WSJ: The Doomsayers Who Got It Right
muggle...@googlemail.com
January 2, 2009
The Doomsayers Who Got It Right
More Bad News in Store for 2009? Last Year's Cassandras Are Still
Gloomy
By JEFF D. OPDYKE
For years, they were the party poopers: financial prognosticators who,
amid the ebullient stock prices and effervescent home values that
defined the early 21st century, warned of trouble. In hindsight,
they're the ones who got it right -- or, at least, some of it.
Often mocked for predictions that seemed outlandish at the time -- big
banks will fail, Fannie Mae will go bankrupt -- a few of these
outliers, including money manager Jeremy Grantham, mutual-fund manager
Bob Rodriguez and brokerage-house owner Peter Schiff, were among the
first to describe key parts of the U.S. financial meltdown.
Still, they say the worst may be ahead.
They weren't always entirely on the money. Mr. Schiff's main thesis,
that the U.S. dollar will crash, hasn't panned out.
Their views often are at odds with what economists generally expect.
The consensus continues to predict a recovery in late 2009, with
rising stocks leading up to that. Economists speak of a stronger
dollar as the rest of the world struggles with recession. Bottom line:
They expect the U.S. economy to lead the world out of the doldrums.
Those who saw the crisis coming, on the other hand, fret that U.S.
government spending on bailouts and stimulus plans that preserve
failed business models could increase the likelihood of a worse
calamity later.
They foresee a long season in which consumers cut their spending, and
instead sharply increase the savings rate. That would be healthy for
savings-anemic U.S. households, which have spent beyond their means
for years, but deeply problematic for a country where consumers drive
70% of all economic activity.
They also envision higher taxes and the likelihood of further declines
in U.S. stock prices as the Standard & Poor's 500-stock index bottoms
out as much as 30% lower than today. And while noting that "deflation"
is today's catchword, several experts say that inflation and perhaps
even hyperinflation (in which prices rise at double- or triple-digit
percentages) is the real issue a few years down the road as the
Federal Reserve increases the money supply and relies on untested
measures, such as buying home mortgages or other assets, to spur the
economy.
"It's all a grand experiment at this point, with no historical
precedent," says Mr. Rodriguez, CEO at Los Angeles's First Pacific
Advisors.
Of course, Mr. Rodriguez and the others have been pessimists for many
years, and even a broken clock is right twice a day. Here are their
views for the future.
Jeremy Grantham
As early as 2000, Mr. Grantham, co-founder of Boston money-management
shop GMO LLC, was warning his shareholders that "a sensational bust"
was coming. That made him more than a half-decade premature.
However, he notes that because the Federal Reserve cut interest rates
to ward off the 9/11-inspired recession, the day of atonement was
delayed. The government's fiscal actions after the 2001 terrorist
attacks sparked "the greatest sucker rally in history," which, he
predicted, would ultimately lead to a collapse of the financial
system.
By July 2007 he wrote that the real risk to the system would likely
emerge in October 2008. He wrote that by the time the crisis passed,
"at least one major bank will have failed."
Surveying the wreckage today, he says that the unintended consequences
of the government's response so far to the crisis are "unknowable.
There is no playbook."
For instance, he says "competitive currency devaluation" could break
out among nations as each tries to boost its own economy by weakening
its currency, possibly spurring similar moves by other nations fearful
of losing any economic advantage. A weaker currency can boost exports
(by making those goods cheaper abroad) but also heightens inflation
risk.
"With so many moving parts," he says, "you could easily have a surge
of inflation."
Treasury bonds, he says, are currently overpriced, "the 30-year
ridiculously so." Bond prices move in the opposite direction as
yields, and at current price levels, the 30-year bond is effectively
forecasting little more than 1% annual inflation for the next three
decades.
"In your dreams," Mr. Grantham says.
And while stocks have gotten hammered, he says, they're still not as
cheap as they were in the 1974 and 1982 recessions. He gives it a
"better than 50-50" chance that the S&P 500 falls further in 2009. He
has set aside cash to invest in case stocks retreat to "a shockingly
low number," he says, "like 600 on the S&P," which would be about 34%
lower than 2008's closing value.
His firm has waded back into a few emerging markets -- in particular,
Turkey, Korea and Thailand -- because of cheap valuations. Mr.
Grantham is worried the dollar could weaken, and foreign securities
provide the potential for gains as foreign currencies potentially
strengthen.
Moreover, stocks overseas fell harder during the crisis and are now
cheaper than in the U.S., he says. He expects that over the next seven
years, real returns in emerging markets will be about 9.5% a year.
Returns in the U.S. will be about 7.5% annually, he says. That's not a
nightmare, but it is below what investors will reap outside the U.S.
One domestic bright spot: franchise names like Coca-Cola Cos., Wal-
Mart Stores Inc. and Microsoft Corp. should do better, he says. "The
super-blue-chips are the most attractive part of the market anywhere
in the world."
Bob Rodriguez
Mr. Rodriguez manages the FPA New Income fund, which was up more than
4% in 2008 due to some notable shifts in the investment strategy in
recent years.
He saw storm clouds gathering in 2005 when newly minted pools of
supposedly high-quality "Alt-A" mortgages began acting oddly:
Delinquencies and foreclosures were surging on mortgages just nine
months old. (Alt-A mortgages, sometimes called "liar loans," were
widely used by borrowers with high credit scores but undocumented
income.)
"We'd never seen that before," he says.
He quickly dumped the holdings, reckoning that by the time he figured
out what was actually going on, whatever disaster the odd behavior
foreshadowed would have already occurred.
Over the next few years he penned increasingly dour shareholder
letters attacking every area of financial services. He stopped buying
Fannie Mae and Freddie Mac debt and took giant insurer American
International Group Inc. off the list of approved commercial-paper
investments. He refused to invest in financial-services companies
because of what he saw as "a pandemic collapse" in the rules by which
lenders approved mortgages.
As of 2004, he began moving his fund to more than 45% cash, even as
one big shareholder yanked out $300 million because of his bearish
stance.
Looking forward, he, too, sees "a massive bubble in Treasurys"
forming. "Quite frankly, we do not trust government," he says, as the
U.S. government adds more debt to pay for economic-revival measures.
He's not buying Treasurys because "We will not lend long-term money to
a borrower that capriciously erodes its balance sheet."
His real concern, he recently told shareholders, isn't the next two
years, "but period three through 10." In an interview, he says it will
be punctuated by inflation, and he expects real GDP growth of no more
than 2% a year, possibly less.
He also expects consumers to save rather than spend, spawning "severe
difficulty for a large segment of the economy directly or indirectly
related to consumers."
By the time the March quarter ends, he expects the U.S. savings rate
will approach 4%. By the first quarter 2010 it could be in the 7% to
10% range. In recent years, that rate has hovered near 1% or lower,
indicative of a country binging rather than saving.
In other words, Mr. Rodriguez doesn't think Americans will shop their
way out of a recession.
He believes the U.S. consumer has transformed into a saver, though
policymakers don't fully understand that. President-elect Barack Obama
"will try to stimulate spending with one foot on the gas, while
consumers are pushing on the brake" by saving. "We're in for a very
discontinuous environment." Thus, he says, the economy will sputter in
fits and starts. The recession will deepen over the next six to 18
months.
Still, for the first time in more than a year, he bought stocks as the
crisis unfolded in October and November. Nearly 70% of those
purchases, though, were in the energy sector, he says, because prices
for real assets, such as a barrel of oil, tend to rise as inflation
rises.
Peter Schiff
Since at least 2004, as president and chief global strategist at
EuroPacific Capital, a broker/dealer in Darien, Conn., Mr. Schiff has
routinely peddled warnings that the housing market was a house of
cards and that stock values were artificially inflated by Federal
Reserve and White House policies that, he says, "were working against
market forces."
In a speech at the Western Regional Mortgage Brokers Conference in
2006, he essentially told the audience of mortgage bankers many would
soon be unemployed due to a housing collapse. He noted as well that a
recession could begin in December 2007 -- correct, according to the
National Bureau of Economic Research. In his 2007 book "Crash Proof,"
he forecast the demise of Fannie Mae and Freddie Mac.
Still, he has been wrong on significant parts of his argument. Many
detractors point out that two of his core beliefs -- a longstanding
prediction that the dollar would collapse and that foreign stocks
would outperform U.S. shares -- have been well off the mark in this
crisis. A rush into the safety of the greenback sent the dollar
soaring against other currencies and, as a side effect, helped
undermine shares of stocks around the world.
Mr. Schiff acknowledges that he wasn't expecting that to happen. But
he says his worries aren't misplaced: A dollar dive and foreign-stock
outperformance are still in the cards.
Looking ahead, Mr. Schiff foresees "massive inflation," and sharply
higher interest rates, since the U.S. will have to entice foreign
investors to buy the trillions of dollars in government-issued bonds
that the U.S. needs to sell to pay for bailouts and stimulus plans.
The quandary, though, is that at some point global investors will stop
buying U.S. debt. "They will stop enabling us," he says, amid concerns
about America's ability to repay the debts. "They will stop buying our
bonds, our currency, and the value of the dollar will drop
precipitously."
Taxes, too, will have to rise, particularly on upper-income families,
he says, because an economy based largely on consumption, not
production, has few ways to generate the money needed to repay its
debt when consumption is waning.
He thinks there's time for government officials to limit the damage he
says they are inflicting. But "if they're not careful," he says,
"their actions are going to wipe out the value of savings in this
country."
Peeassha
<muggle...@googlemail.com> wrote in message
news:9a85e6e1-919c-4406...@q26g2000prq.googlegroups.com...
Wrong about emerging markets. They'll plunge far greater than the S&P 500
this year. Oil will retrace back to the 31 dollar level after this January
effect bullshit and Obama horseshit are over. America will deflate not
inflate.
shortT
> The Wall Street Journal
> January 2, 2009
>
> The Doomsayers Who Got It Right
> More Bad News in Store for 2009? Last Year's Cassandras Are Still
> Gloomy
>
> By JEFF D. OPDYKE
>
These doomsayers are the reason why I choose gold and energy in the
2009 stock picking game
and only 3 of the 10 trade in the US.
The US government is going to need money to pay for all this debt but
the tax base is shrinking. Where will Americans find this kind of
money?
From what I hear the debt/person in the US is between
30K and 100K and it is going to increase by all this spending.
There are four options IMO.
One is to raise interest rates in order to attract foreign investment
the second is to sell parts of the US to foreigners the third to
increase production and narrow
the trade deficit. This will take many years. The fourth is to come up
with some new invention there
by creating a new industry.
Technology is and has been strong in the US and IMO as well as
numerous others in this newsgroup that sector should pick up in the
future.
"To me — absurdity is the only reality."
FZ
shortT
ausound
5ac1da...@k1g2000prb.googlegroups.com:
> The US government is going to need money to pay for all this debt but
> the tax base is shrinking. Where will Americans find this kind of
> money?
>
it"s time for us to sell something
we could sell Rhode Island.... it's small, we'll never miss it
or Louisiana... we bought it from the French... let's sell it back
Gadsden Purchase... we don't even USE railroads anymore... it full of
Mexicans now anyway... let's sell it back to Mexico
or here's one the Democrats would like
Sell Alaska back to russia !!!!
solves the Sarah Palin 2012 problem
btw
nailin' Palin in russian
is nailin' Palin
shortT
> shortT <dev.gn...@gmail.com> wrote in news:fcd13ac0-7ff0-4e3c-b327-
> 5ac1da57e...@k1g2000prb.googlegroups.com:
Love the speech translator, thanks.
Click on different objects on the URL below.
http://www.palinaspresident.us/
shortT
com...@webtv.net
years....eventually, they have to get some things right...just like the
nutball that say a comet is about to strike the earth every year...maybe
one day a comet will hit the earth...a small comet, and then will we say
how smart they were for finally getting it right ? give me a break,
please.
Jesus is GOD
shortT
Hi comics.
To a certain degree you are right, one should not
rely solemnly on what the experts say but rather use what the experts
say along with what they individually perceive as a basis to formulate
their own opinion.
Using your example above one only has to look at the moon to see all
the
craters left by objects hitting it. From that, one would conclude that
the same
will eventually happen to earth. Then they can prepare themselves
for the inevitable. It is better to be safe then sorry.
shortT
com...@webtv.net
late to move my money into sater harbours like utilities and food from
hi-tech and manufacturing.
Jesus is GOD
patmp...@gmail.com
> shortT <dev.gn...@gmail.com> wrote in news:fcd13ac0-7ff0-4e3c-b327-
> 5ac1da57e...@k1g2000prb.googlegroups.com:
>
> > the tax base is shrinking. Where will Americans find this kind of
> > money?
>
> it"s time for us to sell something
>
> we could sell Rhode Island.... it's small, we'll never miss it
>
> or Louisiana... we bought it from the French... let's sell it back
>
> Gadsden Purchase... we don't even USE railroads anymore... it full of
> Mexicans now anyway... let's sell it back to Mexico
>
> or here's one the Democrats would like
> Sell Alaska back to russia !!!!
> solves the Sarah Palin 2012 problem
>
> btw
> nailin' Palin in russian
> is nailin' Palin
>
> http://text-to-speech.imtranslator.net/speech.asp
Nah. Sarah Palin would become czar and come after us with nuclear
weapons. What a nightmare.