Ten Non-Predictions For 2009: Part 1

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.

Text Colour4) 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.

Posted by Macro Man at 9:16 AM  

25 comments:

I disagree that Treasuries will not be lower for another 18,001 years.

Sharvy said...
10:53 AM  

agree with TSYs.. assuming that 20010 was a typo...

short end vols look cheap with what Q1 has in store for us.. the lure of selling gamma always invites hopefuls... lessons learned in 2008, well, haven't really been learned...

spx prediction - no clue... i couldn't even guess if i was paid to. That's how clueless i am.

Arun said...
10:59 AM  

Doh! Fixed.

Macro Man said...
11:13 AM  

MM - thanks. Been following along with your blog religiously though not commenting. A tech question, an observation and (perhaps) two suggestions. Q: how/where did you find EPS data back that far ?
Obs: not sure how to frame this but what's flabbergasted me is how flat-footed and reactive decision-making has been to normal cycles behaviors. One could see this tsunami coming (and some of us did) yet the telltales were widely ignored. Now it's a terrible reactive scramble.

Suggestion - in the US the proportion of corporate profits going to financials grew to nearly 30%. As the leveraged business models get replaced the industry is going to go thru a structural shakeout unlike anything yet anticipated.

Suggestion2 - the auto industry is almost a gimme on similar conclusions except the driver will be a shift from 15-16million/year to 13 or less. The real suggestion is that other industries are not immune as the Great Moderation wanes, e.g. the over-built retail sector.

In any case many thanks.

dblwyo said...
11:47 AM  

As far as Tsys are concerned. The Japan experience is relevant but in my view other elements have to be included.

1) Liquidity/volumes have come down a lot in less than a year (back to levels last seen in the 90s ...) with dealers balance sheet greatly reduced ... 2009 auction volumes with 90s liquidity ... is going to be a problem ... some think that auctions in Italy, UK might not get covered this year -> you need a risk premium ... you need higher real yields ...

2) banks in Europe, much less docile than Japanese banks ... will not buy just because told too ..

jm

Anonymous said...
12:06 PM  

Good stuff altho to be pedantic #5 is not a not...
Oh, oh, I've got one: The ECB will NOT progress to quantitative easing. Sad stories on the big 3 and the obsession with SUVs - echo Arun's sentiment on lessons not learned.
http://dealbook.blogs.nytimes.com/2009/01/05/gmacs-sweet-government-ride/
Cheers, JL

Anonymous said...
12:28 PM  

dbwlyo (what does that stand for, anyways?), I seem to recall you posting a bit a few months ago and linking to your rather erudite website. In any event, I agree with both of your suggestions.

jm, point taken...but I think the bid will rest as long as people are worried about return OF capital. Let's just say that I don't expect to see the animal spirits this year.

JL, agreed re ECB. Hell, even the politicians don't think there's a credit crisis...why should the German wing of the ECB lift a finger to move towards QE then? Oh, and 5 is now a not.

Macro Man said...
1:22 PM  

mm- you flat odf0?
If you like crude tech's here, i wouldnt be surprised you flattened up or even flipped long ODF0 for a quick trade.
mpm

Anonymous said...
1:43 PM  

Funny enough, I've taken half off this morning.....

Macro Man said...
1:48 PM  

There's a 140b diff between 10yr bund vs italian 10yr yields..thats not sustainable is it? Germany's just about fed up with the bastard children of europe (spain + italy). Banks in europe "will buy" when told to... until, that is, Germany says "thats it, I'm out!"

p.s. - each time i use the word "sustainable", i feel a Buiter retort coming on.

Arun said...
1:51 PM  

mm-
Im still employed, otherwise id ask for a job
mpm

Anonymous said...
2:22 PM  

interesting chatter form the tech guys, in a nutshell: "equties showing mixed signals, but the VIX looks like bottoming"

perhaps the rally that was supposed to last till O's inauguration, or the latest till MArch according to other versions, will first fail, positions get washed out and then we will have the rally ?

keep an eye on EURHUF, think it could move a lot higher

spagetti said...
2:23 PM  

Oh, db..., I get my data from Datastream.

Macro Man said...
2:29 PM  

s&p500 / market is already pricing in a ~40-50% decline in EPS. $50 in earnings, 8% risk premium (effective moody's Baa) and assume 2% growth. index value is 800.

equities will get stuck in a range... ~1050-700.

prophets said...
3:03 PM  

MM -- here's a prediction for you: one cannot grow one's economy 8-10% by investing an ever increasing amount in bonds that pay only 3%

China supposedly needs 8-10% growth for the government to avoid "dissension" as they like to it.

Greg said...
3:18 PM  

MM -- agree with you that "animal spirits" are not likely to return quickly, but further to JM's point about Trsy liquidity, how does the market underwrite USD trillion deficits with 1990s liquidity?

Most dealers/banks are technically insolvent at the moment (even if the FASB / SEC / Trsy bends the rules to suggest otherwise)... in other words, it is not about animal spirits

Its not just that they are *unwilling* to provide 2007 levels of liquidity ... they are **unable**

Anonymous said...
3:33 PM  

odfo for the uninitiated?

Anonymous said...
3:40 PM  

January 2010 DI swaps in Brazil.

Macro Man said...
3:55 PM  

thanks MM, wondering why that ticker wouldn't come up anywhere (am sans BB).

Anonymous said...
4:09 PM  

Have to agree with all five of those.
Good post.

Manc Trader said...
4:18 PM  

speaking of the Great Moderation, can traders continue to pay $2000 per month for a glorified e-mail / IM system from Bloomberg?

MM might trade brazil contracts from London, but most have to get prices / trade their domestic bond/equity markets over garban, eTrade, Cantor, etc.

And it should be obvious that bank headcount won't be growing...

Anonymous said...
4:22 PM  

#1: SP lows-- When do they ever hold when my barber tells me during my annual Christmas haircut, "what ya gonna do? put it in the bank? not selling my GOOG."

#2: Chances of winning the Powerball lotto is higher than a central bank getting anything right.

#3: There's nothing like the Ole US of A. Can I interest you in some Chinese government bonds? Didn't think so.

#4: That's why those solar guys will have to push out their IPO dates to 2010 at the earliest.

#5: VIX - as they say, truly historic bear markets end in chaos, then on a whimper.

Mr Risk said...
8:45 PM  

MM - gracias. Not sure what dblwlyo stands for but dblwyo is my three initials plus US state of birth. :).

My day job is management consulting and fortunately had a gig during Oct/Nov and then the hols. Back to occasionally harass you now though.

But erudite ? This coming from the guy who makes up clever parodies and re-phrases of classic poetry ?

dblwyo said...
12:14 AM  

"speaking of the Great Moderation, can traders continue to pay $2000 per month for a glorified e-mail / IM system from Bloomberg?"

While I think that a Bloomberg terminal had more value before the rise of the internet (by having virtually all of the information a trader needs in one place), like the U.S. dollar, I don't see anything that can replace it on the horizon.

It certainly does a lot more than a "glorified e-mail / IM system" (I never use either of those functions anyway). The delivery of news, economic releases, analyses, as well as databases of security characteristics, historical prices, corporate actions, and much more all in one place still makes it a compelling purchase.

I am a private investor, and I pay for a Bloomberg. It seems worth the cost to me. I have a lot of custom built spreadsheets that retrieve data from Bloomberg, and I simply could not trade the way I do without it.

Anonymous said...
11:18 AM  

Just a bit on oil techs... yes it does look like a buy or at least to take profits, but after US stats yesterday, you can only assume this market will continue to grind lower towards $30, and possibly flirt with $25, and yes i refer to the first contract. One can only imagine where prices would be now if not for this ultra cold snap or russia/ukraine row. Recovery towards higher prices and stabilizing there will not happen before H209.

kman said...
11:59 AM  

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