ECONOMIC OUTLOOK FOR 2009
The U.S. and most major economies will remain in recession in 2009. If we are lucky, we will see an economic recovery starting in early 2010. If we are unlucky and the banking system does not create more liquidity, we will not see an economic recovery until mid 2010…or later. When the recovery arrives, it will probably be anemic and create little economic growth. The big problem for the developed economies is that they are becoming more structurally inefficient. We are not aware of any instances in the U.S. or Europe where government ownership of companies and industries has ever produced increases in productivity and efficiency. It is not difficult to speculate that the current experiment will reduce productivity and efficiency.
Some of our predictions for the next few years:
1. Income taxes, use taxes, and fees of all types will rise.
2. Populist economic programs will be implemented. These are well known to lead to slower long term growth in the developed world.
3. The gap between growth in the developed world and the developing world; China, India, and Brazil will expand. The developed world will be less free market oriented, and more constrained by the after effects of the big bailouts. We expect that developed world economic growth could remain at very low rates for years. The well managed parts of the developing world will continue to grow more rapidly (Eastern Europe, and parts of Latin America are not included in the well managed group).
4. The need for U.S. and other major countries to finance their bail out programs will lead to massive issuance of government bonds, forcing the U.S. dollar down.
5. Most everyone is talking about deflation now, but inflation will be the big problem in a few years.
6. We expect U.S. Treasury bonds, which are currently popular with investors seeking safety and liquidity, will prove to have been a very poor investment. We expect those who bought longer term bonds with low yields to be hurt when the bubble in Treasury bonds pops.
We are happy to say that many of our views are the opposite of the consensus, and that very few agree with us. We are most comfortable when very few agree with our views. For example, when we predicted in print years ago the bond and derivative problems would unwind poorly, very few agreed with our view.
BEWARE OF ‘BUY AMERICA’ PROGRAMS AND OTHER ANTI FREE TRADE STUPIDITY
Does anyone have a history book? Does anyone remember Smoot-Hawley? Does anyone realize that tariffs and other non free trade mechanisms made the Great Depression much worse than it would have been otherwise? Do we wish for the world economy to survive and return to health?
If the answer to the above questions is yes, then we should dispense with this anti-free trade political talk immediately. If the answer to the above is no, then may I propose that the politicians who are proposing non-free trade agendas have an economic death wish. They are willing to let the U.S. economy die long term in order to garner votes from the ignorant in the short term.
HOW TO INVEST IN 2009
In our opinion, one should:
A. Buy things that benefit from a declining dollar as the big bond flotations will force the U.S. dollar down. Some examples: Foreign currency denominated bonds, gold shares, and grain commodities.
B. Buy other assets especially stocks, government guaranteed bonds, and income stocks when they get cheap.
2009 will provide discount prices for good assets in many parts of the world, it will not be easy. We must avoid fear and resort to rationality. When things get cheap enough, we will buy them. By the way, from the market bottom in 1932 the Dow Jones Industrial Average rose about 450 % over the next 4+ years. Most would agree 450% is a good return. While we do not see that kind of opportunity right now, we may see some very good opportunities develop in coming months.
Thanks for listening
Monty Guild and Tony Danaher