Fwd: [pcg-team] Fortune : 8 really SCARY predictions : Nice read
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From: vikrant dhiman <vikrant...@darashaw.com>
Date: Fri, Jan 23, 2009 at 11:05 AM
Subject: Fwd: [pcg-team] Fortune : 8 really SCARY predictions : Nice read
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-----Original Message-----
From: "Regan Homavazir" <regan-h...@darashaw.com>
To: "vikrant dhiman" <vikrant...@darashaw.com>
Date: Fri, 23 Jan 2009 10:23:09 +0530
Subject: [pcg-team] Fortune : 8 really SCARY predictions : Nice read
8 really, really scary predictions
Dow 4,000. Food shortages. A bubble in Treasury notes. Fortune spoke to eight of the market's sharpest thinkers and what they had to say about the future is frightening.
We are in the middle of a very severe recession that's going to continue through all of 2009 - the worst U.S. recession in the past 50 years. It's the bursting of a huge leveraged-up credit bubble. There's no going back, and there is no bottom to it. It was excessive in everything from subprime to prime, from credit cards to student loans, from corporate bonds to muni bonds. You name it. And it's all reversing right now in a very, very massive way. At this point it's not just a U.S. recession. All of the advanced economies are at the beginning of a hard landing. And emerging markets, beginning with China , are in a severe slowdown. So we're having a global recession and it's becoming worse.
Things are going to be awful for everyday people. U.S. GDP growth is going to be negative through the end of 2009. And the recovery in 2010 and 2011, if there is one, is going to be so weak - with a growth rate of 1% to 1.5% - that it's going to feel like a recession. I see the unemployment rate peaking at around 9% by 2010. The value of homes has already fallen 25%. In my view, home prices are going to fall by another 15% before bottoming out in 2010.
For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cashlike instruments such as short-term or longer-term government bonds. It's better to stay in things with low returns rather than to lose 50% of your wealth. You should preserve capital. It'll be hard and challenging enough. I wish I could be more cheerful, but I was right a year ago, and I think I'll be right this year too.
Bill Gross
The founder of bond giant Pimco warned of a subprime contagion back
in July 2007.
While 2008 will probably
be best known as the year that global stock markets had their values cut in
half, it was really much, much more. It was a year in which every major
asset class - stocks, real estate, commodities, even high-yield bonds -
suffered significant double-digit percentage losses, resulting in the
destruction of over $30 trillion of paper wealth. To blame this on subprime
mortgages alone would be to dismiss an era of leveraging that encompassed
derivative structures of all types, embodying a belief that economic growth
was always and everywhere a certainty and that asset prices never go down.
As 2008 nears its conclusion, we as an investor nation have been forced to
face a new reality. Wall Street and Main Street are fearful that a
recession may be replaced by a near depression.
The outcome
essentially depends on the ability of the Obama administration to rejuvenate
capitalism's "animal spirits" by substituting the benevolent fist of
government for the now invisible hand of Adam Smith. Federal spending and
guarantees in the trillions of dollars will be required to fill the gap
created by the deleveraging of private balance sheets. In turn, lenders and
investors alike must begin to assume risk as opposed to stuffing money in
modern-day investment mattresses. The process will take time. Twelve months
of the Obama Nation will not be sufficient to heal the damage of a
half-century's excessive leverage. The downsizing of private risk positions
- replaced by government credit - will also result in reduced profit margins
and a slower rate of earnings growth after the bottom is reached.
Investors need to recognize these titanic shifts in market and public
policies and be content with single-digit returns in future years. Perhaps
the most lucrative pockets of value are in high-quality corporate bonds and
preferred stocks of banks and financial institutions that have partnered
with the government in programs such as the Troubled Assets Relief Program
(TARP). While their profitability may be restricted, their ability to pay
interest and preferred dividends should be unhampered. Above all, stick to
high-quality companies and asset classes. The road to recovery will be
treacherous.
Robert Shiller
The Yale professor and co-founder of MacroMarkets called both the
dot-com and housing bubbles.
We don't currently
have anywhere near the level of unemployment that we had in the 1930s, but
otherwise there are many similarities between today's environment and the
Great Depression, with things happening today that we haven't seen since
then. First of all, there's the magnitude of the stock market's move up and
down. The real (inflation-corrected) value of the S&P 500 nearly tripled
from 1995 to 2000, and by November 2008 was down nearly 60% from its 2000
peak. The only other comparable event was the one in the 1920s where real
stock prices more than tripled from 1924 to 1929 and then fell 80% from 1929
to 1932. Second, we've had the biggest housing bust since the Depression.
Third, we've seen 0% interest rates. We've actually seen briefly negative
short-term interest rates. That hasn't happened since 1941. There was a
period from 1938 to 1941 when we were bouncing around at zero and sometimes
negative, but that hasn't happened since.
And the list goes on: Our
numbers don't go back as far as the Depression, but consumer confidence is
plausibly at the lowest level since then. Volatility of the stock market in
terms of percentage changes day-to-day is the highest since the Depression.
In October 2008 we saw the biggest drop in consumer prices in one month
since April 1938. Another thing is that it's a worldwide event, as it was in
the Depression.
I'm optimistic that we'll do better this time, but
I'm worried that we're vulnerable. One of the lessons from the Depression is
that things can smolder for a long time. What I'm worried about right now is
that our confidence has been hurt, and that's difficult to restore. No
matter what we do, we're trying to deal with a psychological phenomenon. So
the Fed can cut interest rates and purchase asset-backed securities, but
that only works in really restoring full prosperity if people believe that
we're back again. That's a little hard to manage.
In terms of the
stock market, the price/earnings ratio is no longer high. I use a P/E ratio
in which the price is divided by ten-year average earnings. It's a really
conservative way of looking at it. That P/E ratio got up to 44 in the year
2000, which was a record high. Recently it was down to less than 13, which
is below the average of around 15. But after the stock market crash of 1929,
the price/earnings ratio got down to about six, which is less than half of
where it is now. So that's the worry. Some people who are so inclined might
go more into the market here because there's a real chance it will go up a
lot. But that's very risky. It could easily fall by half again.
Sheila Bair
The FDIC chairman has been pushing to get mortgage relief for
borrowers.
My 87-year-old mother is
a native Kansan who grew up in the throes of the Great Depression and the
Dust Bowl. She is a classic "buy and hold" investor who would make Warren
Buffett proud. Her investment returns always exceeded those of my father, to
his eternal consternation. He actively traded his stocks and produced decent
returns, but nothing like those my mother achieved by simply buying stocks
of companies she understood and liked, and then holding onto them.
So I have become a strong advocate of the "basics" when it comes to
investing: Do your homework, invest in securities you understand, and then
hold on. As a government policymaker, I advocate informed investment
decisions - not only to protect investors from losses but also because the
efficient functioning of our capital markets relies on investors' doing
their homework.
The private-label mortgage-backed securitization
markets are a prime example. Trillions of dollars of investor money funded
millions of mortgages that borrowers had little chance of repaying.
Investors relied heavily on ratings agencies, which in turn relied too
heavily on mathematical models instead of analyzing the underlying loans. To
be sure, borrowers, brokers, lenders, securitizers, as well as state and
federal regulators, all bear responsibility for the widespread deterioration
in lending standards. But the problem was compounded by the fact that those
ultimately holding the risk - the investors - did not look behind their
investments at the quality of the mortgages themselves. If they had, they
would have seen high loan-to-value ratios, little income documentation,
burdensome fees, and steep payment resets. They would have seen mortgages
unaffordable from the beginning, originated based on the assumption that
home prices would continue to rise and borrowers would refinance. Of course,
we now know that as home prices began to depreciate, borrowers were unable
to refinance, leading to massive foreclosures and further price declines.
This self-reinforcing downward spiral is at the core of the economic
problems we face today.
We will dig out of this. And when we do, I
hope for a back-to-basics society - where banks and other lending
institutions promote real growth and long-term value for the economy, and
where American families have rediscovered the peace of mind of financial
security achieved through saving and investing wisely. We need to return to
the culture of thrift that my mother and her generation learned the hard way
through years of hardship and deprivation. Those are lessons learned that
the current crisis is teaching us again.
Jim Rogers
The commodities guru predicted two years ago that the credit bubble
would devastate Wall Street.
We are in a period
of forced liquidation, which has happened only eight or nine times in the
past 150 years. The fact that it's historic doesn't make it any more fun, of
course. But it is a pretty interesting time when there is forced selling of
everything with no regard for facts or fundamentals at all. Historically,
the way you make money in times like these is that you find things where the
fundamentals are unimpaired. The fundamentals of GM are impaired. The
fundamentals of Citigroup are impaired.
Virtually the only asset
class I know where the fundamentals are not impaired - in fact, where they
are actually improving - is commodities. Farmers cannot get a loan to buy
fertilizer right now. Nobody's going to get a loan to open a zinc or a lead
mine. Meanwhile, every day the supply of commodities shrinks more and more.
Nobody can invest in productive capacity, even if he wants to. You're going
to see gigantic shortages developing over the next few years. The
inventories of food worldwide are already at the lowest levels they've been
in 50 years. This may turn into the Great Depression II. But if and when we
come out of this, commodities are going to lead the way, just as they did in
the 1970s when everything was a disaster and commodities went through the
roof.
What I've been buying recently is agricultural commodities.
I've also been buying more Chinese stocks. And I'm buying stocks in
Taiwan
for the first time in my life. It looks as if there's
finally going to be peace in
Taiwan after 60 years, and Taiwanese companies are
going to benefit from the long-term growth of
China.
I have
covered most of my short positions in
U.S. stocks, and I'm now selling long-term
U.S.
government bonds short. That's the last bubble I can
find in the
U.S. I cannot imagine why anybody would
give money to the
U.S. government for 30 years for less than
a 4% yield. I certainly wouldn't. There are going to be gigantic amounts of
bonds coming to the market, and inflation will be coming back.
In my
view, U.S.
stocks are still not attractive. Historically, you buy
stocks when they're yielding 6% and selling at eight times earnings. You
sell them when they're at 22 times earnings and yielding 2%. Right now
U.S.
stocks are down a lot, but they're still very
expensive by that historical valuation method. The U.S. market
is yielding 3% today. For stocks to go to a 6% yield without big dividend
increases, the Dow will need to go below 4000. I'm not saying it will fall
that far, but it could very well happen. And if it gets that low and I'm
still solvent, I hope I'm smart enough to buy a lot. The key in times like
these is to stay solvent so you can load up when opportunity comes.
The author and chairman of
Montrose Advisors has 50 years of Wall Street experience.
I presume that although we are in a severe recession it will not
decompose into a full-scale depression, because that is what everyone is
afraid of and desperate to avoid. Wall Street likes to say that the market
has anticipated five of the last three recessions - the point being that a
market crash frightens the authorities into taking necessary action.
Keynes observed that pragmatic businessmen often could not imagine that they
were the slaves of defunct economists, but ironically, never is this more
true than today of Keynes himself. So we run a huge deficit to postpone the
worst. That means inflation, so bonds are unsatisfactory.
Investment
opportunity is the difference between the reality and the perception. And
since many equities are priced as though a depression might be on the way,
many of them are attractively priced.
One approach I am comfortable
with is owning shares in wonderful businesses that do well in all
circumstances - Johnson & Johnson and the like. They rarely fly out of
the park, but provide long, steady gains that will get you where you want to
go. They often have huge cash hoards, e.g., Cisco, Apple, Microsoft, and
Berkshire Hathaway, whose war chests exceed $20 billion. Or Hewlett-Packard,
Google, Intel, or IBM, all in the $10 billion league. Such companies can
take advantage of a weak market just as private investors would, with the
difference that they know very well how much to pay for what fits their
product line.
In the present environment I favor companies that can
prosper in the lean years ahead. So, not Saks, but Wal-Mart; not Neiman
Marcus, but Dollar General. Or specialists, such as Fastenal, Monsanto, or
Schlumberger.
And when should you buy? In or near what I call the
Time of Deepest Gloom, if you can spot it.
Meredith Whitney
The Oppenheimer & Co. analyst was among the first to warn that
the big banks had big problems.
What
the federal government has done so far- with TARP, bailing out Citigroup,
etc. - has stemmed the bleeding, but what it hasn't done is fundamentally
alter the landscape. Yes, there's been a tremendous amount of capital thrown
into the system, but my concern is that it's just going to plug the holes.
It's not going to create new liquidity, which is what the system so
desperately needs.
When the government announces these plans,
investors get excited and hopeful. But details have been slim, and while I
appreciate the government saying, "We've been wrong here. Let's try
something different," the strategy changes have not solved anything. So far
we've had TARP 1.0, TARP 2.0, and TARP 3.0, and I'm certain there will be a
4.0, a 5.0, and a 6.0. There has to be, because the companies cannot raise
the capital they need, which means that the default provider of capital has
to be the federal government.
What happens in 2009? Frankly, it's
hard for me to predict what's going to happen next week, never mind next
year. What I will say is that I expect all these banks to be back in the
market looking for more capital. We'll also have a wholesale restructuring
of our banking system, probably toward the end of 2009. There will be banks
getting smaller, banks going away, and banks consolidating. At the same
time, though, I think you'll see more new banks created. We've already seen
more applications. And it's a great idea: You start with a clean balance
sheet and make loans today with today's information. Plus, right now you've
got a yield curve that's good for lending.
I think the overall
economy will be worse than people expect. The biggest issue will be consumer
spending. If 2008 was characterized by the market impacting the economy,
then 2009 will be about the economy impacting the market. It's already
started.
Wilbur Ross
The billionaire chairman of W.L. Ross & Co. specializes in
turning around troubled companies.
We
are clearly in a serious recession, and more aggressive action is needed to
turn things around. The federal government initially underestimated the
scale of the mortgage and housing crises and later panicked into an
ever-changing series of ad hoc measures that at best dealt with some of the
effects of the original crises. But homeowners have now lost $5 trillion,
and 12 million families have mortgages in excess of the value of their
homes. Therefore the economy will not stabilize until mortgages are adjusted
down to the value of homes, with affordable payment schedules, and until new
mortgages become available across the home-price spectrum. Till then, the
poverty effect of falling house prices and unemployment moving up toward 7%
will hold consumer spending back from its former 70% contribution to our
economy.
I'm optimistic about the choices that President-elect Obama
has made for his economic team, and I've got some suggestions for what they
should do. Hopefully the new Treasury Secretary, Tim Geithner, will
incentivize lenders to restructure mortgages by guaranteeing half of the
reduced principal amount and sharing among the government, homeowners, and
lenders any subsequent appreciation. Lenders would gain liquidity by selling
the Treasury-guaranteed portion of the loan, and government would receive
annual insurance premiums to further protect it against loss. That would
cost taxpayers nothing now and probably little or nothing in the future.
Addressing unemployment is paramount. Detroit needs government support
in order to implement independently verified concessions from all
stakeholders - not just labor - which are sufficiently large to permit
profitable operations even if auto sales remain as low as 11 million cars
per year. A pre-negotiated bankruptcy may be necessary in order to implement
the restructuring, but both the industry and the economy are too fragile to
withstand the domino effect that a free-fall bankruptcy would have on a car
company, its dealers, and its suppliers.
In addition, to avoid
reversal of the 242,000 jobs created by state and local governments in the
past 12 months,
Washington should provide or guarantee funding for
sorely needed infrastructure projects that would create immediate
construction jobs and meaningful amounts of permanent jobs.
If
President Obama promptly and decisively resolves these problems, whether or
not he adopts my recommendations, and restores public confidence, he can end
the recession by early 2010. If not, the economy will languish for a long
time. Given the economic uncertainty, investors who are too worried to buy
equities might consider tax-exempt bonds with yields around 6%, equivalent
to almost 10% before federal, state, and local taxes. Investors who want to
hedge the risk that federal deficits might lead to longer-term inflation and
drive up interest rates, causing these bonds to decline, might buy some
TIPS, or Treasury inflation-protected securities, as well. TIPS are U.S.
Treasury bonds whose principal amount varies with consumer price indexes to
provide holders with a rate of return in constant dollars. TIPS prices
currently imply near-term deflation, and that means that they would
appreciate in value if inflation comes back.
At my firm, we've been
starting to invest in some distressed financial companies. That seems as if
it will work out reasonably well, because they're very, very cheap. The
financial services sector is kind of where the problems started, and it's
probably going to need to be fixed in order for the problems to be resolved.
We see opportunities there.
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hassaan noor
Date: Fri, 23 Jan 2009 12:24:34 +0530
Subject: Fwd: [pcg-team] Fortune : 8 really SCARY predictions : Nice read
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