Here are my 2009 Financial Predictions. My general thesis is:
- Cash is King
- If You’re Long You’re Wrong.
S&P 500 – By the end of 2009 it will hit 633. This estimate is based solely off earnings ($42.26 x PE of 15). That is a conservative number. If you use a 12 PE, the number drops to 507. If Bernanke loses control of the long bond, this number will go below 500. The S&P 500 is at 931 now. The upside is very limited, where as the downside is serious.
Dow – I don’t invest in or against the DOW. Earnings in these global corporations are highly influenced by currency events. No prediction.
Recovery, Recession or Depression in 2009? – Depression. Until mark to market accounting is restored and the bailouts stop, monetary velocity will continue to plummet. The new Treasury Secretary appears to be another Hank Paulson and we are stuck with Bernanke until at least 2010.
Real Estate – Prices will continue to decline and decline at an INCREASING pace. As this happens bank lending will get tighter as their risk increases. Higher down payment requirements will force prices much lower. Those on the sidelines will continue to see home prices fall faster than they can save. There are $1Trillon in ALT-A resets. A massive wave of foreclosures is coming. The stigma of walking away from an underwater mortgage is going away as America becomes Bailout Nation. No recovery in 2009. If you must buy, the best deals will be new construction sold directly by distressed builders.
Oil – I nailed it last year. Now with every central banker racing to devalue their currency this is going to difficult to predict. My wild guess is it goes down to $25/bbl before heading back up slowly.
Unemployment – U3 unemployment will hit 9%. U6 unemployment will hit 16%. Definitions here.
Deflation, Inflation or Hyperinflation? – Deflation. Asset prices will continue to fall as the leverage comes out of the system.
Gold – All the experts seem to think it is going up. I’m a contrarian. I’m thinking deflation will be a more powerful force than every central banker devaluing their currencies. Gold drops to $600/oz.
30-Year Bond – This is the most important number. If it ramps America is hosed. Bernanke is using Quantitative Easing to push this number down. It is working for now. If it fails, look out below. I plan to have a post on this topic soon. I’m going to bet against the grossly incompetent Bernanke and go with 4%.
An Investing Strategy For 2009
Note that I am not a certified financial planner and you should do your own research. The advice below is what I would say to a close friend. There are no shortage of investing tips for 2009 on the Internet. Here goes another one.
- If you have debt, pay it off. Stop consuming.
- Exit all long positions in the stock market until trust is restored.
- Fixed Income is still the safest. Good old bank CDs. Money Market accounts. Short term Treasuries. You will not make money here, but more importantly you will not lose money here. If the economy improves and the stock market starts moving up, you can always jump back in. Missing the first few percents is worth it. Let someone else take that risk. Guessing the bottom has destroyed many investors.
- Prudent Bear and Grizzly Short are two mutual funds that make money in a bear market. These funds will make money as long as stock prices are falling. As soon as a recovery starts, you need to be out of these. If you don’t follow the market at all, then I would stay away from these.
- Bet against Bernanke with TBT. This is a high risk ETF that I will most likely be acquiring soon. There are a lot of banks, hedge funds and foreign governments holding US Treasuries. Our Federal Reserve has been leveraging up its balance sheet buying these to force interest rates down. If at some point any of these parties either stop buying Treasuries or if they try and dump them, interest rates will spike. TBT is a leveraged ETF that will double that spike for you. But if interest rates drop, you can lose. For me this is ETF is less about an investing thesis and more about insurance against Bernanke stupidity.
Disclosure: I own shares in both Prudent Bear and Grizzly Short. I also plan to buy TBT.
What are your 2009 Financial Predictions?
UPDATE (1/4/09): I realized after I published that there are 2 points I wish to make more clear.
- If you plan on buying new construction from distressed builders, make sure that if there is an HOA, that is solvent. That sweet deal you got on condo may backfire if you are the only paying into the HOA. Buildings require money from the HOA for parking garages, security, elevators and a host of other fees.
- My picks for Gold and Oil are pure guesses and not true predictions. We are in uncharted economic territory now. Currencies are being devalued everywhere and at different rates. Everything else listed is a prediction.
Jan 3, 2009 — 10:56 am
Be careful with the Ultra ETFs (short or long). They are not meant to be bought-and-held, and their inefficiencies lead up to a *minimum* of about 6% per year of losses against what you expect the theoretical value to be. These ETFs are best bought when you think you’ve nailed a 1-90 day period where something is going to happen in your favor. I happen to be with you on the Treasuries thing, but I was a month ago as well.
If I bought TBT then, I’d be down 12% or so. A month earlier and it would be more like down 40%. Curious to know what you are using as your buy signal, especially since the Fed keeping changing the rules on everybody.
The way I’m playing it is to load up on high-grade munis instead. 5% tax-free and liquid beats Treasuries by a mile now and as people begin to realize that the state of California and the state of New York aren’t exactly going away anytime soon, a lot of this safe haven money should flow into the muni market instead. Especially after Barry O. boosts everyone’s confidence in local economies again.
Jan 3, 2009 — 11:15 am
I agree with you on theses Ultra ETFs. Anyone looking at SRS knows these things are dangerous.
I have not bought TBT yet and would buy it for simple insurance. Rates can’t go to zero. At some point people will need to sell Treasuries to realize their huge gains. When does that happen? Next week or next year?
We will see a lot of BKs in the Muni space. Debt has to be restructured. The math just doesn’t work out to fund all the debt-financed promises. I’ll take a risk-free 1% over a 5% muni. Then again that is area I no little about, so I would avooid it on those grounds.
Shalom P. Hamou
Jan 3, 2009 — 11:26 am
Sorry, But Quantitative Easing Won’t Work.
In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.
Hence, the Keynesian paradigm I = S is not verified.
The purpose of Quantitative Easing being to lower the yield on long-term savings it doesn’t create $1 of investment.
It does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on savings.
This and other issues are explored in my tract:
A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order
This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.
It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.
It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes’ Liquidity Trap…
It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.
A Credit Free, Free Market Economy will correct all of those dysfunctions.
The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.
A Specific Application of Employment, Interest and Money
Jan 3, 2009 — 12:01 pm
Here’s the thing: would I put a lot of money in some random California county because their bonds were yielding 7% tax-free? Nope. But there are plenty of municipalities which are in great health and will continue to be in great health. Remember that state budgetary laws do not even permit the submission of unbalanced budgets.
I would love to be an experienced muni trader right now and be able to pluck out the 10 best bonds out of 10,000, but I’m not, so my best bet is something like VWIUX right now. It’s only yielding 4.5% tax free and you can certainly find higher yields than that, but you’ve also gotten about 4% price appreciation in the last few weeks as the muni market is finally starting to exhale and relax again. There’s a whopping 1700 bonds in the portfolio, Vanguard only takes .08%, it’s all A-AAA, and it’s intermediate term so you won’t get stung by interest rate action.
Anyway, I’m not an expert… just someone who will take a safe 6.75% taxable-equivalent yield until the cows come home… especially right now. For a good read on municipals and defaults, check out Accrued Interest (great blog).
Jan 3, 2009 — 12:08 pm
Great tip MIKE D.
Jan 4, 2009 — 11:43 am
If this article proves to be true, we may see new records set for gold in 2009. Maybe hyperinflation towards the end of the year?
Jan 4, 2009 — 4:36 pm
I am not in the hyperinflation camp. It would mean the end of the republic. Weimer hyperinflated, but its debt was held in foreign currencies. Ours isn’t. Also, you can’t hyperinflate wages in a global economy.
The FED is trying to print, but the banks are not lending. Thus the expansion of credit is not happening.
The more likely scenario is default.
Jan 4, 2009 — 7:11 pm
I’m with MAS on the hyperinflation …I think it is possible after housing bottoms and employment starts to pick up again …but these events may be 2-6 years away. When the economy picks up again and treasury rates increase, just paying the interest will become a huge problem though …at that point we deflate, default or increase taxes.
Anyway, I agree with everything MAS wrote, but think the markets could have a fairly substantial bear rally (up to 1000-1100 on the S&P) before we ultimately go lower again.
I also agree oil is unpredictable due to the unpredictability of currency crosses. Another bubble seems very unlikely though.
I think gold will follow equities (up, then down – see above) …deflation and deleveraging will ultimately take it lower (unless there is a serious world conflict). Gold has no real intrinsic value though …it is worth what people think it’s worth.
I would still avoid any real estate. Unemployment is the next tidal wave to hit this investment, taking out prime this time (as well as alt-a).
Unless you are prepared to do alot of research in munis I would stay away. Many trusts, cities, governments, pension funds, etc. bought toxic debt without even knowing it. Until real estate bottoms many of them will think they are safe, but won’t really know.
If there is a decent pull-back, I will probably put some money into long equities, but shift back to shorts as they begin to roll over again. I will go with GRZZX and true shorts to avoid counterparty risk.
Anyway, my 2 cents …happy new year!
Jan 4, 2009 — 7:12 pm
typo – in my first paragraph I should have said:
“…at that point we INflate, default or increase taxes.”
Jan 4, 2009 — 9:05 pm
Personally, for the past many months, I’ve been converting my assets into investment and business opportunities not correlated to the stock market so I’m not too concerned about equities.
So, my private financial firm invests in business opportunities we control for our small investor group that creates passive residual income flows. And, we are seeing some great opportunities opening up right now. And, I have a feeling it’s only going to get better over the next 1-2 years.
Jan 4, 2009 — 8:52 pm
Without a doubt, the big event of 2008 was the collapse of Wall Street.
Gone are the venerable investment banks of Bear Stearns, Lehman Brothers and Merrill Lynch. They, along with a few dozen trillion dollars of investment capital, were simply wiped out by the leading edge of the financial Tsunami that is now sweeping the planet. Thousands of other financial institutions stand at the brink.
The triple curve was first published in 1996, or thereabouts, right about the time the derivatives market was taking over the financial system.
The vertically ascending line represents the financial claims in the form of stocks, bonds MBS’s, CDO’s, CDS’s and dozens of other forms of debt, and layer upon layer of exotic derivatives on top of that; and the second ascending line represents monetary emissions to facilitate the payment of debt. The descending line represents the physical economy. And the straight, horizontal line represents time.
As the diagram projects, the trajectory of all three curved lines steepen as time progresses, eventuating into the financial and monetary lines going vertically upwards and the productive economy going in the opposite direction. This is what now seems to be occurring. The financial system and the real economy are coming completely uncoupled.
The crisis that suddenly erupted over the summer was due to the fact that the debt imposed upon the underlying economy could no longer sustain the financial bubble and it began to violently contract. But in order to prevent the global casino from imploding a coordinated campaign by central banks and governments around the world began pumping trillions upon trillions of dollars (and whatever else) into the system. While this has temporarily prevented the financial bubble from completely collapsing it has had no effect upon the underlying economy. In fact, the diversion of money from the economy into the credit bubble has greatly accelerated the collapse of the real economy.
What will the new year bring?
Because the underlying economy has now gone into freefall it has caused deflation, at least temporarily. But with the central bankers and treasuries committed to the creation of unlimited amounts of liquidity to prevent the derivatives bubble from deflating too, a hyperinflationary firestorm is a possible result as the monetary line goes vertical. “Monetization” is when the feds create more money to buy up debt, that otherwise would not have buyers. You can safely translate that to “inflation”
What is occurring is simply the disintegration of the entire global financial system.
Happy new year to you too!
Jan 4, 2009 — 9:17 pm
For more, see:
Jan 5, 2009 — 12:35 am
Ed – The government will throw trillions at this problem, but it may not even stop deflation. We have spent decades creating a parabolic debt bubble …add huge amounts of leverage …and there is the potential for such massive deflation nobody can do anything about it.
Here is a great quote from a Markman article from over a year ago regarding the leverage:
“When you add it all up, according to Das’ research, a single dollar of “real” capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion — or eight times total global gross domestic product of $60 trillion.”
If these derivatives unwind it is game over. On the other hand if your hyperinflation theory is correct it is also probably game over. If either turns out to be correct it probably doesn’t matter what you invest in.
Jan 5, 2009 — 12:37 am
Here’s a link to the Markman article:
He is very sharp …I try to read him every week.
Jan 5, 2009 — 9:43 am
Jim – Good article. Written in 2007 it did give a very warning to anyone that read it.
Jan 5, 2009 — 12:20 pm
Wow, lots of apocalypse chasers here. Everybody git yer guns! 🙂
Jan 5, 2009 — 12:23 pm
Also, what’s up with every comment getting moderated? I have almost 20,000 comments on my blog, do about 100,000 uniques a month, also use WordPress, and I don’t have a spam problem.
(You don’t have to publish this comment… just asking)
Jan 5, 2009 — 12:38 pm
I have yet to figure these comments out. It should ONLY hold the very first post. After the first post is approved, you should be able to post wo/moderation.
Sometimes I’ve noticed WP holding posts with lots of links or if the post is very short.
Some users change their email each time they post a comment, which requires me to moderate each one.
Jan 5, 2009 — 9:27 pm
the article looked familiar, I have MSN for my home page so I more than likely came across it.
The thing that its lacking in my opinion are the consequences in the aftermath.I suspect the reason is because many people believe its just another cyclical economic downturn. I hope they’re right. Its much more interesting from a historical perspective, if an article can give some details to where it may lead us in the future stream of time. He gives no input on this.
Im glad there are a number of experts out there who can keep us tuned in to “whats real”….but I think La Rouche and a few others are a step ahead of the curve in the “future events” realm. Im sure there will be more talk on this as time marches on.
Jan 5, 2009 — 11:09 pm
Hi Ed –
I just think the consequences are unknown because we are in completely uncharted waters. The $485 trillion in derivatives is what Buffet called “financial WMDs.” This potential unwinding won’t be completely avoided until housing bottoms and hedge funds stop unwinding.
Until then, we are faces with the prospect of what I call a deflationary death spirals:
– homeowner is underwater, house forecloses, bank sells below market price, more homeowners underwater…
– workers get laid-off, ex-workers spend less money, less demand for goods, more workers get laid-off, etc…
These death spirals cause more unwinding and defaults …blowing up more derivatives and causing more money to get sucked into the black hole of paying down debt.
Anyway, I have a hard time seeing inflation causing problems in these scenarios …though I agree that after the economy starts to recover there may be serious inflationary problems. Especially if the Fed and Treasury can’t get any of their money back from the deadbeats they loaned it to.
I hope we are both wrong though. It would be a terrible thing if our experiment in democracy is cut short because capitalism failed.
Regardless, this has been an interesting thread and I appreciate you forcing me to think as much as I have …cheers my friend!
Jan 6, 2009 — 1:36 am
One final note about hyperinflation …the velocity of money and asset prices are both declining rapidly at the moment. The velocity of money just went below one recently …and we have all seen what has been going on with real estate, commodities, energy, automobiles, etc. For the hyperinflation thesis to be correct, we have to see all of this head the other direction first.
Ok, I’ll shut up now… 🙂
Jan 6, 2009 — 7:14 am
I’m looking at monetary velocity as well. In GD1, MV dropped to 1.17 in 1932.
Jan 7, 2009 — 9:17 pm
Hi again Jim,
re: “The velocity of money just went below one recently …and we have all seen what has been going on with real estate, commodities, energy, automobiles, etc. For the hyperinflation thesis to be correct, we have to see all of this head the other direction first”.
Sounds good to me….here’s how one guy describes it.
How deflation creates hyperinflation
1) Deflation slows the speed of money to crawl due to fears about the deteriorating economy. The public hoards cash, or, in the case of the US, short term treasuries.
2) The slowing speed of money and debt destruction force the government to create huge quantities of cash to prevent prices and the economy from collapsing. However, because the public is hoarding cash (or short term treasuries), most of the money doesn’t reach the real economy, which leads the central bank to print even more money. In essence, cash hoarding acts as a dam, preventing the enormous quantities of printed money from affecting prices.
3) Deflation weakens economy until it leads to a loss of confidence. With doubts about the government’s solvency growing, the velocity of money quickly picks up speed, and a flood of hoarded cash comes out of hiding, entering the marketplace all at once and creating hyperinflation.
US stands on the verge of hyperinflation
Gold Backwardation signals that the next phase of the economic crisis, a rapid acceleration in the velocity of money, is about to begin. Right now, the flow of money through the economy is basically frozen: everyone is panicking into treasuries due to deflation fears. Negative yields on the 3 month treasuries are a sign of this.
Despite the glacial rate money is moving through the economy, the dollar has started to fall again, and gold has begun to rally. As this continues, investors will begin to questions the safety of treasuries, and sell them off. The money coming out of treasuries will add fuel to gold’s rise and the dollar’s fall. Once the dollar hits new lows and gold breaks convincingly over $1000, Investors expecting deflation will begin to panic, and a flood of money will come out of treasuries. It is then that hyperinflation will begin in earnest.
I wonder if the world is going to keep financing our trade deficits while our debt- to- GDP ratio keeps increasing into oblivion.
Jan 7, 2009 — 10:30 pm
Here’s a great two part DVD set that describes how the international bankers rule the world by controlling the money. Its a good starter for anyone interested in new world order agenda. Which is basically the direction were headed in my opinion.
Jan 7, 2009 — 11:54 pm
Hi Ed – Great dialog …thanks!
I don’t really agree or disagree …it’s sort of a Godzilla versus King Kong sort of thing to me …as soon as either one wins they are back to destroying the city again, but they are both too powerful to decide who wins up front.
I give the edge to deflation simply because of the destruction of wealth from 2008+ that will be incomparable to any other time in history. I think you have to fill that hole before you build the hyperinflation hill on top of it.
I also think the GD and 90s Japan are the only comparable situations …and in both cases alot of stimulus didn’t create hyperinflation.
I certainly could be wrong though …wouldn’t be the first time! The danger in my mind though is hyperinflation after the economy reboots. As long as the interest on the debt is very low the Fed is ok, but as treasury interest rises the Fed may find it impossible to make the minimum payments on their VISA card. They may need to print to keep up and in a growing economy this becomes a scary proposition.
Personally I just find gold a distraction. It tends to move the opposite of the market …except when it doesn’t, like when hedge funds are deleveraging or there is some geopolitical crisis going on. The gaps in the chart are as large as the daily moves though, it’s volatile as hell and hard to predict. I just avoid it and generally ignore it. I might buy some physical gold if I decide things are getting really bad, but it won’t be a huge position (I’d rather just short instead).
Regarding the US$, I think the rest of the world will suck worse than we do, which is somewhat bullish for the dollar. I’m not going to speculate on this though, because I don’t really know if it plays out that way (or the timing).
I think your last comment is very prescient though …will they continue to buy treasuries? I think the Fed is going to start buying them right? I know …hyperinflationary! 🙂
Jan 8, 2009 — 6:20 am
I’m with Jim.
The 2 paths of doom are: default and print
Defaulting would hurt those holding Treasuries. Mostly China and Japan. Hyperinflation would hurt EVERYONE, but most importantly it would kill the bankers themselves.
So why would the central banker stick a gun in its own mouth? To me it makes more sense for them to turn to Congress and say “we did our best, your turn to tax or cut spending”.
2009 = Deflation
2010 = Let us cross that bridge later in the year. 🙂
Jan 8, 2009 — 6:06 pm
Thanks for the comeback…..and don’t ever feel a need to “shut up” were in this thing together. You can tell me to shut up if need be. I just have a gut feeling people will be throwing their money in the streets at some point, don’t know when.But determining where one lives, will depend on how bad one “sucks” or not. I think people in the inner cities of Hong Kong might not get to put something on their bowls of rice on a day to day basis, but Im sure they can handle the pandemodium much better than the average American. Thanks again for your input.
re: “So why would the central banker stick a gun in its own mouth? To me it makes more sense for them to turn to Congress and say “we did our best, your turn to tax or cut spending”.
Im curious why you didn’t let my last post and link I gave to the “moneymasters” go thru…..the two part DVD covers all the bases on the intention of the central bankers. Their agenda is to crush the nation-state system, and create a one world government with one international bank and currency. As it stands at the present moment the U.S.(democracy) is a restraint to their plans and has been for a long time. Until now. This is what Britain and the financial oligarchs within the city of London have been steering towards for a long time. Im totally convinced of this, not out of paranoia or a desire for the world to go to hell, but like a puzzle, the pieces just fit until the picture becomes more clearer. The DVD isn’t really that disturbing and doesn’t get into anti-semitsm, just basic facts of the evolution and control the moneychangers have on the world. It confirms my belief when I hear people like Kissinger recently make comments on CNBC about the shake-up in Gaza, a “perfect oportunity for a new world order” This is what they discuss, I assume, at meetings like G-20 or Bilderburg group meetings.
Jan 8, 2009 — 6:40 pm
Sorry about that. WordPress is holding some of the comments that have links in them. I can’t seem to figure out this comment system.
I located the comment and it is now visible. Thanks for bringing it to my attention.
Jan 9, 2009 — 6:45 pm
Anybody catch Barney Frank’s Q&A session this morning? Congress and Barry O. apparently approve of using Fed funds to purchase municipal debt directly from issuers in the near future. Additionally, I forget Frank’s exact quote late in the session but it was something to the effect of “general obligation municipal bonds should have the exact same risk profile as Treasuries”.
One thing I’ve noticed that’s nice about the municipal bond market is that it tends to move in slow motion. When news comes out that should affect the market, it’s always a week or two before prices really adjust. I think it might be because most people who are in munis don’t move money around very often. How people are ignoring 4-7% tax free yields right now though is beyond me.
Jan 10, 2009 — 9:10 am
From “Setting the Bull Trap” by Bennet Sedacca:
“What about municipal bonds? Pundits are declaring municipals cheap relative to Treasury bonds. Treasuries are not a good barometer as they are being manipulated lower in yield. With the insurers like MBIA and AMBAC gone, and little if any research available on the nearly 50,000 issuers out there, and downgrades coming like Noah’s Flood, I cringe to think that they are attractive as well. ”
Shorting the indexes seems a better bet for me.
Jan 10, 2009 — 3:06 pm
It must have disappeared in space somewhere.
I guess it doesn’t matter really anyways. In case anyones interested its :
Jan 11, 2009 — 12:28 am
Hmmm …Krugman just made a good deflation argument today (versus hyperinflation):
Jan 3, 2010 — 8:33 am
Can’t keep laughing at how wrong your prediction is.