Themes For 2010 - 1 - Review of '09

For much of 2009 I was proven to be too bearish on asset markets. I have learned a lot from this experience. That is the entire purpose of this blog. For me to learn. That is how it began in late '06 when I simply wanted to organize my thoughts and decided to publish them online. I have left all my previous learning experiences online, in part hoping that others can learn from them. But mostly because I want my past failures to remain inescapable. I am cognizant of the various forms of psychological bias (recency bias, confirmation bias, cognitive dissonance, etc). And I'm determined to mitigate them while expanding my knowledge in an industry typified by those with a heightened sense of self-importance. Modesty is either willfully accepted or forcibly applied.

This is the fourth year in which I offer my thoughts. Previous year's themes can be seen here: 2009, 2008, and 2007.

I am typically as critical of my own performance as I am of others'. But that aside, my overarching theme of debt deflation/deleveraging and its adverse consequences for asset markets has been proven correct in spades, even while that sentiment was deeply unpopular in the beginning and widely thought to be "impossible" in many academic circles.

Lastly, some context to last year's themes. At the end of 2008 we had just endured two massive plunges, bailouts and confidence campaigns by governments everywhere. Markets had rallied 25% from their November lows. Most concluded that the bottom was in and would not be revisited. In the first two months of '09, most of my themes were playing out according to plan. Markets plunged 30%, making new lows. The recession was deepening. People were getting scared. Riots and protests broke out in much of Europe. I had forecasted a "false recovery" of sorts. But I thought it would be brief. August was as long as I thought it could last.

I had fallen victim to my own success. Self-attribution bias. So it was a tale of two seasons for me. January to March vs the rest of the year. Shockingly accurate and then wrong.

In last year's themes for 2009 post I had derided the popular bullish projections given by most analysts. 1200, 1300 by year-end. Pft! By the end of the year, they were far closer than my bearish calls. But with the early year plunge, most had retracted their projections. So if one listened to the bulls a year ago, would they have held on the whole way? Hard to say.

Here are my Themes for 2009: (this year's thoughts in bold)

- 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 -- Half point. In some areas credit came back. In others, it has continued to deteriorate. And others still, it has been manipulated. I was right about the lawlessness bit.

- Crumbling corporate earnings as consumer psychology moves away from the "gotta have it now" mentality to "it can wait until next year" -- Airball. Consumers have changed, but only slightly (when don't they?). But corporate earnings benefited from cost-cutting, strong exports and low interest rates. Huge miss.

- Municipal and State bankruptcies requiring federal bailouts in the US -- This is the second year I've made this one of my themes. It continues to play out, although slower than I expect. Half point again.

- Skyrocketing unemployment. Official figures to reach 9% or higher in the US. -- Swoosh. That one seems almost too easy, but was far from consensus a year ago.

- 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 -- riots in Europe, Thailand, Iran were not what I had in mind. Miss.

- Plummeting stock markets worldwide with losses of 50% or more in major indices as hype over President Obama wanes -- Obama went from 70% approval ratings to 48%. The market did not follow as I expected. Miss.

- A wave of bankruptcies in retail, restaurants, airlines and financial services. Nationalization of the politically well-connected --- Small business bankruptcies rose 44% for the year. Restaurant activity contracted all year. We know what happened to the banks. I'll take a point here.

- A continued strength in the US Dollar vs most other major currencies as European infighting escalates -- Finished down 3%. Euro tensions indeed growing. Miss.

- Declines in the price of gold but continued relative outperformance to other assets and most currencies -- Half point. Price up and outperformed.

- Large declines for Canadian real estate, notably in bubble areas of the west and prairies -- Again, worked well early. Fell apart thereafter. Miss.

- Social "witch hunts" for those responsible for the common plight. Multiple scandals uncovered. Persecution and enormous tax increases on the extremely wealthy -- Not as fierce as I expected, but I'll take it. Tea Parties, windfall bonus taxes, populist anger growing toward bankers. Insider trading rings, hedge fund ponzi schemes, tax haven busting.

- An increased focus on the family, on close friends and "time" in general -- Too interpretive to take credit either way. I see it slowly evolving.

As I always disclaim, "some of these will be proven correct, others will prove laughably false." While I give few absolute targets, and thus many are interpretive, I lean toward the critical side. I'd rather learn something from going too far or not far enough, than simply pat myself of the back.

In some areas, I have become even more bearish than I was at this time last year. In others, the unfolding events have me convinced that some legitimate progress is being made. I will surely expand on these thoughts, sparing no ink over the next week or so. I will cover the current state of the credit markets, the economy in general, followed by the impact this will have on asset markets. Stay tuned!

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