Now I Am Getting Scared

This is the 100th post for my blog and, well, some interesting stuff to note. Overall, somewhat of a slow news day, but there were a few gems I stumbled across well worth consideration. If you look back to my predicitions for 2009, some fit that mold quite nicely. Yes, I realize we still have over 50 weeks to go and anything can happen, but it is my 100th post, so let me feel smug just for one day.

Prediction 7, Political Instability

One of the major concerns I noted in tough financial times is political instability. This takes numerous forms. First, certain countries were not too strong to begin with and can be the subject of military or revolutionary overthrow. A lot of these countries, such as some in Africa, were heavily reliant on commodities to support them financially. With most commodities seeing the bottom fall out, instability is on the increase drastically.

Second, some countries, like Russia, were able to build relatively large reserves and can - at least for now - take advantage of the crisis to nationalize some institutions they would like to nationalize and control. Moreover, they can use their remaining military might to perhaps invade and acquire weakened neighboring assets. Expect Russia to begin testing the waters even more as oil is at a price where it is not profitable for Russia.

Third, some countries like Pakistan pose a regional or larger nuclear threat as they become increasingly financially unstable. The IMF is aiding Pakistan, but with inflation over 20% they have many challenges ahead. God forbid their strife leads to nuclear arms getting into the wrong hands.

Fourth, some countries like China are going to face increasing social instability and pressure to no longer support their trading partners, i.e. the U.S., which will have its own effects here. And increasingly, emerging economies just starting to learn the advantages of capitalism, are now learning its disadvantages and may revert to other models. At a minimum, many poor countries will blame the U.S. for their woes, perhaps correctly in part, and the U.S. will have many years of work to restore whatever good reputation it had. Expect a lot more anti-U.S. sentiment in years to come. Oh how far we have come since we had the whole world behind us after 9/11.

The simple truth is that when people are hungry or cold or desperate, they start to believe anyone promising hope and better times. Radicals gain traction and ideas that would be repugnant to morality in normal times suddenly seem more sane. It was no mystery that Hitler gained prominence in a desperate economy.

And you thought this was just an economic mess.

http://www.bloomberg.com/apps/news?pid=20601109&sid=ai1qca78_ezs&refer=home

Prediction 3: Stocks Lower YoY By Year-End 2009

The market being down substantially at the end of 2008 may lead folks to believe it cannot go much lower. They may be right or they may be wrong. In historical terms, however, it is worth noting that in inflation adjusted terms the S&P is still at its highest ever, excluding the recent past since 1995. For comparison, the value of the S&P versus U.S. GDP in 1974, a very low point, was 31% of GDP. Now it is still 100%.

The point being that while we could have a nice rally, stocks are not that cheap today compared to lows of the past. And with all the other problems we face at the moment, how incredible is it to believe that we actually do revert to something matching the lows by historical standards. That could well be another 40-50% down from here. That is lower than I predicted, but any prediction is just a guess, educated or not.

I will point out that the S&P is already down over 3% this year. I expect a bounce for the Obama inauguration and thereafter for a week or so, but that will run against a very strong headwind of truly awful earnings results, so I do not think it will last long. Again, just a guess.

http://www.nakedcapitalism.com/2009/01/some-cautionary-observations-from-marc.html

Prediction 4: Increasing Bankruptcies

This one was a gimme. More bankruptcies were inevitable. Still, no one says your predictions have to be unpredictable. The WSJ thinks a lot more is on the way, and there was at least another jewelry store going under today. Not to mention that covenant-lite lending is causing the payout on bonds and loans, when bankruptcy occurs, to be just pennies on the dollar. Oh well, the big wheel just keeps on rolling.

http://online.wsj.com/article/SB123171955382272193.html

http://www.nakedcapitalism.com/2009/01/bond-recovery-in-bankruptcies-likely-to.html

http://www.calculatedriskblog.com/2009/01/retail-bankruptcy-shane-jewelry.html

And some auto dealerships could easily be high on the list of bankruptcies.

http://globaleconomicanalysis.blogspot.com/2009/01/gm-expects-to-lose-500-us-dealerships.html

Longest Recession for the U.S., EVER!?

I did not put this in my 2009 predictions as it would not come true in 2009 and, in any event, I still believe it is more likely wrong than right. But here we have a definitional problem. I think fiscal stimulus spending will technically bring us out of a recession for a quarter or two, but then we will plunge into the darkness again for several years. So by pure definition, this is hard to call. Certainly it will be the worst and longest since the Great Depression, but will it be longer? Perhaps, but by a slim margin. Just a guess!

http://www.financialarmageddon.com/2009/01/more-than-just-average.html


Enough doom and gloom for one night. I may have nightmares.