We set out to see what the experts are saying about 2009. What we didn’t realize was how the art of providing financial outlook has become a game of “one down-manship.” How else would you explain the boom in competition for the title of Dr Doom?
So it would seem that the Rapture is upon us, are you ready? Yeah, we feel the same way.
Here’s our survey of what some of the bigwigs in the investment industry have said about 2009 in recent months. In our mock* roster, we have Warren Buffet the sage; Nouriel Roubini aka Dr Boom/perma-bear, or our favourite, the playboy Professor; Nassim Taleb aka Black Swan; Peter Schiff who’s-laughing-now; Jim Rogers my-kids-speak-Chinese-and-that-is-my-investment-hedge; Marc Faber the original-Dr-Doom; Don Coxe via Basic Points; and John Embry the Canadian goldbug.
Outlook for 2009
Investoralist: So how bad is 2009 looking? Don’t hold back now, give it to us straight-up!
Warren Buffet: We have lived in one way in one type of economy. And we’re now deleveraging that economy. We’re gonna have to live without the same impetus from credit expansion that really helped propel the economic engine for a long period of time. That wind will not be at our back.
The economy will be in shambles throughout 2009, and, for that matter, probably well beyond, but that conclusion does not tell us whether the stock market will rise or fall.
Nouriel Roubini: The worst is yet to come. I don’t want to name names, but many [banks], given the housing bust, will become insolvent. Their losses are mounting because they have written down only their subprime loans so far. They haven’t started writing down most of their consumer-credit losses, and reserves for losses are much less than they should have been. The banks are playing all sorts of accounting gimmicks not to recognize them. There are hundreds of millions of dollars outstanding in home-equity loans that eventually could be worth zero, too.
Nassim Taleb: The problems are still here. People that were in charge, they are still around. The bankers that got us here are still around. And we’re giving them more money. It’s not a regular crisis, the whole system need to be changed. We need to reduce debt. We need to reduce asymmetric pay-offs of the banks. This is just the beginning, we need to de-leverage so massively.
Peter Schiff: I wouldn’t get to enthusiastic about it. I think the lows are not in for the Dow, if you measure Dow in terms of ounces of gold, then US stocks are headed for a lot lower in 2009. Ultimately, everything that Obama is proposing is destructive to our economy.
The government is interfering with the free market cure, and they are worsening the disease. We are broke because we borrowed and spent too much, we need a serious recession by going back to saving and producing. The government is trying to re-inflate the bubble, to dig us into a deeper ditch. And therefore it’s going to be much more difficult to get back to the viable economy again.
Had they allowed a more severe recession to take place in 2001-2002, we never would’ve had the housing bubble in the first place. We need to let the market function.
We’ve had a bull market in bonds since the 1980s. We’re now in the maniac stage, when the bubble bursts, we’re gonna take out the lows in the bond market in the 1970s. The dollars in which they’re denominated in are gonna plunge too. People are going to get wiped out in its purchasing power.
Jim Rogers: 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.
Marc Faber: Well, economically it will be very bad. We have a contracting economy, globally, everywhere. And, I mean, not mildly contracting, but falling off a cliff. However, after this fall off of a cliff, the news in the next 3 months could look somewhat better than expected. In other words, there could be some rebound from the lows in economic activity.
John Embry: [On the subject of currencies] Nouriel Roubini recently checked in with his latest prognostication and it qualifies as a true shocker. He suggested that credit losses in U.S. institutions could now peak at a level of $3.6 trillion, half of them absorbed by banks and broker-dealers, and to him, this means the US banking system is insolvent.
However, those wishing to flee the U.S. dollar aren’t going to be all that thrilled with their alternatives in other currencies, all of which appear to be terminally flawed.
The euro is being dragged down by the countries formerly known as Club Med but now derisively being referred to by the acronym PIGS (Portugal, Italy, Greece and Spain). These countries are suffering from economic and financial infirmities that are approaching or, in some cases, exceed those of the U.S. The question is not what the relative value of the euro might be but whether it can even survive if things continue to worsen.
The English pound does not even deserve mention in view of the horrific state of the British economy, while the Japanese yen, despite its current strength, will ultimately be dragged down by the endemic deflationary problem plaguing the country which has one of the highest government debt-to-GDP ratios in the world. The Russian ruble is headed down the toilet hand in hand with the discredited oligarchs whose proclivity for debt has brought many of them to the edge of ruin.
[And] I honestly think most observers may be missing what is really going on in China. The country for years has had one of the most unbalanced economies on the planet with exports and capital spending constituting an inordinate large amount of economic activity in the country. To keep the Yuan from rising, China is going to have to print a lot of money domestically.
This will all be part and parcel of the world’s major nations staging a race to the bottom in a declining currency derby.
Investoralist: What do we have to do to get out of this, can we get out of this, what’s the timeline here?
Warren Buffet: Well, I don’t think it’ll be five years. But I don’t have the answer to that. I don’t know what the stock market will do in the next year. What I do know is that, if you go back to the 20th century, 100 years, you had two great wars, you had other very large wars, you had the Great Depression, you had the flu epidemic, you had a dozen recessions and panics, you had all kinds of things.
At the end of that century, the average American was living seven times as well as the start of the century. The Dow Jones average went from 66 to 11,497. With all those problems. This is a country that has the ingredients that well, it unleashes the potential of humans. And they’re still here. So five years, you can put me down on that one. You can’t put me down on one year.
Nouriel Roubini: Every time there has been a severe crisis in the last six months, people have said this is the catastrophic event that signals the bottom. They said it after Bear Stearns, after Fannie and Freddie, after AIG, and after $700 billion bailout plan. Each time they have called the bottom, and the bottom has not been reached.
Nassim Taleb: The ones that saw the crisis coming, should be put in charge. Nationalize banks, guarantee bad assets. Do what they did in Sweden versus what they did in Japan. We need to look at the credit losses.
Peter Schiff: This is a bear market that began in 2000, we’re 8 years into it, I think there’s 5-10 years minimum left of the bear market.
Jim Rogers: The (biggest issue) right now is that the American government is printing gigantic amounts of money right now and that in the end is going to be the worst problem. They’re propping everyone up everybody in sight; throughout history, when you’ve printed that much money it’s led to inflation, and in some cases runaway inflation. I think in the end, the credit problem is not going to be the serious problem.
Marc Faber: I think a recovery will not come for the next couple of years— maybe in five, ten years time. But I really don’t see a catalyst that would propel economic growth to a higher rate. I think we’ll fall sharply like we fell in economic activity in October, November, early December. And we’ll be at the bottom of the valley for quite some time, and maybe we’ll go even lower. I think 2009 is going to be a catastrophe, economically speaking.
Don Coxe: Both Keynesian and Friedman policies are put into place. There’s some serious heroin economics going on, but the alternative is dying in horrible pain.
In the meantime?
Investoralist: Capital preservation? What can we invest in while the rest of the world falls to pieces?
Warren Buffet: If you own a farm nobody tells you when it’s gone down 50 percent ’cause you don’t get a quote every day. But you really look to the farm and what it produces to determine whether you made a good investment. Now if people look to the newspaper every day at the price of a stock to determine whether they made a good investment they’re making a mistake.
They have to look to the business, the asset itself. If you own an apartment house you wouldn’t get a quote on it every day. You’d just look at– what the rent rolls were, and what your taxes were and expenses were. And if they all came in with– in line with what you expected when you bought it you’d feel you’d made a satisfactory investment, and you’d never get a quote on it. So I don’t look at quotes. I can’t tell you what Berkshire Hathaway is selling for today.
Nouriel Roubini: Cash.
Nassim Taleb: Cash.
Peter Schiff: Opportunities are to preserve your purchasing power. By getting out of US dollar assets. The biggest casualty is going to be the value of our money. Seek out a tax haven from the inflationary tax, and invest aboard. There’s been a firesale on foreign assets.
Load up on quality companies outside the US, continue to buy precious metals (gold), and we’ve had a major dip in commodities, industrial, energy, agricultural commodities. This is one of the best commodity buying opportunities that I’ve seen.
Jim Rogers: Virtually the only asset class I know where the fundamentals are not impaired – in fact, where they are actually improving – is commodities. 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.
Marc Faber: Buy gold, buy commodities, and buy natural resource stocks while getting ready to short U.S. debt massively.
Well, I personally, I think that the Chinese economy will suffer very badly. They’ll have a bad recession. And I also think that politically in the world, geopolitically, we have tensions coming up. And so I would be trading Chinese stocks— maybe you buy them here and you resell them like other emerging economy stock markets that have underperformed the U.S. over the last 14 months. Since the market peaked in November 2007, the emerging markets and those of commodities have been hammered. And so the rebound may occur there more than, say, in the United States. But, as I said, look at it as a trading opportunity.
I continue to like gold. And, at the present time, that is very depressed compared to physical gold are gold miners— the exploration companies. I would also say that oil at around this level is becoming attractive, and that oil companies are reasonably attractive. So these are the investments I would carry out at the present time. And the big mining companies— CVRD, Rio Tinto, BHP, and larger gold producing companies like Newmont. But after their very strong rebound I think we have to wait for a correction.
I think the dollar is a disastrous currency. But the others are not much better. The Swiss franc is not the Swiss franc we had in the 1950s. Its quality has gone down very substantially. And the Fed, by pursuing this zero interest rate policy, which leads essentially to dollar weakness, it’s to some extent a trade war. You cheapen your currency, so you export problems to somebody else. But since the whole world is engaged in trying to lower the value of their currencies, it may very well happen that all currencies lose value against, say, hard currencies like precious metals, silver, platinum and gold.
Don Coxe: Commodities stocks, not commodities. You want to be able to identify management talent. For coming out the other side, an appropriate portfolio should be 50% commodities. There will not be a dawning of the new world unless the banking sector reforms. Commodities in 2011 will go higher than I thought they would ever go, because of what’s been done in response to the [banking] crisis. The next commodity bull market will make the first one look tame.
In 2008, commodities caught up with the rest of the market and other risk assets. they were the last to go down, which is characteristic of where they should fit in the cycle. They have traded as if they were stocks. The slaughter was more dramatic because they had a last-minute run up when the stock market was going down. As for oil, for the majority of the cycle, demand was always slightly ahead of supply, driving the price up. Once the recession hits and supply drops, you fill up the extra tankers, and that extra little supply is enough knocks the price out.
John Embry: Gold. [But] as long as people are abandoning the sector and taking money out of these funds, then there’s a lot of irrational selling. The fund manager has no choice but to sell. This is creating a phenomenon where prices don’t make much sense. The larger cap stocks are the ones being bid up; they trade because generalists buy them. There’s a far bigger pool of capital prepared to buy them. That’s why you’ve got this remarkable discrepancy in valuation between the little guys and the big guys.
You can’t get into production because it’s hard to attract capital and the capital costs have risen so much, but an existing mine with a good orebody is fine. This credit problem will significantly impact gold production over the next three or four years. There’s a bunch of mines coming off the table as they get depleted and the high-grade ores run out. Without new mines, production is going to fall regardless of the gold price. The supply-demand gap, which is already yawning, is growing wider and wider. Central banks will do what they can to fill the gap but if they can’t, the price is going to explode.
The downturn in both gold and silver was literally preposterous in magnitude relative to the rise in the dollar. This was a violent intervention by the paper players. Three U.S. banks on COMEX shorted something like 8,000 contracts in a very short time. That’s more ounces than all the world’s miners produce in a month.
*Not real questions, but the responses are taken from interviews given in various TV and newspaper, thus very real.