Transcript Economic Predictions for 2009

Economic Predictions for 2009
By Daryl Montgomery
Dec 4, 2008
Copyright 2008, All Rights Reserved
How to Think About the Contents of
this Talk
• Our views for the economy in 2009 should not be
characterized as either positive or negative.
• They indicate a series of risks and opportunities.
• Your goal is to minimize the risks you face and
maximize the opportunities (survive/then thrive).
• The bigger the crisis, the bigger the opportunity.
• Many large fortunes will be begun based on
investing and business decisions made next year;
many will also come to an end.
Our Predictions last December for 2008
• Recession
• More mergers and bailouts of financial companies
with government help.
• Continued decline of residential real estate.
• Credit crisis spreads to credit cards, car loans and
student loans.
• Multinational intervention to support declining
dollar.
• Monolines (bond insurers) crisis.
• Sharp downturn in commercial real estate.
• Inflation
What Actually Happened
• Recession
--On Dec 1 2008, NBER declares recession started in the U.S. in
December 2007 (something we’ve said many times).
-- What could our prediction have been worth to you?
Dec 12, 2007: S&P 500 closed at 1487
Dec 1, 2008: S&P 500 closed at 816
The difference: S&P 500 lost 45% after you heard from us and
before you heard from NBER.
-- U.S. Government GDP reports (falsely) claim:
GDP Q4 2007: +0.6%
GDP Q1 2008: +1.0%
GDP Q2 2008: +2.8%
GDP Q3 2008: - 0.5%
What Actually Happened
• Government arranged Bailouts and Mergers
(the month we published a prediction and the month it
happened)
- Bear Stearns (Aug 07, March 08)
- Fannie Mae and Freddie Mac(Dec 07, July 08)
- AIG(April 08, Sept 08)
- Merrill Lynch (April 08, Sept 08)
- Wachovia(Sept 08, Sept 08)
- Washington Mutual(April 08, Sept 08)
- UBS(April 08, Oct 08)
- RBS(Sept 08, Oct 08)
- Citibank (April 08, Nov 08)
What Actually Happened
• Continued decline of residential real estate
- Case-Shiller Q3 yr over yr decline 16.6%
• Credit crisis spreads to credit cards, car loans
and student loans
- Asset back paper market for credit loans dries up
in September.
- Credit card delinquencies up 17%, charge offs 45%
• Multinational intervention to support dollar
- Federal Reserve holdings of Foreign central bank
paper increased significantly starting in mid-July.
What Actually Happened
• Monolines (bond insurers) crisis.
Downgraded slightly; stock prices collapse; most
still in business.
• Sharp downturn in commercial real estate.
Significant bank write offs, Lehman largest holder, these
loans cited as in trouble at Citigroup.
• Inflation
Alternative figures as high as 13% in mid-year,
currently around 7%
Predictions for 2009 - Economy
• U.S. Recession turns into Depression.
• Banks, brokers, insurance continue their collapse; big
increase in small and medium bank failures; more major
failures; many hedge funds go under.
• Bankruptcies in Retail (major increase), Auto related,
Home Builders, small businesses, and individuals.
• Available Consumer credit shrinks substantially; credit
card defaults rise rapidly.
• Real estate: residential drop continues, commercial
becomes big problem.
• Unemployment heads to double digits.
• Asset price deflation in beginning of year; consumer price
inflation bigger worry at end.
Predictions for 2009 – Government Reaction
• Fed institutes ZIRP – (close to) zero interest rate policy.
• Budget deficit/National Debt explodes.
• Financial companies all require more funding. MS, GS,
BAC, and GE will need help; TARP proves to have been
ineffective.
• GM, F and Chrysler will collapse without bailouts;
propping them up will have to be done multiple times.
• A number of states and municipalities need Fed bailout;
municipal bonds in trouble.
• Money market funds have to be supported again.
• An Exchange (Comex?) may need to be bailed out.
• Bailout efforts shift toward individuals, away from
corporations.
Predictions for 2009 - International
• 2009 is the year of global recession (U.S., ECB,
Britain, Japan, China, Australia, etc.).
• China in trouble – big drops in manufacturing,
danger of political instability.
• Problems spread to countries dependent on
exports to China – most commodity producers
and Japan/Korea.
• Great Britain worst hit big country in Europe.
• Many smaller countries implode a la IcelandUkraine, Hungary, Romania, Latvia, Estonia.
• World reacts with easy money (printing) policies.