Wednesday, January 07, 2009
Better late than never, Macro Man is happy to reveal is list of non-predictions for the new year. And so, without further ado.....
1) Last year's lows in the S&P will NOT hold. Consensus looks for 2009 earnings to be roughly the same level as 2008. This looks too high. The economic environment in the US and the world is not the worst since the early 80's, it's the worst since the 1930's. And while the end of the Great Moderation will bring with it the end of the uber-leveraged business model, that model will go out with a bang rather than a whimper. The growth of leverage in US corporation can be seen in the chart below; observe how during the period of relative macroeconomic stability (1982-2006), each recession brought about a steeper drawdown in corporate earnings from the cyclical peak. Macro Man expects a substantially deeper drawdown than during the previous recession, both because of the continued unwinding of leverage in certain sectors and because of the execrable macro backdrop. Ultimately, this should lead to 2009 equity lows modestly below 2008's.
2) 2009 GDP forecasts from the Fed, ECB, and the UK Treasury will NOT be achieved. The Fed's last forecast annex expected a mid level of 0.45% for 2009. The ECB staff forecast in December looked for a mid point decline of half a percent in 2009. And Alistair Darling, one of the great purveyors of fiction of modern times, forecasts a fall of 1.1% in the UK. These outlooks are all grossly over-optimistic.
3) The "bond bubble" will NOT pop. The theme of the great exodus from US assets, particularly government bonds, has gotten quite a bit of traction thus far in 2009. A US budget deficit reaching thirteen digits would also seem to be a reason to flee Treasuries. However, given Macro Man's view of an extended period of extremely poor economic conditions, he believes that this will be a 2010 story rather than one for this year. He is old enough to remember when some punters thought JGBs were the "sale of the century" at 3% in late 1995. Yields traded up to just over 3.5% in early '96, then fell back below 3 and have never been back since. Given that we're all Keynesians now, it's worth remembering that bonds can stay bid longer than shorts can stay in business.
4) Oil (defined as the second WTI contract) will NOT trade at either $25 or $100 in 2009. The bone-crushing recession will keep demand limp enough to ensure that we don't get a 100% rally this year from the 2008 close of 48.59. Yet ironically enough, the collapse in oil could, in the long run, be a terrible thing for the global economy. It discourages investment in future production and indeed renders some current projects unviable should crude trade at $40 for the long-term. All of which means that when demand finally does recover, there will be insufficient supply to meet it, and we'll live through H1 2008 all over again. Meanwhile, the decline in energy prices has removed the incentive for Americans in particular to trade in their dreadnoughts for more energy-efficient cars. Macro Man read one investment website a few days ago wherein one contributor proudly announced that he had bought a Chrysler station wagon (retail price: > $30k)for his wife. This is a car that gets 14/22 mpg. That's lower than a Porsche 911 turbo, one of the fastest cars that you can buy....and for a family runaround! It boggles the mind.
On a shorter-term basis, Macro Man reckons (unscientifically, admittedly) that oil in the 30's will take enough production off-line that crude doesn't get into the 20's, no matter how tepid demand is. Indeed, if anything, crude looks like it wants to break higher, technically.
5) VIX will post a higher average in 2009 than 2008 but will NOT reach 2008's peak. Quick! What was the average level of the VIX last year? 45? 50? 60? No, 32. That's only a couple of percentage points above the average from mid-01 to mid-02. And that's despite a much bigger financial crisis and a much deeper recession. While the former may wane this year, the latter will not. Given that Macro Man looks for new lows, it seems reasonable to expect VIX to remain elevated. However, the battery of Fed programs should see that financing conditions do not reach the level of last year's panic, and it also seems reasonable to expect that the authorities learned their lesson with Lehman. As such, Macro Man doesn't expect to see 80 again on the VIX.
Tune in tomorrow for the second half of the list.