2009 Predictions I Hope Are Dead Wrong 32 comments
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I have seen a lot of people posting on predictions for 2009, so what the heck, let me give it a stab. Let me warn you in advance, this is not going to be warm and fuzzy.
- Housing will continue its decline, probably for most if not all the year. Why? Well, for one thing there are a lot of adjustable rate mortgages (ARMs) resetting in 2009. Now you might think the low rates will allow them to reset lower, and in some instances that is likely correct, but the wonderful lenders came up with a nice product called an option ARM that lets the buyer chose among various payment options, which can include paying interest only or even less than that. Moreover, while rates are low now, ARMs almost always start with artifically low teaser rates well below where the reset will go, despite low rates today. Accordingly, there will be a host of new foreclosures adding pressure to prices, along with unemployment and other factors. Some markets are near a bottom already, like parts of California, but overall, I suspect housing will continue its decline throughout 2009.
- Credit will continue in a nearly frozen state for the year. The banks we look to for lending are simply in a horrendous situation and will not be looking to lend their money any time soon. Housing declines will continue to pressure them, as will CDSs, off-balance sheet vehicles and their debtors going belly-up. Some local and regional banks might be more willing to lend, but increasing problems in commercial real estate will impact them too. Continue to look to the government (federal government only) as the lender of only resort.
- The stock market. I am going on the record here and predicting that the market in the U.S. will be lower at the end of next year than it is right now, and I expect a good 10-20% lower. Not many people are predicting this direction for the market, so you are asking why. After all, doesn't the market typically start to rebound six months or so before a recession ends? Well, the problems we are facing are deeply entrenched and so far we are not doing the right things to fix the problem. I have ranted here enough about the TARP and other moves being taken, so I will not repeat it again. It is possible the next administration will make smarter moves, but I fear even the right moves will not avoid a few years of pain. Yes, a few years of pain. We are in some rather severe spirals that will take a long time to escape.
- Bankruptcies, and lots of them. And I am talking the Chapter 7 liquidation kind becasue debtor in possession (DIP) financing is very hard to come by right now, which means Chaper 11 reorg is near impossible. For the shareholders and creditors of those that go under this is bad news, but overall for the economy it is a healthy move. We no longer have the massive debt-driven consumption that enabled all the companies to exist, much less the easy credit that let them make ends meet when they probably should have folded instead. Time to thin the ranks.
- Unemployment over 8%. Even using the government's bogus unemployment numbers I anticipate unemployment going over 8% by year-end 2009. The real unemployment rate is already above that but the government plays games with the numbers to keep them artifically low.
- Crime will be on the increase as desperate souls seek to make ends meet. Not a surprising call, but often overlooked. Lock those doors.
- Political instability. A number of countries will become increasingly unstable over the next year. Riots and public protests, like those taking place in Iceland and Europe, will increase. What is truly troubling is the prospect that countries will increasingly turn to military action as political frictions escalate between countries.
- EU with no U. The strains on the EU have never been greater and Germany's reluctance to play ball with the rest of the union will, in my opinion, cause a rift that cannot be fixed. I doubt the EU will disband in 2009, but pressures will reach a critical point and it may well happen in 2010.
Well, there you have it, for better or worse (actually no better here). I am first in line to hope that all these predictions are dead wrong.
Disclosures: None.
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I wonder how local governments will fare this year. Brother, can you spare a dime?
Disclosure: My predictions are a lot like my resolutions, much better in January than December.
At this risk of being labelled a copycat, my predictions will simply be to put guestimated probabilities of occurrence on Craig's list (is that a pun?):
1. 80%
2. 67%
3. 50%
4. 67%
5. 80%
6. 67%
7. 33%
8. 10%
If you notice that my percentages are based on simple ratios (4/5, 2/3, etc) you are right. How precise can guesses be?
Seriously, Craig, you have as much a right to make predictions as anyone, and your list shows a lot more insight than some I have seen.
Ten year P/E averages typically fall to 6-7 during serious recessions so expect the Dow to fall to 3500-4000, the Nasdaq to fall to 600-700 and the S&P 500 to fall to 350-400. Oil falls to $25 as Russia, Iran and Venezuela cheat on their agreements to cut back on output because they are short on cash (a similar thing happened in the early 1980's). After pausing so the markets can fully digest the shift to ZIRP, the dollar slowly goes up (it has trended up through most of this crisis) against most currencies with the notable exception of the Yen (ironically the only other country practicing ZIRP). This is because as more and more developing countries enter a crisis mode money flees those country's currencies into the safe haven of the dollar and the Yen. Gold correlates with oil, other commodities, the Dow and the S&P 500 within an admittedly broad band, so sooner or later it will have to follow them down. It has almost never been more than 30 times the price of oil and typically been 15 times the price of oil. Expect some gold to be sold off by individuals or organizations reluctantly seeking to maintain solvency, so this will start to drive its price down. Since gold has a risk premium in a crisis I'll split the difference and say it will be 22 times the price of oil or $550.
The general economy predictions are more interesting (at least for me):
Quarter Real GDP (annual rate) Unemployment
2008Q4 -6.0% 6.7%
2009Q1 -4.2% 7.4%
2009Q2 -2.3% 8.1%
2009Q3 -2.2% 8.6%
2009Q4 -0.8% 9.0%
Quarter CPI Core CPI PCE Core PCE (all annual rates)
2008Q4 -10.8% 0.0% -6.7% 0.4%
2009Q1 -7.2% -0.1% -4.7% 0.0%
2009Q2 -2.4% -0.1% -1.7% 0.2%
2009Q3 -2.2% -0.1% -1.6% 0.2%
2009Q4 -1.1% -0.1% -0.4% 0.1%
Deflation may cease in 2010 as real GDP starts to grow again, but core inflation will remain near 0% (just way too much productive slack in almost every market). Unemployment will continue to rise slowly, going double digit by the first quarter of 2011 and finally peaking at 10.8% in the first quarter of 2012. It will remain in the double digits for 12 quarters thus satisfying Brad Delong's definition of a depression (just barely). Housing prices will continue to fall briskly until 2012 by which time they will have fallen 55% from their 2006 peak adjusted for the CPI. They will continue to drift downward until finally bottoming out 63% below peak in real terms in 2017 (in other words a classic overshoot). Thereafter they will slowly recover to their secular average which will still be 50% below the 2006 peak in real terms.
The biggest problem may be in predicting the timing of the bottom in the stock market. Most analysts have assumed that the bottom will occur a few months before real GDP bottoms out. However that assumes this is a typical recession (which it clearly is not). Rogoff just released a paper on financial crises that shows that the average trough in equities occurs about a year and a half after the trough in real GDP. See below:
ws1.ad.economics.harva...
My scenario then implies that the trough in the stock market should occur in the second quarter of 2011. Note that the average time from onset of the recession/crisis before trough in Rogoff's paper is 1.9 years for GDP, 4.8 years for unemployment and 6 years years in housing. The average decrease in GDP was 9.3%, and the average increase in unemployment was 7%. Anyone who thinks prosperity and inflation are just around the corner just don't understand how severe a financial crisis can be.
On Jan 02 11:28 AM Mark A. Sadowski wrote:
> I've been indulging in my own New Year predictions:
>
> Ten year P/E averages typically fall to 6-7 during serious recessions
> so expect the Dow to fall to 3500-4000, the Nasdaq to fall to 600-700
> and the S&P 500 to fall to 350-400. Oil falls to $25 as Russia,
> Iran and Venezuela cheat on their agreements to cut back on output
> because they are short on cash (a similar thing happened in the early
> 1980's). After pausing so the markets can fully digest the shift
> to ZIRP, the dollar slowly goes up (it has trended up through most
> of this crisis) against most currencies with the notable exception
> of the Yen (ironically the only other country practicing ZIRP). This
> is because as more and more developing countries enter a crisis mode
> money flees those country's currencies into the safe haven of the
> dollar and the Yen. Gold correlates with oil, other commodities,
> the Dow and the S&P 500 within an admittedly broad band, so sooner
> or later it will have to follow them down. It has almost never been
> more than 30 times the price of oil and typically been 15 times the
> price of oil. Expect some gold to be sold off by individuals or organizations
> reluctantly seeking to maintain solvency, so this will start to drive
> its price down. Since gold has a risk premium in a crisis I'll split
> the difference and say it will be 22 times the price of oil or $550.
>
>
> The general economy predictions are more interesting (at least for
> me):
>
> Quarter Real GDP (annual rate) Unemployment
> 2008Q4 -6.0% 6.7%
> 2009Q1 -4.2% 7.4%
> 2009Q2 -2.3% 8.1%
> 2009Q3 -2.2% 8.6%
> 2009Q4 -0.8% 9.0%
>
> Quarter CPI Core CPI PCE Core PCE (all annual rates)
> 2008Q4 -10.8% 0.0% -6.7% 0.4%
> 2009Q1 -7.2% -0.1% -4.7% 0.0%
> 2009Q2 -2.4% -0.1% -1.7% 0.2%
> 2009Q3 -2.2% -0.1% -1.6% 0.2%
> 2009Q4 -1.1% -0.1% -0.4% 0.1%
>
> Deflation may cease in 2010 as real GDP starts to grow again, but
> core inflation will remain near 0% (just way too much productive
> slack in almost every market). Unemployment will continue to rise
> slowly, going double digit by the first quarter of 2011 and finally
> peaking at 10.8% in the first quarter of 2012. It will remain in
> the double digits for 12 quarters thus satisfying Brad Delong's definition
> of a depression (just barely). Housing prices will continue to fall
> briskly until 2012 by which time they will have fallen 55% from their
> 2006 peak adjusted for the CPI. They will continue to drift downward
> until finally bottoming out 63% below peak in real terms in 2017
> (in other words a classic overshoot). Thereafter they will slowly
> recover to their secular average which will still be 50% below the
> 2006 peak in real terms.
>
> The biggest problem may be in predicting the timing of the bottom
> in the stock market. Most analysts have assumed that the bottom will
> occur a few months before real GDP bottoms out. However that assumes
> this is a typical recession (which it clearly is not). Rogoff just
> released a paper on financial crises that shows that the average
> trough in equities occurs about a year and a half after the trough
> in real GDP. See below:
>
> ws1.ad.economics.harva...
>
>
> My scenario then implies that the trough in the stock market should
> occur in the second quarter of 2011. Note that the average time from
> onset of the recession/crisis before trough in Rogoff's paper is
> 1.9 years for GDP, 4.8 years for unemployment and 6 years years in
> housing. The average decrease in GDP was 9.3%, and the average increase
> in unemployment was 7%. Anyone who thinks prosperity and inflation
> are just around the corner just don't understand how severe a financial
> crisis can be.
I think we are seeing the slow motion collapse of the world as we know it. It hit critical mass last year and we are just watching it in slow motion. The fundamentals support the predictions - or worse. This is not a movie or a book. People act based on motivation.
I will add two things to number six though.
1 As we all know, one of the biggest stresses on marriage is finances. Expect the divorce rate and/or domestic violence to increase.
2. Countries are like people. They can get desperate. It is what gave us Nazi Germany. I believe there is a strong possibility this thing could end like the GD did, with world war. Some try to say this is a good thing because it will "clean house", etc. I agree with them. However, I do also believe that once the house is cleaned it may be hard to put any money into Wall Street if Wall Street glows in the dark.
Also, the US specifically does not have the character it did during the GD. The Waltons we aint.
It is like living in a movie though. Things change very fast. Popcorn futures should be up.
If you still believe we have a "free market system", you must be following the herd instead of leading. With all the corporate scandal, greed and corruption, not to mention an unlevel playing field for American companies, we are NOT a free market system anymore. Was WorldCom, AIG and Enron playing in the free market system? I think not..... We need to eliminate the inequity of CEO pay, get rid of the lobbyists in Washington and get back to some real manufacturing in the USA.
On Jan 02 09:06 AM Amouna wrote:
> In my opinion we are headed for another bad year, but we should have
> all seen it coming during the good ol'days of binge consumption fueled
> by excessive reliance on Chinese and Japanese hard earned capital!
>
>
> Lets get real here folks, the economy is in an awful shape and all
> the governement is doing is trying to fix the symptoms, not attack
> the disease. The governement should just step aside, let the house
> of cards collapse. the free market will take care of itself: winners
> survive, but an awful lot of cash strapped, debt strangled companies
> will go under including generation old names! house prices will collapse
> too to their own "fair" level, as the market views them and the dollar
> will be wounded a little, but it wont die!
>
> I predict a few 2-3 years where the whole economic landscape as we
> know it changes, but this is the reality of our world in the 21st
> century if we truly want to save it. Good luck guys and stock up
> on Gold and Food!!!!
But I don't think I'm saying anything Nouriel Roubini or others wouldn't say if they were willing to let their magnificent intuitions be completely pinned down. I was reflecting on your Save and Invest comment and it made me think of a few more things I might say if anyone is interested:
1) Asset Bubbles
We have three asset bubbles that have a some way to go yet. In each case we have analysts that for various reasons are trying to keep the bubbles going. The housing bubble is halfway deflated and will not even begin to see bottom until the labor market recovers. The equity bubble is also halfway deflated and only "animal spirits" can explain why it manages to resist gravity. And then there is an unrecognized gold bubble that is partly risk based but is also clearly being held up by goldbugs. Our asset bubble situation most resembles the Japanese case when housing and equities were both problems, as compared to the Great Depression when the stock market was the overwhelming problem as it grew five-fold in value in a period of only a few years. This suggests that Japan is a better model of what lies in store for us which is either good or bad depending on your particular point of view.
2) Stimulus
In a deflationary liquidity crisis both the monetary stimulus and the fiscal stimulus must work in tandem to be effective and that will take some time, much longer in fact than most people expect. ZIRP and quantitative easing have started but the actual amount of "printed money" has been quite modest so far (perhaps $160 billion). Bernanke is an inflation hawk and will not do anything that cannot be undone once the economy shows some signs of life. The federal fiscal stimulus will be key, but it will take months to get through congress and even then it will take even more months before the economy feels its effect in a meaningful way. Furthermore its advertised size is likely to be much larger than the amount of new spending as state and local governments continue to retrench their budgets. In Japan's case during the 1990's, the advertised size of the fiscal stimuli was about three times the size of the actual new spending. Expect something similar in our case.
3) Imbalances
Although the federal deficit may seem alarming, and it will get a lot larger in the years ahead, it needs to be put into perspective. The U.S. is actually in much better shape than the EU or Japan with respect to public debt. We thus are relatively fortunate in having some leaway in being able to afford a fiscal stimulus. I think that the two biggest imbalances our country faces are a productivity/compensat... imbalance and our current account deficit imbalance. Since the late 1990's productivity in this country has greatly outpaced real unit labor compensation. As a result we have seen a rapidly growing imbalance in the distribution of wealth and income and an explosion in corporate profits (mainly financial). In other words there is not so much a shortage of savings in this country as much as a shortage of labor income. The last time we saw such a huge imbalance in the US was in the 1920's (not so surprisingly). The current account deficit however is perhaps the most alarming problem. We are fortunate in the sense that our foreign debt is denominated in our own currency for the most part. Running a large current account deficit should inevitably depreciate our currency. But as our foreign assets are denominated in other currencies this means the more we depreciate the dollar the more our net foreign asset position remains unchanged. In fact throughout much of the decade we have run huge deficits but as the dollar depreciated our net foreign debt hardly budged. The current run up in the dollar may only last a short time (a year or two?) and that actually may be good in terms of our net foreign asset position in the medium term. But this does seem like a neverneverland kind of situation. I'm not sure where it is leading us (it cannot be sustained). I'm also wondering if the productivity/compensat... imbalance is somehow related to our current account deficit. What would Roubini or Krugman or others say about this if they were willing to completely bare their thoughts?
On Jan 02 08:41 AM prudentinvestor wrote:
> Interesting perspective after one looks at Craig's bio. He does not
> claim to be a financial expert, just an educated observer. Given
> how wrong many experts have been, it may be worthwhile to listen
> more to the astute observers than to the "financial experts".
On Jan 02 03:28 PM skagitvalleyboy wrote:
> I agree with all of your comments until I read "The governement should
> just step aside, let the house of cards collapse. the free market
> will take care of itself...."
>
> If you still believe we have a "free market system", you must be
> following the herd instead of leading. With all the corporate scandal,
> greed and corruption, not to mention an unlevel playing field for
> American companies, we are NOT a free market system anymore. Was
> WorldCom, AIG and Enron playing in the free market system? I think
> not..... We need to eliminate the inequity of CEO pay, get rid of
> the lobbyists in Washington and get back to some real manufacturing
> in the USA.
On Jan 02 05:56 PM mrgeneric wrote:
> I suppose it's no different than real estate agents being "experts"
> in their fields.
>
> On Jan 02 08:41 AM prudentinvestor wrote:
Housing will continue a downward spiral as the ARM resets and Alt-A mortgages take their toll. Hank and Ben seem to think they will prevent this by bringing rates to unprecedented low levels, but they seem to have forgotten that the troubled homeowner not only needs a low rate to qualify, but he needs to bring a boat-load of cash, which he hasn't got because his bank, the HELOC, is closed. Of course, the HELOC really wouldn't have worked for that purpose anyway. More and more people will just walk away, even ones who can pay the mortgage. In fact, I'm one of those. I have the cash to buy another place when the market does bottom, and that's what I'll do. Why would I continue to pay on a 80% $350k note when I can just put down $50k and convert that to a 80% $200k note? I would have to move, which is the only thing that gives me pause. And why shouldn't I walk? Don't I deserve to benefit in some way for being responsible?
Credit may ease slightly, but what happens when nobody is willing to lend the USG 10 year money for 2.4%? That will also happen in 2009. Can you say 18% interest and hyperinflation? I thought you could.
Yes, many more bankruptcies, personal and business. More importantly since it plays into the real estate downturn, what about municipal bankruptcies, sharply higher state and local taxes, and the destruction of the retirement savings of millions who right now think they have a pension coming from a state or local government? That's really going to smart.
Dow down 30% before July. I suppose another sucker rally could bring it up a bit by the end of the year. Nevertheless, it will certainly see 5000 before it ever sees 14000 again.
Unemployment well be over 10%. Real unemployment over 15%. Of course crime and instability will accompany that.
I disagree about the EU, but there will be issues with the Euro.
In general, I think you've painted a far too rosy picture of the upcoming year. The Obama administration will have no ability to fix the problems as the socialist Juggernaut of the Bush admin has made the problems sufficiently insurmountable that they can now only be fixed by time (5 - 10 years) and a lack of resources to continue trying to fix the problem and prevent economic disaster.
I do hope I'm wrong.
But I'm not.
2. Crdit will loosen during 2009, it can't get any tighter.
3. The stock market will hover in 9-10k range. with plenty of bumps along the way. With the Dems finally taking the reins, there will be alot more optimism.
4,5 and 6 I to tend to agree.
7. What else is new?
8. Ain't worried.
To sum it up, the world is ready for a new beginning and a new world view enough reason in itself for optimism. And burned out on negative news. Its the nature of the human spirit.
I hope I'm right.
Housing will not recovery by any measure this spring.
1. All previous recoveries took much longer to bottom. The most recent for my area (San Fran area) from peak to trough was 1989-1996.
2. All previous recoveries took place after much smaller peaks. How you think that translates into _less_ price stickiness confounds me.
3. House prices are sticky, even more so right now than normally.
4. There are three legs to housing-demand: credit, employment/wages, relative cost of renting alternatives. Even if credit is made available and costs fall below traditional equivalent rental costs, employment will not recover by spring. Simply, when people are worried about their jobs, they don't buy houses.
But good luck selling your overpriced homes this spring. There may yet be a few fools wandering around with pockets full of dumb money.
Other than that - yea. Maybe in September 2009 the housing market will turn around.
It looking alot like '76 and '77 under Jimmy Carter again with high unemployment - just not as much inflation.
Kobie
Control is not a precise thing.
Good luck and be safe!