Most investors don't take seriously warnings about the future of the economy and the financial marketplace, but those who did avoided the dreaded “Cs” of finance: the Credit Crisis and Crash of '08. What warnings are we talking about you might ask? Well, it was the headlines of several years ago screaming that a ‘Category 6 Fiscal Storm', ‘Debt-Driven Meltdown', ‘Systemic Banking Crisis', ‘Financial Train Wreck', ‘Wild Ride', ‘God-Awful Fiscal Storm', ‘Major Upheaval', ‘Rude Awakening', ‘Great Disruption', ‘Debt Bombshell', ‘Major Upheaval', ‘Unwelcome Economic Spiral', ‘Perfect Financial Storm', ‘Serious Collapse', ‘Drastic Fall', ‘Financial Disaster', ‘Major Bear Market' and/or an ‘Economic Earthquake' was in store for the U.S. and, indeed, the global economy in the very near future. And the future is now!
Some Predictions do Come True
These warnings and predictions were often derided as just negative nonsense coming from alarmists, ‘party poopers', ‘Chicken Littles', ‘perma-bears', ‘doom and gloomers' and the like rather than from the insightful economists and financial and market analysts who made them. To their collective credit they were all substantially correct in their prognoses of what we could expect to happen as exemplified by what has occurred (and is still occurring) over the past 6 months. It has cost many investors 50+% of their stock market investments, 20 - 30% of the value of their home or even the loss of their house itself. Perhaps we should have paid more attention to what they said and as I compiled in the 6-part series back in 2006 regarding the “Ominous Warnings and Dire Predictions of World's Financial Experts” followed up by a 4-part series entitled “Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure?”
Once again warnings and predictions are being put forth about the next crisis to befall us and this time round it behooves us to pay more attention and make sure this time that we are better positioned to survive and prosper whatever comes our way.
Below is an economic and market forecast by Russell Napier, author of the book “Anatomy of the Bear”, a professor at the Edinburgh Business School and a consultant to CLSA Ltd. which is one of the top research houses in Asia. Napier's research indicates (and I paraphrase) that:
The S&P 550 will Reach an Interim Bottom by 1Q'09
The S&P 500 now trades at below fair value based on Tobin's “q” ratio (which compares the market value of companies to the cost of their constituent parts) which has dropped below its long-term average of 0.76 to 0.68 from a peak of 1.9 in 1999, and the cyclically adjusted 10-year price-to-earnings (CAPE) ratio and, as such, should bottom by the end of the 1Q'09.
The S&P 500 will Rally between 2009 and 2010
The S&P 500 will experience a significant rally from the end of the 1Q'09 until mid-2010 to late 2010.
The S&P 500 will Decline to 400 by 2014 (the Dow 30 to 3800)
The S&P 500 will then undergo a major crash that will see U.S. equity prices bottom at almost 50% below current levels (i.e. to 400 or less; the Dow 30 to 3800 or less) sometime around 2014 as Tobin's “q” drops to 0.3 signaling the end of the bear market, as it has done at the end of the four largest U.S. market declines in 1921, 1932, 1949 and 1982.
U.S. Treasury Sales Could Collapse Leading to End of U.S. Dollar as Reserve Currency
The crisis of 2008 will force key large global economies such as China, India and Russia to target domestic consumption-driven growth to replace sales to the U.S. and Europe. When China, in particular, succeeds in shifting to a consumer-driven growth model it will clearly provide the key marginal demand for most global consumer goods and this will further reduce the need for the current export-oriented growth countries to manage their currencies relative to the U.S. dollar in pursuit of export growth to the U.S. The fewer countries that pursue such a policy, the less foreign support there will be for the U.S. federal debt market. This could well be the cataclysmic event that forces U.S. equities to the massive under-valuations seen at the previous major bottoms of 1921, 1932, 1949 and 1982 and the end of the U.S. dollar as the de-facto reserve currency.
Deflation Expected until 2015
The yield on treasury inflation-protected securities (TIPS) shows (using the yield differential between Treasuries and TIPS) that deflation is now expected and forecasts that the average prices in the U.S. will decline every year between now and 2015. Such a deflationary economic contraction would be a major shock to the business community and earnings damage associated with such a contraction would probably be larger than normal initiating a significant decline in the U.S. equities markets.
Continued Deflation or Renewed Inflation are Possibilities
The supply of U.S. Federal debt will be soaring just as foreign demand for that debt is waning and this combination will produce an up-shift in the yield curve which, if it were not met by a Federal Reserve reaction, would be highly deflationary for the U.S. On the other hand, if the Fed were to decide to open its balance sheet to buy Treasuries and keep interest rates low, then the consequences would be an inflationary scare that would further exacerbate capital outflow and the collapse of the dollar.
Sell U.S. Treasuries Soon, Buy Equities in 2014
Bond investors are already being presented with a once-in-a-lifetime opportunity to get their money out of U.S. Treasuries. Equities will look truly terrible by 2014 but they will be so cheap they will once again represent excellent long-term value as they did in 1921, 1932, 1949 and 1982. Should the world lose faith in U.S. Treasuries sooner and suddenly then U.S. equities would decline the projected 50% very quickly thereafter.
Foreign central banks' faith in Treasuries can be monitored by checking the value of marketable securities held in custody for foreign official and international accounts at www.federalreserve.gov/releases/h41/Current/. Any marked decline would be a warning to investors in U.S. securities that the end game was in progress.
If you still need to be convinced that extremely difficult times are ahead and that action must be taken please refer to www.kiplinger.com/features/archives/2008/12/they_were_right_08.html for an article entitled “They Called it Right (Plus Predictions for 2009)”. This article reviews the correct predictions of 8 noted investors, analysts and academics for the year 2008 and their outlook for 2009. The individuals are: Nouriel Roubini, Peter Schiff, Meredith Whitney, David Tice, Jeremy Grantham, Robert Shiller, Bob Rodriguez/Tom Atteberry and Mark Kiesel.
In summary, we are being forewarned yet again about yet another economic and financial crisis coming down the pike. This time don't get burned as you most likely did during the Credit Crisis and Crash of '08. Instead, position what is left of your portfolio such that you will actually prosper during this ongoing financial hurricane. Now that you know what is about to happen, take action, now! To just hope that everything will turn out okay would be downright foolish.
About the Author:
Lorimer Wilson is an economic/financial analyst and commentator and Contributing Editor to
www.preciousmetalswarrants.com who has written numerous articles on the major economic and financial crises (past, present and impending) of our times plus articles on precious and rare earth metals, investing in times of crisis, analyses of gold mining indices and gold:gold mining index ratios and market timing indicators. He can be contacted at lorimer[dot]wilson[at]live[dot]com.