Sunday, January 4, 2009

Themes for 2009 - Part 6 (Final Thoughts)

I am often confronted by readers who feel I am too pessimistic. I am told that "things have a way of working themselves out." Instead of always looking at the glass half-empty, I should instead look at it as half-full.

My response to this is usually the same. That these people are misinterpreting my point. What I am saying, is that what we have experienced over the last 10-15 years has not been desirable. That all of the thoughtless materialism and constant obsessiveness about money were in fact destroying the very institutions that made our various cultures great. Groups of friends were separated into social classes. We became suspicious of our neighbours instead of automatically trustworthy. Families were working longer hours to "keep up with the Jones'." Bigger, faster, sexier took over from efficient, practical and natural. This is what is collapsing.

So am I a pessimist to advocate a further erosion of that? Hardly. I'd argue that I'm actually an optimist - regardless of the nasty side-effects. With that in mind, here is a summary of some major themes I expect to be prevalent in 2009. I offer it with my usual caveat: Some of it will be right, some of it will be laughably wrong. Chaos theory ensures that much. There are any number of "Black Swan Events" that could come along and render some of these themes as not only wrong, but irrelevant to more important issues.

- Government attempts to "get credit moving again" will fail. The credit contraction (deflation) will continue even as governments and central banks do everything within the law (and even some outside) to encourage hyperinflation
- Crumbling corporate earnings as consumer psychology moves away from the "gotta have it now" mentality to "it can wait until next year"
- Municipal and State bankruptcies requiring federal bailouts in the US
- Skyrocketing unemployment. Official figures to reach 9% or higher in the US.
- Worldwide social unrest or even war as currency collapses, unemployment and falling asset prices shake people's faith in their governments and scapegoats are made of traditional enemies
- Plummeting stock markets worldwide with losses of 50% or more in major indices as hype over President Obama wanes
- A wave of bankruptcies in retail, restaurants, airlines and financial services. Nationalization of the politically well-connected
- A continued strength in the US Dollar vs most other major currencies as European infighting escalates
- Declines in the price of gold but continued relative outperformance to other assets and most currencies
- Large declines for Canadian real estate, notably in bubble areas of the west and prairies
- Social "witch hunts" for those responsible for the common plight. Multiple scandals uncovered. Persecution and enormous tax increases on the extremely wealthy
- An increased focus on the family, on close friends and "time" in general

One reads a lot of "predictions" for the coming year around this time and these will probably be among the more dire that you come across. Keep in mind that I too would benefit very little if such events were to transpire. My own family and friends will be affected. No individual can come away from such a situation unscathed. Although society itself will be much healthier once all is said and done.

However, among other sets of predictions I see a striking pattern of unrelenting bullishness. The common citation for this bullishness is that there is too much negativity. I find it difficult to wrap my mind around that paradox. If everyone is so bullish, how can their reason be that everyone is bearish? Take the following anecdotal evidence. As of this writing, I am looking on Bloomberg.com and their videos section has four videos with the following titles:

Cantor's Pado sees bull market for US stocks in 2009
Jeffery Saut says, "worst has been seen" for stocks
Vitner sees "definitive bottom" for home sales in 2009
Analysts say Obama stimulus to "drive stocks higher"

The Wall Street Journal has the following article on strategist predictions for 2009. 80% of the 20 strategists surveyed see higher stock prices for 2009, many of them substantially so. This New York Times article does a better job than most in pointing out some caveats in the forecaster's methods, but still leaves the reader with optimistic conclusions. Clearly, the consensus is not for a continuation of 2008, and almost nobody is expecting an acceleration.

Another observation I have made over the last few days is the increasing use of the word "hope" by analysts and commentators on TV. They all "hope" that Obama's stimulus plan will have a positive effect. And they "hope" that corporate earnings will recover in the second half. Yet, when pressed, none of them can explain exactly how these things will happen. To me, hope is not a viable investment vehicle. I prefer to see strong balance sheets with increasing opportunities for growth when I look at buying companies. "Hope" does not often enter into the equation. It appears that these analysts, all of whom presumably own a great deal of stock, need the markets to rise in 2009 and are searching for what they think could be the catalysts for that to happen. Typically, such sophistry backfires.

Perhaps I'm wrong. Perhaps that black swan event turns out to be something revolutionary. Maybe CERN's Large Hadron Collider will teach us how to make infinite amounts of energy from nothing. Maybe we discover a miracle drug that renders sleep unnecessary. But really, do we actually want the bubble to reflate again only to come crashing down a few years later? Is that really a noble objective? I don't think so. I suppose that's where I differentiate myself between most other analysts and politicians.

Let me wish all my readers a healthy and happy New Year. Try to remember that net-worth and self-worth are not the same things. When it is all over with, even if that takes years, those who were part of the solution will be revered. Those who were part of the problem will be reviled. Keep that in mind.

4 comments:

Woolybooger said...

Enjoyed the series. Unfortunately for many I feel you are spot on in many areas. It will be interesting to see how Peak oil and declining demand play themselves out over the next couple of years. Take Care and thanks again.....Woolybooger

Gil said...

Looking at this past year's returns, I think silver has lost it's identity as a monetary metal. Plus the bankers, who run the world, do not have any reserves of silver stashed. I may be a bit biased... :)

Nice blog. I like how you review your predictions after 6 months and admit when things haven't worked out as you expected. I can relate since years ago, I placed a 1/3 of my net into silver bullion. I just recently sold off almost all of it.

Been looking for a place to lurk, since the last few places have became "unsound". Maybe I'm a lodestone! LOL, though I think it's the building frustration from the entire situation, that we are all facing.

freddyv said...

For a 26 year old you have outstanding insight. I feel better about our future. Please do not let the trend followers wear you down.

Matt Stiles said...

Thanks for the comments.

As far as insight for my age goes, I still feel like an intellectual midget. But my learning has been exponential. After 13 years of mediocre education (public ed) I feel like I have a lot of catching up to do. I hope it never stops.


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