Thread: Where We Are, Where We're Heading (2009)

Don't really have an opinion about this article but it's a very interesting read. Especially the 2009 predictions.

Where We Are, Where We're Heading (2009) - The Market Ticker

Sounds about right...

Were screwed! But at least not as bad as everyone else.

Originally Posted by andviv

If I read correctly, our economic policy is just not working. Debt will continue to be a problem. Credit will not be available for people that need it (i.e. if you DON'T need money, go ask for it).

So, given this scenario, why is he recommending to take a cash position?

He doesn't believe the dollar is going to collapse (one of his predictions). And based on everything else he says, it appears that he believes the dollar will hold up well compared to the stock market, commodities, and other currencies. So, it appears that he believes the dollar is the safest investment for 2009, if not optimal.

so for long-term investors (401(k) and other retirement accounts, etc) the strategy he proposes is to go into liquidity? how do you do that?

Most 401k and retirement accounts will allow you to put your money in a money market as opposed to stocks/bonds or other investments.

He also warns about REITs being insolvent due to the collapse of commercial property... (for some reason I can't picture an empty mall in the middle of a big city) so what happens with those properties?

I don't think this is any different than what we're seeing with residential property, in that there will be foreclosures and properties will eventually be sold off on the cheap.

The big difference is that with residential, those people who have been displaced need somewhere to go...which drives rental demand and keeps a supply/demand equilibrium, albeit at a lower price point. In the commercial world, companies that lose their property don't necessarily need a place to go, as the company often goes out of business. So, higher commercial foreclosure is also generally indicative of higher unemployment.

Originally Posted by from the article

All of the above have taken what was a 10% correction in GDP that was necessary in 2000 (and which was primarily centered in businesses) and moved it to a nearly-30% correction in GDP that is now necessary. If we continue down this path and actually spend all the so-called "committed" funds in 2009 as would be expected, the net contraction in GDP necessary to bring the system back into balance could reach 50%. This level of contraction would be catastrophic and could easily threaten the political viability of our government, not to mention 30% of American jobs and incomes.

This is a new concept for me-- that GDP has been falsely inflated by debt.

Makes sense. But it's also very, very scary if the debt is used to leverage (which is what he asserts).

A very thought-provoking read.

-Russ H.

Not sure how many of you went back to the 2008 prediction post. I know he touched on it at the beginning of the 2009 prediction post, but he explains some stuff in a little more detail.

The Year In Review And a Look Ahead for 2008 - The Market Ticker

2008 predictions

• The US will enter a recession, if it has not already done so. It will be consumer spending driven, with its genesis found in the Housing market. The slowdown will become evident once the “real” holiday sales data is posted, and accelerate into the first quarter.
• Unemployment will increase significantly, rising to north of 5% by the middle of next year. This will of course cascade back into consumer default rates (mortgages, credit cards, auto loans, etc) and cause yet more layoffs. The “virtuous cycle” will turn vicious.
• Housing will not turn in 2008. The total damage to prices will exceed a cumulative 15% from 2005-2008, and it will not be over. At least one, and probably several, national home builders will be cut to the single digits on their stock price or go bankrupt and be reorganized. Residential Real Estate will NOT be a buy in 2008; you’re still at least one and probably two years too early.
• The story in the housing space in ’08 will be the defaults on “prime” mortgages – which in reality were nothing of the kind (e.g. “Option ARMs”), and on the piggyback seconds and HELOCs behind them. “Jingle Mail” will become common as homeowners that are deeply – 20% or more – underwater simply mail in the keys and say “screw the credit rating.” This will result in a near-total overhaul of the “FICO” system in the next couple of years, as these people will have defaulted on mortgages but nothing else, essentially forcing risk premiums higher for consumer credit and decoupling FICO from actual consumer credit (other than mortgage) behavior. I expect there will emerge a “shadow” FICO system which ignores mortgages but rates everything else.
• The stupidity in the rest of the consumer lending space (rollovers in auto loans and 0% balance transfer hell for plastic, primarily) will come crashing down on these companies and bring a crushing wave of defaults there as well, along with yet more downgrades in the asset-backed paper market.
• Recreational sectors (e.g. boats, RVs, etc) will get smashed. If you’re in the market for high-dollar recreational assets and have cash, late ’08 and into ’09 will present some incredible buying opportunities.
• Government will, as is usual, try to meddle in the market’s adjustment of risk and price. The depth of this meddling will be the determinant on whether this is a deep but sharp and reasonably-short recession or whether it morphs into something far more serious. With 08 being an election year the temptation to engage in SEVERE tampering will be significant, and if they do, the risks rise materially. There is a serious risk of an all-out deflationary depression, and if we get one, it will almost certainly be the government’s fault. Whoever wins the Presidency may wish they had lost come ’09 and ’10.
• Buffett just announced he is setting up a Municipal Bond insurance company. This will put a stake into the Monolines’ hearts, taking all their business away that is profitable, and leaving them with structured finance which has huge embedded – and unrecognized – losses. The announcement, which showed up on the 28th, didn’t send shockwaves through the market – but it should have. Effectively, Warren threw a grenade (minus pin) into the magazine of structured finance. This is the death knell for the few trillion in CDSs that are out there can’t be paid; there is no longer any reason to believe that the companies writing these things will be able to be recapitalized off “profitable” sides of their business! This is how fortunes are made (for Warren) and lost (for everyone who did imprudent things.) The “big story” in the financial markets for 2008, and the likely trigger for major turmoil, will be the implosion of the CDS marketplace and how Buffett profited from it. This will stabilize the municipal bond marketplace which has been positively hammered.
• Equity prices will be choppy in the first couple of months and will experience a peak to trough swing of at least 20% during the year in total. I expect the S&P 500 to at least touch 1220 in 2008 and my current downside target is 1070. Note that should we get a “parabolic” sort of move in the first quarter, which is possible, the potential for an even louder “boom” (collapse) goes up dramatically; in that case I would not be surprised to see a three-digit handle on the S&P 500 sometime during the 2008-2010 time period.
• Return OF capital will be far more important in 2008 than return ON capital.
• I do not expect the central banks to “hyperinflate” anything. Metals, in a protracted, serious deflationary selloff will get smashed. (If you're a "Gold Bug", read below for why I think you're nutty to hold metals - there's a better play if you believe in hyperinflation.)
• Debt will be paid down when possible and when not, defaulted. This, of course, prevents deploying capital towards consumption and production. Expect this to show up in the first quarter in ways that cannot be refuted, and for the market to “get it” some time before the end of the second quarter.
• Commercial Real Estate will collapse. The leverage in these deals has actually exceeded that in residential, if you can believe it. This will prove to have been totally insane and the losses taken there will be immense. It will also put a fork into the “this is contained” thesis, and validate the fact that generally, commercial R/E lags residential by 12-18 months. Guess what – time’s up!
• Business CapEx will slow precipitously and may go negative. This will be “spun” for the first quarter or so, but by the middle of the second quarter it won’t be able to be spun any more, and the truth will have to be faced. That “truth time” will likely mark the start of the second big leg down in the equity markets.
• The Dollar will bounce all over before starting to take off when it becomes apparently that the rest of the world is going to get it worse than we will.
• The “market callers” who are (almost to a man!) calling for big moves northward in 2008 will be coming to the public “hat in hand” as we get into the latter part of the year. These people will be roundly discredited and yet another wave of so-called “analysts” will disappear from the scene, along with all the money the chumps who listened to them lost.

So what CAN you do to make "Return OF Capital" your goal?

For 95% of long-term investors, this is a time to be in cash or close to it.
There is nothing wrong with insured CDs. Nothing at all. In fact, you can find them yielding close to 5% or even a little above. Six month CDs, with no more than $100,000 in any one bank, are not a bad idea.

Next up would be the short end of the US Treasury curve. Emphasis again - SHORT END! What's "short"? 2 years or less. You can buy these through Treasury Direct. Yield is lower, but they're even safer in that the US Federal Government would have to go under for them to be worthless. For an ETF that holds these, look at "SHY".
Finally, quality municipals look interesting here. Note that municipal bond income is federal tax exempt and in many cases AMT-exempt as well (doesn't count towards AMT income.) Be careful with municipals however as if this really gets bad defaults in the municipal sector are likely.

What do you stay away from?

• Equities, and especially momentum stocks! This means nothing in the tech space of any sort. No banks, no broker-dealers, no consumer discretionary. At all. If you must buy equities for some reason, utilities might be reasonably safe, but even there the losses may be significant.
• UNSECURED or UNSUBORDINATED debt of ANY KIND. Especially dangerous are "demand notes" from various institutions. These have been pushed hard to many seniors and others; don't be a sucker! They have no insurance and if the company defaults, you just plain eat it.
• Any sort of corporate debt is dangerous, and the junkier it is, the more dangerous it is. EXCEPTION: If you're really good at picking through the fundamentals of the issuuing company, you can make some great buys in this space. For nearly everyone, however, you're playing Roulette here. DON'T!
• Any bank account that has more than $100,000 in it. Don't do it. Just don't. Yes, I know there are exceptions (you can have $200k in a joint account.) If you're absolutely certain you can keep an eye on this to the degree required to insure you're covered by the exceptions, have at it. Just don't cry if you're wrong.
• Any money market which holds any sort of asset-backed commercial paper or SIV assets of any sort. These funds are extremely dangerous if there is a blowup in that your principal is potentially at risk.

There will be many who say "oh, that's way, way too conservative."

To which I answer - "so what?" If there is no meltdown and no sign of one in six months, what have you missed out on? 5, maybe 10% appreciation?

Wow. Such a rosy outlook for 2009. I'm going to go now and OD on some sleeping pills


One point I completely disagree with him on is

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.

That's complete BS. Banks are not lending and that's a fact. I deal with banks on a daily basis and I know. For real estate, the only loans going through are FHA loans for residential and a combination of FHA, SBA and some Freddie Mae and Fannie Mae backed loans for commercial. Banks are not making loans that they are keeping on their books. Bank of America, JP Morgan Chase and Wells Fargo may claim they are giving loans but, a overwhelming majority of those loans are ones that are FHA, SBA or backed/bought by some other entity. None are portfolio loans.

The TARP program was a colossal mistake. No doubt Paulson and his chumminess with his ex Wall Street buddies played a huge role. Giving $700 billion to ailing banks is the height of stupidity. Its like owning a business thats on the verge of failure and millions of dollars in debt and suddenly, you are given a check for a couple of million dollars. Do you use that money to prop up your ailing business or would you rather start a new business from scratch and let the old one fail ? Makes more sense to let the old business fail and start fresh with the millions. The TARP program is the exact opposite. Throwing $700 billion into this blackhole of CDOs, SIVs and other crap banks are holding. The money has disappeared and is being used to prop up the balance sheets of banks.

The FDIC has taken over several banks. They could have created a good bank/bad bank model by removing the crap from those banks balance sheets into a seperate entity and given $700 billion to the good banks with the clean balance sheets. Using a multiplier of 10, that $7 trillion which could have circulated back into the financial system. Instead that $700 billion is lost for over. Sheer idiocy !

Thanks for sharing this Bio. ++++speed

I thought it was a very interesting read. I would like to see a bit more backup on his theories and where they are derived from.

Honestly, he'll probably be spot on for 50% of it. Are greatest triumps come through hardship, I wounder if it will hold true here.

Originally Posted by imirza

Banks are not lending and that's a fact. I deal with banks on a daily basis and I know. For real estate, the only loans going through are FHA loans for residential and a combination of FHA, SBA and some Freddie Mae and Fannie Mae backed loans for commercial. Banks are not making loans that they are keeping on their books. Bank of America, JP Morgan Chase and Wells Fargo may claim they are giving loans but, a overwhelming majority of those loans are ones that are FHA, SBA or backed/bought by some other entity. None are portfolio loans.

I certainly can't speak for a majority of banks, but I, my partners, and my friends have had no trouble getting both traditional (Fannie/Freddie) and portfolio loans over the past several months.

It takes income and strong credit, but in my recent experience, there are plenty of lenders out there if you qualify...

Btw, in my opinion, the problem is that too many people think 700 is a good credit score. If that's your barometer, then yes, credit will be difficult to get...

Originally Posted by JScott

It takes income and strong credit, but in my recent experience, there are plenty of lenders out there if you qualify...

I can vouch for this personally and my credit score isn't near as high as JScotts. Many folks are still trying to get 30-40% debt to income ratio loans with little to no down. That just won't work. Now I'll agree 100% that some folks are being disqualified that shouldn't be, but that's the natural pendulum swing of the current market.

Were still quite lucky as far as getting homes with less then 20% down. Its use to be a high as 50% down. (turn of last century)

It takes income and strong credit, but in my recent experience, there are plenty of lenders out there if you qualify...

Not to mention down payment of 10% or more. Income and credit requirements are so stringent that for all purposes banks have essentially made over 90% of the US population ineligible for mortgages. I would say compared to 2005, currently only 1 out of 20 people who could have gotten a mortgage back then can currently qualify for one. If banks won't lend to people with FICOs under 720, that's less than 30% of the population who can now qualify. Throw in income and down payment requirements and that number shrinks even further.

As far as banks lending, the smaller local banks are still lending though to only certain borrowers. The bigger banks for the most part are only giving FHA, Freddie/Fannie and SBA loans. Nothing out of their portfolio. For the most part they are insolvent so you can't really blame them.

Very interesting. I remember reading some pretty disturbing stuff from him before, but what the hell. In these times it's almost more likely for the doomsayers to be right than the soothsayers, not to mention that if you follow the old "prepare for the worst, hope for the best" principle, you really DO want to listen to the doomsayers.

He almost seems like a subscriber to the austrian school of economy (mises.com stuff), except he believes the dollar is not going to collapse and there will be deflation instead of inflation. I'm not sure about that. I'm just a very small fish and don't have so much experience with studying economics, BUT most of what's going on has been predicted by libertarian types for decades, and people like Peter Schiff who has been literally laughed at when he predicted exactly what happened in 2008. They aren't laughing anymore.

And Peter says that the dollar will drop like a stone around February, certainly in 2009. Ron Paul (you all know him, right? ) would agree. I'm not willing to write those off just yet. Cash is good either way for me though. I've been stockpiling cash and silver personally (though not as much silver), here in Croatia.. Cash cause I can easily spend it in an emergency and if I lose too much of my current income, and silver in the absolute worst case collapse scenario where even the little paper money wont help.

That said.. how to make money off of this depression? There are always opportunities, they just jump from place to place and in depressions they're there somewhere.. Gotta find them!