Jeff's 9 Predictions for 2009

Posted by jeff

Tue Dec 23rd, 2008 10:18 AM

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So it's that time of year again, when bloggers and commentators the world over issue their predictions for the coming year. I thought it would only be fair to rate last year's performance, while I speculate on 2009. You can find the complete piece here....just to keep me honest.

#1 In late 2007 I predicted that "The U.S. will enter a recession." It was not a wildly contrarian call at the time, but I did say that "We may already be in it." My timing wasn't bad. The National Bureau of Economic Research, the official arbiter of recessions, stated a couple of weeks ago that the recession started in December 2007. My prediction for 2009 - MORE RECESSION! Really ugly in the first half, with the potential for a positive GDP quarter in the second half driven by government spending and easy comps, but 2010 could easily see a relapse of negative GDP for a quarter or two.

#2 Last year I also said "The dollar will remain weak, but will start to stabilize." I stated that this would be driven by weakening foreign economies. I got that call right, but also speculated that foreign investment in US assets would help, if it continued. I don't think it really has. Foreigners want to buy US government debt, even at negative rates of return, because the U.S. is the most politically stable economy in the world, one of the most transparent (scary as that sounds in the aftermath of Madoff with the money) and one of the most proactive when disaster hits. The dollar is a "safe haven" if you will, although it may be less of one than ever before. The dollar will continue to see inflows from wealthy people worldwide who are scared to death to own anything else....except maybe a little gold. While countries like China foolishly try to devalue their way into competitive prosperity, I predict a relatively stable dollar for 2009.

#3 For 2008 I predicted "Strong Manufacturing/Exports" - I think this one turned out to be about half right. It worked for the first half of the year, but crumbling world economies and a 16% trade-weighted rally in the dollar have started to chill exports since the summer. With 19% of manufacturing now going towards exports, the slowdown is going to sting. Of course, the domestic side has been slow for three years, so one would think it would not have too far to fall, but I predict that the auto industry debacle will result in a horrible year for manufacturing.

#4 Last time around I wrongly opined that "Commodity & Agricultural Prices Slow but Stay Firm." I did write, however, "I wouldn't be surprised to see a jaw- dropping correction in commodity prices in the first half." This is why I am not George Soros....my timing is always a tad early. If you had been short commodities in the first half you would have gotten your head ripped off. The second half collapse was also far worse than I expected. Frankly, I didn't have the guts to make a loud contrarian call on the BRIC nation economies at the time. But I did make a bunch of negative calls on emerging markets soon thereafter, starting with China. My call for this year is that the Russian, Chinese, Indian and Brazilian economies are gonna break down like a soup sandwich in 2009. Investors will start to say "Next time I mention the BRIC investment strategy, throw one at me!" Watch out overhead for falling oligarchs, conglomeratures, sultans, dictators and assorted banana republic-type billionaires. These guys were largely over levered to commodities and in hock up to their eyeballs, a combination that any Comex or Chicago Merc trader would tell you to avoid.

#5 I was early and accurate on one of my calls last year predicting "State Fiscal Crunches." For this this one I give myself a little gold star...and a cupcake which I am going to eat right now. The unfortunate thing is this is only going to get worse in 2009 and I see increased tax burdens coming for sure. They will be sneaky, strange, and irrational and will have UNINTENDED CONSEQUENCES. The New York State proposed "iPod tax" for downloading audio or video makes all the sense in the world to me. I will also make the bold prediction that services will be cut universally.

#6 In late 2007, I predicted that "Foreign Visitation Will Continue to Flourish." I will claim technical accuracy on this prediction. Through the first half of the year, tourism continued to come on strong. But by October, the city's tourism office, NYC & Company, was revising down the estimated number of people traveling to NYC in 2008 to 47.3MM, or 400,000 less than the 47.7 million initially expected. If this number proves out, the growth rate will have fallen to 2.2% from levels ranging from 2.8% to 7.1% in the prior five years. For 2009, my prediction is for a significant decline in NYC visitation, maybe 5%. This ain't gonna be good for all the new hotels being opened. According to John Fitzpatrick, Chairman of the Hotel Association of New York, "Our industry is already grappling with a twenty percent decrease in hotel revenue over last year, in November alone." The President & CEO of the Fitzpatrick Manhattan hotel group made the comment in response to word of a plan to significantly increase the city's hotel tax.

#7 Did I mention that sometimes I hallucinate? Apparently I was last year when I wrote that "Availability of Business Loans Will Be Strong." I guess if the BRIC countries had held up and exports had remained firm, this would have been somewhat more of the case. But SBA loans started to plummet earlier this year, in line with declining availability of business credit of all types. Today, SBA loans are becoming even harder to get due to new regulatory changes. These loans are one of the primary ways that entrepreneurs fund start-ups and that folks fund the acquisition of small businesses. Since small business formation often helps lead the way out of recession, you can understand why I am not at all bullish on an economic recovery. My prediction is that 2009 will not be a good one for small businesses, due to tough economic times and a shortage of capital, but by 2010 things should be truning the corner.

#8 Stocks Will Bottom in 2009 - Yes, I am bearish on the economy, but pretty neutral on stocks. I think there will be one more hair-raising sell-off (it will be much less impressive in terms of volume and fortunately I have hardly any hair left to raise), which ends the hedge fund liquidation process and the final towel-throwing by individual investors. Coming out of the bottom, small cap growth stocks will outperform because the premium put on any kind of sustainable growth will be huge. No one will care and only the intrepid and/or foolhardy? will profit. I think the economy is going to be moribund for years, but the debt liquidation crisis will end next year and hence stocks, which always look forward by 6 to 12 months, will bottom sometime in 2009.

#9 - Inflation will be nowhere to be seen in 2009 and 2010 - I don't care how many dollars we print. The complete destruction of commodity and manufacturing-levered foreign economies will cast a pall over "demand for stuff," particularly raw materials worldwide and pricing will be horrendous. Hence, despite all efforts to devalue the dollar and cause hyper-inflation, it won't happen in 2009 or 2010. Deflation will continue to be the bugaboo as the financial system continues to work through the ever-growing mountain of bad debt. Money is being destroyed faster than the government can print it. Next up is commercial real estate followed by municipal debt and corporate debt. By the time that's all over there will be only relatively less debt liquidation to worry about.

Bonus Prediction - 2009 will be the year that New York City residential real estate catches down to the rest of the country. I will wager that by June people will be calling the New York City residential market a disaster area and prices will be down 30 - 40%. For those looking for shelter it will be time to start looking around.

Of course it goes without saying that if you keep reading Urban Digs that you will not continue to have whiter teeth, fresher breath and be a hit at parties again in 2009. This prediction of 2008 was so dead on that I think you can just depend on it for the foreseeable future.


Have a Happy & Safe Holiday Season