2009 Outlook
Hope for the best, but prepare for the worst.
I'm not a prophet and I don't have a crystal ball. Many topics I find myself to be more agnostic about than I may have been in prior years due to the recent wrath of unconventional interventions and policy’s that in my opinion distorted Mother Economic Nature.
Trust and confidence have been brought to record low levels many of us have ever seen in our lifetimes. It's quite discouraging the recent events of fraud in the financial markets and lack of transparency on our Governments end to dealing with the current financial crisis.
Although fear and uncertainty persist in the current economic environment, we are all still capable of steering our own destiny and making our own decisions to which will allow us to prevail these difficult times.
Much of my job is to decipher information and make decisions to how to invest your accounts provided under my management. Not always does 2 + 2 = 4 in the world of investment.
Oil started out in 2008 at $95.98 a barrel and by the middle of July, reached as high as $147 a barrel. By the end of the year, it closed at $44.60.
Oil makes for an extreme example of how hard it is to predict the short term price movements of any asset. Short term being months or 1 year time. It also shows just how extreme asset prices can move in any given year.
I suspect that 2009 will be yet another year of surprising volatility and market moves that go beyond expectations. But I will have my biases.
By Jason Tillberg Jan 11, 2009
Housing
We enter 2009 with deteriorating employment conditions. Given these conditions coupled with house prices still at historically overvalued levels, Real estate market will continue to build inventory and prices will continue to fall as much as 10% - 25% more before bottoming as late at 2012.
Bright side: Housing is becoming more affordable to own if you are still saving for a house.
Down side: Existing homeowners no longer can borrow against home or may not be able to sell at a profit for the time being.
Your strategy: If you own, continue to pay off mortgage. Time should be in your side. Also, if the US $ becomes more devalued, inflation will help keep the house up in dollars.
If you are in the market for a home, you should be ok to wait another year or two if you are looking for the best price. Continue to save as high a % of your income as possible for the biggest down payment you can make. I encourage you to take out a 15 year mortgage and pay back your loan sooner rather than later.
The US $ and Inflation
"The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).
Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."
Those are the words of our current Fed Chairmen Ben Bernanke in a speech he gave in November of 2002.
Nearly everything Ben said in that speech he is doing today.
Although the US $ has strengthened recently and inflation seems to be under control, I expect for it to pick up, perhaps substantially so, later this year and into next.
America cannot print its way out of its economic problems. Until we get an expansion in our productiveness creating goods and services that have value, we risk a far weaker US dollar in the future that has consequences on far lower standards of living.
Bright side: Holders of hard assets like land, precious metals and even debt should welcome inflation not only to help inflate away the debt but increase the value of one’s hard assets.
Down side: Holding of cash in savings, government bonds and other paper assets paying low rates of interest will have negative returns.
Going back to Buffet and his Op Ed piece from 2008 Review, he also said “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.”
Your Strategy: Avoid holding too high a % of US $ in cash, government bonds or other US debt instruments.
I would encourage all to own some gold and silver, physical if you can, in the event of a major dollar collapse that has a possibility in the coming years. In the stock market, we can invest in companies with hard assets like silver mining companies and or oil companies that would preserve value in the event of inflationary pressures.
Commercial Real Estate
Last year, we saw financial companies go out business and or merge with another financial company. This year I believe the commercial real estate market will be hit hard due to an over expanded retail market place and countless layoffs at offices. This is an industry that has lots of leverage and should prove very bad for those who overleveraged during the boom.
Stock Markets
The short term movements of the stock markets will be unpredictable. It would not be too surprising if we were to get a substantial rally of 30% or more during this year. When such a rally could take place is anyone’s guess. If 2008 taught investors anything, it's just how unpredictable and how extreme markets can be.
All in all, my bias is that stocks finish the year lower from where they started. But this will depend on the success of the Obama administration's economic plan. I would not want to rule out the possibility it works and bolsters the economy for 2009 and jolts up the stock markets. However, post this economic stimulus, America will have to pay the piper and this should lead to a 2010-2013 worse than would have been in my opinion.
Strategy: Being ultra selective for value. Being defensive and not panicking.
Gold and Silver
"We have gold because we cannot trust governments" so said Herbert Hoover to Franklin Roosevelt in 1933.
To kill deflation in 1933, the newly elected President FDR, on April 5, 1933, made an executive order requiring all owners of gold bullion, coin or certificate to redeem them at a bank for paper money. The gold was then sent to the Federal Reserve, which by the way is no more Federal than Federal Express. Gold at that time was $20.67 an ounce as it had been since 1837.
On January 30th, 1934, gold was re priced at $35.00 an ounce. The devaluation of the US $ killed the deflation that had crippled the economy and got stocks up, real estate up and most important, got businesses to invest again so they could hire more workers and be productive.
Governments around the world are doing all they can to stimulate their economies. Many European counties as well as the US are awash in debt.
Where will all this money come from to provide the stimulus?
It'll have to be printed. The Federal Reserve has already stated they would be buyers of agency debt.
With interest baring instruments paying so little interest, gold and silver should prove a superior hedge against inflation in the coming years.
Strategy: Own gold and silver in portfolio and in physical form if you can.
Disclosure: This newsletter is not a means to solicit any of the securities mentioned nor does it recommend it for any person before they speak with a licensed professional investment advisor for their own suitability. Investing in Equities bears risk of capital loss. This newsletter is strictly the opinion of Jason Tillberg, President and founder of Tillberg Capital Management, Inc. and shall not be held responsible for investment loss from this newsletter.
