8 Market Trends For the Next Few Years

Here are some current headlines from three of the premier mainstream media publications dealing with business and the economy:

The Wall Street Journal

March May Be Quite Cruel
Top Bankers Defend Pay Packages
MBIA Dislikes Fitch's Ratings Models
Markets End Week With A Slide
Margin Calls Throttle Thornburg
U.S. Payrolls Shrink Dramatically
MTV Reveals Computer Breach

The New York Times

In California, A Generational Tale Of Real Estate Boom And Bankruptcy
As Foreclosures Rise, Investors Pull Back
Aversion to Risk Deepens Credit Woes
Apple To Encourage iPhone Programmers
Alabama County Facing Deadline On Sewer Debt
Discounters Led Retailers Last Month

The Financial Times

Fed Expands Lending To Attack Liquidity Crisis
Chips Are Down As Las Vegas Feels Pinch
Fickle Investors Shun Debt-Laden Stocks
Malaysian Stock Market Reforms

My sense is that we are going to see almost exactly these same headlines again and again and again for the next 2-3 years. They capture what I consider to be a representative mix of short- and long-term trends, trends about which investors and all citizens should be aware when trying to get a grip on what the future holds.

1. The economy sucks now, and will continue to do so well into 2009 and perhaps beyond. This isn't because I'm a bear; it's because I'm a pragmatist. The types of deeply embedded problems facing the U.S. economy (and, therefore, impacting economies the world over) don't resolve themselves in a matter of months. We're talking years.

2. The real estate bust is a major reason for our despair. While the problems in California are acute and perhaps among the worst in the country, they are indicative of problems across the U.S. and the stories we are hearing and being played out in dozens of markets. Further, the ripple effect on Wall Street and Main Street are not only hitting the banks and investment banks, but the bond insurers, investors, employers and the broader economy.

3. Fears across the financial sector will make things worse, thereby fueling more fear and making things worse, and on and on. This negative feedback loop will continue until the excesses are stripped out of the system, excesses of such a magnitude that it will easily take 2-3 years before the depths of despair have been wrung out of the myriad toxic portfolios and balance sheets out there. It is what it is, and what it is really, really sucks.

4. Municipalities will be hurting, placing tremendous financial strains on states and the Federal government just as tax revenues are declining. Increasing funding costs and reduced tax receipts will threaten cities that overspent while times were good, leaving them with difficult debts to service when times are bad. And with an economy encountering general malaise, its not as if state coffers have the resources to help out much. That leaves our already debt-stretched Federal government. Terrific. Just what we needed. Not.

5. Computer security will continue to be a pressing issue. As more of our lives move online, and as richer and richer data is out there to be used appropriately or by bad actors, we'll see more and more examples of data theft and security breaches. It is somewhat analogous to the steroids users and steroid testing; the labs coming up with designer drugs are always at least one step ahead of the testers. Similarly, the bad guys, their resources and impressive collaboration represent a real and present danger to our data security now and in the future.

6. Previously closed systems will become increasingly open. Apple's (AAPL) release of an SDK for the iPhone is only one example of formerly proprietary, "walled gardens" becoming open, seeking to leverage the collective intelligence and creativity of developers everywhere. Facebook is doing it. MySpace is doing it. Microsoft is starting to do it. It is a megatrend that will not be stopped.

7. Seemingly recession-proof sectors prove not to be recession-proof. When things are going badly the "vice stocks" do great, right? Well, maybe not. Casino expansion has occurred at a break-neck pace, with stock prices and market caps rising in parallel. My guess is that the casino business will fall on hard times, as all those marginal gamblers will stay away while the merely wealthy (versus the mega-wealthy) gamblers will cut back their "leisure gambling." Conversely, discounters should outperform retailers as consumers pare back spending to deal with their lack of job security and high debt levels.

8. Emerging markets will continue to progress, driving convergence with the developed markets. This is a megatrend that has moved in fits and starts, but seems to me to be moving forward at an inexorable pace. It is just not stopping, and this is good for the global financial markets and investors everywhere.

There are certainly others to be mentioned but I think these eight are pretty good. I feel like I don't need to read the paper until after 2010. I'm pretty confident of what it will be saying between now and then.

Comments

[AmesTiedeman]

No real estate market it the U.S. will do worse than southern California or Florida for the next 10 years. What will keep places like Austin, Texas booming are the "exit dollars" from these places. People are moving to Austin from California in droves. Austin has the strongest real estate market and economy in the entire U.S. This will continue to be the case for years to come.

[Dana Cole]

You know what? We're going to get through this.

It's going to be all right.

[GKM]

The one thing I know about the years to come is that the years to come will likely be different tomorrow than they are today.

At this point, I can't fault any of the observed trends except to perhaps add one. That is pandemics and talk of pandemics could very well become a growing concern in the future. I'm not sure if there is a mathematical model to juxtapose the growth rate of infections (both human and animal) against the growth rate of solutions to what may ail us. My gut feel is this: what doesn't kill you makes you stronger. And if 'you' happen to be a virus...

I would point out that in human history, the successful solution to deadly viruses was eradication of both virus and host until the remaining virus and host adapted to live together - a draw. If you perturb that natural adaptation and provide your opponent with the formula for how you are playing the game, perhaps your opponent (the virus) will not know when to call it a draw. Maybe the solution lies in Game Theory.

A little outside the scope of this article - but whatever.

[Tony Soprano]

I love your article because it makes me so VERY BULLISH! Here is why: even before your 8 market trends you list all of those negative links. HARDLY ONE WAS POSITIVE. The Russians are coming. The Russian are coming. The Russians are coming. Do you remember this phrase? I guess not. The fear was that they were going to invade America by crossing over Siberia and invade Alaska and come down through Canada. lol.

#1

You say the economy will suck well into 2009 - 2009 is only ten months out. You say we have deeply embedded problems - Americans loves a difficult challenge the more difficult the better. You say that these problems will affect the world over - this contradicts your 8th trend - you cannot have it both ways.

#2

You say that real estate is a mayor reason for our despair - I like to hear words like "despair" - to me it means the bottom is within sight. You say that there is a ripple effect on Wall and Main street - duh I wonder how many times have heard this but keep it up - its bullish.
Will buyers from foreign lands come in as an investment and currency play? See the Reuters story at the end.

#3

I love this one. Fear fueling more fear. Whoa!!! Will I be able to look up into the sky and see dark clouds of locusts eating everything in site? The Dow better drop 2,000 pts on Monday.

#4

Another great word - tremendous. Tremendous financial strain on our states. I guess Warren Buffet made a mistake by getting into the muni business. Poor Warren or should it be more poor teachers pay? Warren will get richer and the teachers will get poorer. I can't believe I said that. Anyway you should love your profession more than you love your salary. lol.

#5

This is just plain lame. I'm more concerned about terrorist than this one. But I guess we'll have to hire more FBI agents.

#6

From the macro to the micro. The internet is the internet and that's it. Let's not make too much out of it. Just sit back and watch Google, Apple, News Corp and Microsoft battle it out while your home is foreclosing. lol.

#7

They overbuilt. Its that simple. But aren't there other recession proof sectors that are still hiring. Even with the last unemployment report? I wonder which one it was?

#8

I'm bearish here and this is why. Inflation will eat (no pun intended) these countries alive. They now have a appetite for meat the pundits say. They want cars. They want homes. They have water and pollution issues. Gee what else can I say? 2 or 3 billion people will be eating T-bone steaks. It ain't going to happen. However, health care is an issue in the emerging markets and you have to address this issue before the t-bones. I guess this is why Warren has been loading up on JNJ, GSK and SNY.

Does the foreign dollar play and commercial real estate make sense?

See below:

Foreign buyers see U.S. property as currency play
03/07/2008 07:00 AM EST
Copyright 2008 Reuters

(Repeats story from March 6 with no change to headline or text)

By Ilaina Jonas

NEW YORK, March 7 (Reuters) - For over a year, U.S. real estate has offered bargains to foreign buyers as the euro or British pound gets ever more bang against the sinking buck.

Now, however, a shopping mall, office building, high-rise condominium, or hotel is, to some foreign investors, a vehicle to bet on the dollar.

The trend hasn't escaped Rene-Pierre Azria, chief executive of Tegris, a New York investment bank specializing in cross-border mergers and acquisitions.

Azria has been meeting with investors for Tegris' third real estate fund. The firm plans to raise $300 million in foreign currency in Rossrock Fund III LP to buy the least risky senior portion of distressed commercial real estate mortgages.

While making his rounds to British and European investors, many institutional buyers wanted the funds invested immediately instead of spreading them out for more consistent returns over two or three years.

"They said, 'I want to buy dollars now and get out whenever the fund matures ... (say) in four years, five or six years, because then I'll be making money on the exchange rate,'" he said.

On Friday, the dollar hit a record low of about $1.54 against the euro. The British pound rose to a year's high of more than $2.00.

Commercial real estate investors traditionally have hedged against currency fluctuations.

However, European and British investors remember when the dollar was on top and believe it will happen again as Europe succumbs to an even longer and more painful economic slowdown than in the United States, said Azria, former global partner with investment bank Rothschild Inc.

"Therefore, the exchange rate turnaround is going to happen sooner rather than later," said Azria, whose co-founder Janet Christensen was chief of staff to Blackstone Group LP Chairman Stephen Schwarzman.

"By the time they take their money out of the fund, which is three, four, five years down the road, it will be fully in their favor," he said.

The dollar could begin to strengthen against both currencies in the second half of 2008, said foreign exchange analyst John Normand at J.P. Morgan Securities.

A strengthening dollar could boost the eventual property sales value, as well as the rent, for European property owners who buy now and hold their U.S. investment for several years.

Even half-empty new condo projects and foreclosed houses in Florida have attracted foreign buyers, said Peter Zalewski founder of Condo Vultures, a real estate investment consulting firm in Bal Harbour, Florida.

"They're saying, 'Let's get into dollars simply because we think there's a currency arbitrage play there,'" Zalewski said.

Hedge funds from the Czech Republic, Monaco, Belgium and France, and a Singapore fund looking to recycle pounds earned from London office properties into dollars have contacted him.

One UK fund wanted only single-family homes in southwest Florida markets such as Naples and downtrodden Ft. Myers, he said. "They want to get out of pounds, get into U.S. dollars."

STICK TO WHAT YOU KNOW

Yet many real estate experts recommend that commercial property investors avoid currency plays.

"Real estate investors are not experts in currency," said Michael Pralle, president of real estate private equity firm JER Partners.

"People who get into currency speculation, that's fine, but they should recognize that's exactly what it is," said Pralle, the former head of General Electric Co's GE Real Estate unit. "That's a different business from ... real estate. The people that mix it up, they're fooling themselves."

The U.S. economy also could wipe out any currency gains by driving down rents, said Benjamin Lambert, chairman of real estate brokerage Eastdil Secured, a unit of Wells Fargo & Co .

"For the most part, the activity that we've seen has been from pretty sophisticated people," Lambert said. "A great deal of them are more concerned about a recession."

(See [Link removed for security purposes] for the new global service for real estate professionals from Reuters)

(Editing by Richard Chang)

[InformationArbitrage]

TS, it is nice that you have an opinion. I respectfully disagree with much of your theses. But thanks for commenting.

[Frank Li]

"Emerging markets will continue to progress, driving convergence with the developed markets."

This, I think, is the most interesting of the 8. Will investors in emerging markets do well relative to the US, or are emerging markets a high beta version of US growth stocks? (Do a search for Geoff Considine on this site and see what he says.)

And will the dollar rebound, in which case foreign assets won't look so great.

And will the Chinese economy wilt under the total destruction they're doing to their environment and human capital?

[blah-blah]

Tony Saprano beat me to it on the fear items - well said

This is the type of incredibly negative article that you really want to see when you are well on your way to a bottom. We still need to see more of these, not just the ones that say it sucks but saying it's absolutely horrible like this one.

I've seen people mentioning 9K as a DOW bottom with a bear lasting 2-3 years. Some guy was cutting current prices of quality stocks like JNJ by 60% today as target buying points(laughable but telling). On many of the forums, many newbies are asking how to short stocks.

This is really great stuff - thanks to the author

[Rambo]

California- I find it interesting when journalists, analysts and the like talk about how bad the r.e. mkt is in California. Well- not everywhere. Desirable areas like the south bay of Los Angeles are still thriving and still way overpriced for most people. The areas suffereing most are where most people don't wan't to live and were affordable- Modesto, Inland Empire, etc. This is a big state with many micro communities - some thriving very well.

[Tony Soprano]

Thanks BlahBhah for your feedback. The author's trends are 'post hoc'.

If the author had predicted some of these trends a year earlier I would be treating him (upstairs) to one of my girls at the Bada Bing.