be brought to DC and given a good spanking and a few more tomes worth of (re) regulation.
4) The financial services sector will start deflating back to more normal standards as a percentage of economy-wide profit and employment. Slow, cyclical process that will continue until the next mega bubble (10, 15, 20, 30 years?). There will always be swash-buckling financial types making billions throughout the whole period, just like there have been in every period, but the overall industry has to contract substantially and instant deca-millionaires of the past few years will be rarer.
5) The current recession has done wonders for oil prices but does nothing to change the medium-term dynamics that demand is steadily rising while supply is not.
We will still have a crunch in the medium-term. Stock up now while it is cheap! Contango saying the same thing.
6) Ongoing theme from the past: Biotech, nanotech and artificial intelligence will revolutionize society in the next 10-30 years in a way that is hard for most to appreciate, so to some degree, we are still worrying about our horse-drawn carriages when a Ferrari is on the horizon.
I continue to prepare for the day when we will welcome our robot overlords.
7) If you are reading this blog and wondering about how high-yield might trade relative to Treasuries, you are likely already one of the 0.0001% luckiest humans to ever live.
So, don’t forget that and have a very happy and healthy 2009.
