30 December 2008

2009 Projections and Other Readings

Working long, but not hard today, so I've had the opportunity to pluck some compelling pieces from the interweb.

The end of the year is a time to reflect on the past year, and to try to gauge what will come next. Paul Kedrosky's Infectious Greed blog, found via Seeking Alpha, maps out four possible 2009s for the market.

While reading each scenario, I kept thinking how plausible most of his arguments were to me, even though the market outcomes described in each scenario contradict the others. I also thought of Barry Ritholtz' refrain about the folly of forecasting. Kedrosky aptly sums up the goal of the exercise:

I generally think it's important to have in the back of your head what you're expecting, what you're worried may happen, and what you think is impossible.

Anyway, here are Kedrosky's four scenarios:

1) The Straight Line Lower
This one is the favorite of uber-bears and logicians and the Schiff-ian sorts, and it works out pretty much as described: The economy and markets sink deeper into depression as it becomes obvious to all sentient sorts (and most semi-sentients) how egregious credit market excesses have been. We see massive wipe-outs in retail, commercial real estate, tech (yes), insurance, etc., plus a give-up on GM later in the year. Bears are on TV non-stop, and at least one bear gets a column in a major magazine/newspaper/webthingie, assuming any sort of media industry still exists 12 months from now.

In terms of key bits and pieces of the financial machinery, the dollar tumbles, gold soars, Russia collapses, and global markets tank, with worldwide trade tumbling by something like what happened during the Great Depression, on the order of 30% or more. There are no signs of inflation, what with deflation everywhere we look. We maybe get out of the year without a new war though, and the Colorado snow pack looks decent, so we have that going for us.

Dow: 5,000. Nasdaq: 900. S&P 500: 500 Oil: $25 Gold: $1700

2) The Non-Boring Flat Line
No-one is talking about this, so it's at least worth throwing into the mix: The market races higher early in the year as Obama-nomics looks real and fun, and then tanks mid-year as the economy refuses to get off the floor despite lots of happy-talk, a few new bridges across things, and some state bailouts. Later in the year markets pick up again as strategists counsel patience, and chatter begins about a first-half 2010 recovery. We end the year essentially flat.
Turning to the financial bits, the dollar surprises by only falling 10% against the major currencies; gold strengthens and then falls off a little; trade is crummy, but there are strong spots. There are a few surprises, like some sovereign wipeouts – Spain? Italy? Australia? other? -- but essentially flat-lining the year is a big surprise to all concerned.

Dow: 8400 Nasdaq: 1500 S&P 500: 900 Oil: $60 Gold $1000

3) The Double Dip
In this scenario we mess with the 2008 lows early in the year as worries increase that this is Great Depression 2.0. And then, however, expectations mount that something good has to come out of all this stimulus stuff -- damn the bears, look at the credit spreads and the 30-year mortgage rates! We hit mid-year confounding the critics with a 30% gain in the major indices, perhaps even a few pro-Ben Bernanke magazine cover stories, like "How Ben Did It!"
Things turn south, however, in the second half, perhaps on renewed signs of U.S. weakness, perhaps on some outlier events, but the upshot being the same, that global trade is not going to come back anytime soon at levels that justify prices at then-current levels. Markets start saw-toothing lower, a process that accelerates into the end of the year, leaving us lower than where we started.
Turning to the bits and pieces, the dollar weakens a little in the first half, but surprises everyone by strengthening again in the second half, as dollar gets squeezed on renewed fears of Great Depression 2.0. Gold falls early in the year, and then surges in the second half, ending the year considerably higher. The long bond ends the year closer to 5%.

Dow: 7500 Nasdaq: 1330 S&P 500: 765 Oil: $50 Gold $1200

4) The Moonshot: Nouriel Who?
The markets, to a chorus of carping all year long, climb a wall of worry. Consumers spend a little, businesses buy a little, and the Fed bails a lot, and the result is a surprisingly strong economy-like thing. Investors can hardly believe their good fortune in having repealed financial gravity, so they celebrate by taking stocks higher at every provocation through the year, despite some sharp falls here and there. Wells Capital's Jim Paulsen is the hero of bulls everywhere, and "Nouriel Who?" pictures are on NYSE traders' end-of-year celebratory t-shirts.
Is it pure froth all the way? No, of course not. There will be some sharp declines here and there. There will also be plenty of bankruptcies to keep bear-ish sorts from feeling entirely left out, and those will be viewed, in moralizing fashion, as just the sort of thing the Schumpeterian/Austrian economist/doctor ordered (even if they aren't). There will also be a sharp increase in inflation, but that will be shrugged off as "the price you pay" and something that the Fed can manage by "mopping up" all the liquidity it introduced. The year will close in this surreal fashion, albeit with bears pointing to myriad signs that the market is propped up solely by government deficits, and that Treasury yields are climbing and this game can only go on so long …
Turning to the numbers, the markets soar in the U.S., if less so elsewhere; gold starts the year strong and then weakens; oil strengthens; the long bond yield climbs sharply; and global trade, while weak, is non-zero.

Dow: 12,000 Nasdaq: 2100 S&P 500: 1210 Oil: $90 Gold $700

Barry Ritholtz looked back at his outlook for 2008 in a Wallstrip video interview.

Much of Ritholtz' gloom came true, but he did offer up the wise nugget that you rarely see market predictors get it right two years in a row. If that theory holds true, then Ritholtz' outlook for '09 should be suspect as well as sunshiney Nouriel Roubini's take on the next year:

Equity prices and other risky assets have fallen sharply from their peaks of late 2007, but there are still significant downside risks. An emerging consensus suggests that the prices of many risky assets - including equities - have fallen so much that we are at the bottom and a rapid recovery will occur.

But the worst is still ahead of us. In the next few months, the macroeconomic news and earnings/profits reports from around the world will be much worse than expected, putting further downward pressure on prices of risky assets, because equity analysts are still deluding themselves that the economic contraction will be mild and short.

While the risk of a total systemic financial meltdown has been reduced by the actions of the G-7 and other economies to backstop their financial systems, severe vulnerabilities remain. The credit crunch will get worse; deleveraging will continue, as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing more price falls and driving more insolvent financial institutions out of business. A few emerging-market economies will certainly enter a full-blown financial crisis.

So 2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies. Only aggressive, coordinated, and effective policy actions by advanced and emerging-market countries can ensure that the global economy recovers in 2010, rather than entering a more protracted period of economic stagnation.

Roubini's outlook seems to align with Kedrosky's scenario number three, the Double Dip. If my name were Randolph Duke, I'd bet a dollar on the Double Dip.

I have trouble taking anyone seriously who needlessly peppers conversations with the word "like." And, like, y'know, second to my distaste for, uh, the overuse of like, is, y'know, "you know." Specifically amongst Senate candidates.

Mickey Kaus is growling about unions and separately the two children of successful politicians up for New York's vacancy in the House of Lords.

Kausfiles pointed me to this interesting anecdotal teardown of UAW work rules and the Wagner Act.

Has the line "It's too big to fail." become as tiresome as "If you do x, the terrorists win."? Right now, it looks as if GMAC, and GM, are too big to fail.

And now more consumers will qualify for the right to not buy GM cars.

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