Monday, March 29, 2010

Predictions 2009: more Good, Bad, and Ugly

Today is the second anniversary of the Ca$h Bull. Having made good headway this year with demonstrating the plausibility of the cash-inventory equivalency, I think this blog will be able to enjoy a tighter focus going into the future. I plan to have fewer, but longer posts, that will go into more depth onto the state of the economy once theory posts wrap up.

Out of curiosity—and not that I'm expecting a dime from this, but just to see what it is like—for this year I plan to start hosting ads. I'll report on my experiences with it next year.

I've been more leery about making predictions lately since we currently operate in a bailout economy. Bailouts drive the economy today. Wherever you find optimism and success nowadays that is usually because of government intervention. The rest of the economy is struggling if not crashing. Take away all bailout efforts including a zero-interest rate policy and I anticipate a major crash. So predictions now are nothing more than second-guessing what policy decisions will be made by Washington, rather than successfully understanding a complex system.

So, this time, I'll review predictions made over calendar year 2009 (instead of the last 12 months), repeating some before March of last year, and skipping some from the beginning of this year. This is because it is hard to comment on predictions made two months ago. Even forecasting the demise of the health bill (which I took back in a comment a week later) which would be a disastrous prediction since it recently passed—not all is said and done yet and the perspective of a year will offer a clearer view.

I'd like to revisit one prediction, from 2008:

9/11/08: "The federal government will buy troubled mortgages from banks, I imagine at near face value, floating Treasury Bonds as needed to pay for them—such that the Treasury Department holds the mortgage stinkers, bought for with bonds that will be paid off by the taxpayer over time. Banks now have the opportunity to become re-capitalized from recent losses and dump toxic mortgage securities all at once." This was on my list of predictions from last year (3/29/09) that I filed under "ugly," since last year they were doing everything BUT that. The more time passes, the more accurately it describes the situation.

Okay, without any further adieu, here on the predictions from 2009—the good, the bad, and the ugly:

The Good:

1/26/09: “future indicators show no end to budget cuts and profit downgrades.” Comment: budget cuts big time. Profit downgrades—well since banks factor bailout money and mark-to-model accounting into profits, what can you do?

1/28/09: “Expect quantitative easing soon.” And we got it.

2/10/09: About Geithner and acquiring toxic assets from banks: “The fact he is calling for the use of private capital in all of this, for this ‘bad bank,’ which obviously isn't going to happen unless it is fully guaranteed, strikes me as almost a delay tactic.” Comment: That seems like ages ago. Anyway, the whole public-private investment program has fallen by the wayside. This "bad bank" now is just the Fed and the GSEs. I can't see any private capital of significance involved in the toxic asset bailouts.

3/21/09: Regarding the establishment of some new global currency at the G20 meeting: "Anyways, from what I've been reading it does not sound like these talks have progressed very far, and unlikely will by meetings end." Cha-ching!

6/15/09: Regarding coercive tactics to get banks to modify mortgages: "Where the mortgage markets are already starting to freeze, despite the Fed's efforts at quantitative easing to keep money flowing, a move like this can't make banks more likely to originate loans." Comment: I don't have any precise data, but news and hearsay suggests they haven't been. I'll add that any benefits of quantitative easing on the general economy seem unimpressive.

6/26/09: "It's been a tepid rebound we've had since March. If it were in line with past dead cat bounces, eyeballing the DJIA over the decades, such a faux-recovery spike could have easily reached 10,000 and maybe even 12,000 before the true decline to fundamentals began." Comment: of the various general mis-statements made by me this year on the stock rebound, it is this statement I prefer to remember.

8/12/09: "In the current environment of tightening credit, we have 90% of the money supply that could potentially contract quite a bit, and if credit falls more than 15%, such would wash out any total monetary expansion from quantitative easing." Again, no exact numbers, but this seems about right. The $1.8T quantitative easing plan may have been successful at holding off economic disaster, but I would not describe our present economy as "stimulated."

12/11/09: While my post "Even Steven" does not give any predictions what direction the dollar would take, it falls almost perfectly on the date the USDX turned around and started heading north again. Even though the USDX wasn't quite at the all time lows of March '08, I wrote the post "Even Steven" on that day figuring I might not have much more chance to comment on the lows of the dollar. I guess you'll just have to take my word on that.

The Bad:

3/21/09: "With talk of a new world order, gold has been doing okay. The dollar I anticipate will recover after the meeting closes." I'm tempted to leave this one out because it offers no time frame. The USDX did take a significant hit in early March, then recovered some in April before beginning a prolonged decline that lasted until November.

4/12/09: "But I'm guessing we are closer to economic stabilization by a return to fundamentals than we are to the speculative peak of the bubble." This was about a month into a Bear Run that lasted until November. While neither correct nor incorrect, I'll use this line to represent a handful of statements that failed to sufficiently incorporate the impact of bailout efforts.

5/7/09: Regarding the "Stress Test" of banks back in May: "I'm going to hazard a guess now that the economic contraction will exceed their worst case scenario, and another stress test will be needed before all is said and done." The Stress Test was nothing but accounting silliness that has already fallen into obscurity. My only regret is reporting on it at all. The Stress Test will not be performed again. The banks will simply be bailed out. The Stress Test is irrelevant anyway because even in this bailed out economy the numbers have exceeded the Feds worst case scenario, and no one wants to draw attention to that.

6/21/09: "My money remains in dollars, but at this point diversifying into gold and some competitively priced stocks would be a more sensible strategy than when this blog first began. Were I a more savy investor I would have jumped from dollars into stocks in March, but had I done that now I would be going back to cash." The DJIA was around 8500 at this point. It would still be months before the DJIA would plateau. It just goes to show: pay no heed to me when it comes to investment advice.

8/17/09: To summarize my post "Squeezing the Shorts": as long as there remains a strong market for short sales, there remains a strong market for stocks, and prices can stay high. I now believe the current stock market is driven by fundamentals, not by aggressively shorting the market—since competing investments are so poor nowadays, stock dividends don't have to be particularly high to sell well.

12/16/09: "Personally, I see no economic fundamental driving the recovery other than an easy money policy directed at Wall Street and Corporate America." I guess age has made me less cynical, even though that statement was made a scant 3 months ago. As stated above, I now feel stock P/E ratios of stocks are in line with other investments. Absolute numbers might have risen, but stock yields have been deflationary.

12/28/09: "Today, the Fed announced hopes of crafting a policy which would drain banks of their reserves." Now, this isn't a prediction, not mine anyway, but reserves sharply increased right after this statement was made. I don't know why I blog on anything the Fed says, other than as a contrarian indicator.

The Ugly:

3/10/09: “Get dollars now and sell your stock while you still can.” Definitely the wrong sentiment at the beginning of a long bear run. I called it as ugly last year in the same month the prediction was made, so you have only three weeks worth of malinvestments you can blame on me. Still, since the inception of this blog, if you accepted one and only one investment strategy, you would be better off holding onto cash than stocks, and I think gold is the only major investment category that would have beaten cash.

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