The response and feedback from my previous year’s ten predictions have been overwhelming. I want to thank all of the viewers who have given their time to read them. Many of my predictions luckily, and a few unfortunately, have turned out to be true. I intend to continue this practice every year regardless of whether I predicted well or poorly in the previous year.
Making prediction one year at a time is much harder than predicting ten year return, something Jeremy Grantham of GMO has done very well. If you look at GMO's estimated ten year return and ranking of various asset classes published in 1998 they are amazingly correct in both their actual returns and rankings. For example, he predicted ten year zero return for S&P 500 in 1998, which sounded very crazy then, but it turns out to be conservative since the real return is actually negative from 1998 to 2008.
Short term price targets however, like the predictions made here for only a year, rely more on gut feeling, market experience, flexibility, courage and conviction. As I said last year, I will be extremely happy if I can get two thirds of them right, and will be quite happy to get even half of them right. The purpose is more for my metal exercise, to provide investors with food for thought about my fundamental views and to prepare them for market movements that they may or may not expect. I may or may not trade these trends and any of my opinions are subject to change over time.
As you will see, these new targets are adjusted more conservatively than I originally anticipated a half year ago. I take into consideration that the current de-leveraging process creates many sellers forced to meet margin calls and redemptions. At the same time, buyers become less capitalized and more careful and reluctant to buy anything these days (except US Treasuries) even the fundamentally strong precious metals sector which should be very bullish in such an economic and monetary environment.
The valuation trap, as I correctly predicted last year, now becomes a liquidity trap. Government injection of its own capital into the inefficient industries of banking and autos with worthless and toxic financial products and excessively high cost of production will further lower the efficiency and investment return of the whole society. US Government can set the interest rate to zero like Japan, but if consumers don’t borrow while in savings mode, it won’t lift the economy, it will only lift inflation, which will further depress consumer spending, becoming a vicious circle for many years to come. As a society overburdened with killing amounts of debt in both government and households, we need to accept a simple fact: tomorrow will be worse than today.
The current monetary inflation by the Fed, printing a huge amount of money, instead of helping will only elongate the oversupply and overproduction problem and make the existing depression worse. When former Goldman Chairman John Whitehead said last month that the current crisis is worse than the great depression of the 1930s, I believe he was speaking from his heart. The additional bailouts next year and the upcoming fiscal stimulus package are basically adding even more monetary inflation and wasting more taxpayers’ money on many questionable infrastructure projects thus reducing the overall efficiency in this country. In simple words, the cure is worse than the disease.
You will see several ten percent figures in my 2009 predictions, a cornerstone for many markets next year. In 2008, people already realize there is nothing to cheer about when "The World Is Flat", which only brings us financial Armageddon, monetary crisis and upcoming hyper-inflation which everyone around the globe has to painfully share... so much for globalization. 2008 was an important turning point, so my predictions last year had a few surprising elements to some investors. In 2009 there are even more continuous trends from 2008 as I see them, but I try to insert a few surprises. Without further delay, here are my ten predictions for 2009:
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