Monday, December 22, 2008

Economic Tsunami of 2009

Before you ask" "why should I give any credence to this article?" Please take a couple of minutes to read my 2008 assessment - written in Dec 07: Ushering a new Economic Era.

Though I hope that I'm wrong in my bleak 2009 outlook below, these are my expectations as I see things today. Ultimately, the data (12 months from now) should tell us whether or not I was close.


Economic Tsunami of 2009

The US is still in the early stages of a growing global economic crisis, combined with a tectonic monetary transformation, yet many Americans are merely in a daze and struck with surreal disbelief - like a group of tourists wandering the beach in Phuket, Thailand after the waters receded... This awe inspiring event has never been seen before and most are oblivious to the fact that this is just the breathtaking precursor to a disastrous outcome, so the ignorant masses stay put - trying to grasp the unreal - incognizant of the devastating consequences of their inaction...


The waters started receding in 2008 and as the year comes to a close, the tide is now fully pulled out to sea... 2009 however will likely cause mother nature to reverse these forces quickly, and the first wave of this massive economic tsunami, building on the horizon for over a year now, will finally come crashing ashore with quite destructive results.




My personal 2009 expectations:

- US Job Market to get much worse and will be the "hot topic" discussed in the mainstream media; The BLS officially published and severely understated U-3 unemployment rate will easily cross the 10% threshold in 2009. (link to the real US unemployment picture)

- Housing market will continue to crater while prices fall unabated - due to increasing unemployment, resetting ARMs, inability to refinance, and more people (who CAN afford their mortgage) merely "walking away" - out of disgust/exasperation that banks refuse to work with them (the responsible borrowers/homeowners) while they continue to reward the irresponsible. Home sales however, may likely start to pick up, as those who 1) have a job and 2) can qualify, take advantage of lower mortgage rates and homes become more affordable - but the number of new buyers will significantly lag behind the pervasive increase in foreclosure rates, so home inventories will continue to build while prices fall.

- Bailouts Galore; we're already $8.6 Trillion into this bailout mess (link to 2008 bailout figure)), so what's several more trillion in unpayable (aside from inflation erosion) taxayer dollars? I anticipate we will see bailouts for California, Michigan and others; more money for AIG, the Bond market, Infrastructure improvements, additional stimulus checks for the masses, etc. link to the money hole

- DOW to test the 6,000 range; though we will see a few nice bear-market rallies before and after, the 6,000 range will likely be tested - but don't think this will be the "ultimate low", as that should come later. link to DOW, where's the floor?

- US Dollar to fall to lowest levels in history; with all the new bailouts and increasing debt levels of the US Gvt, the dollar will lose its prestige as a global monetary safe haven and will ultimately test the 65 level (and possibly lower) on the US Dollar Index - sparking a new round of consumer inflation for the masses. The US dollar won't lose its reserve currency status in 2009, but it will in due time. link to Dollar: faltering foundation of US economic strength

- Treasury bubble pops - a flight to safety ensued in late 2008 and Treasuries were the vehicle used. High demand caused rates to fall while face values rose. When the Treasury bubble bursts in 2009, traders will be crushed as rates rise and face values fall. As this happens, the buying price of the bond drops and thus, traders will have to sell currently owned bonds for less than what was paid.

- Derivatives unwind; over a quadrillion (a thousand trillion) dollars in derivatives existed at the height of this economic bubble - part of the reason for our "slowed and controlled" economic implosion. Our monetary masters (AKA: The Plunge Protection Team - PPT) have thrown everything - including the kitchen sink, at our banks, markets and economy - to prevent a massive unwind of this monsterous derivatives complex. From what I understand, much of the froth in these notional derivatives have already expired/bled off, yet we are still stuck with about $700 Trillion outstanding. If the PPT can keep our house of cards afloat for another 18-24 months, these too will expire and the biggest threat to our global economy will have blown over, but I think we're going to see some fireworks first. If AIG, Fannie/Freddie, GM, Citigroup or a big someone else implodes, they will likely set of a chain of cascading counterparty derivative dominoes - insurance bets that can't be paid, but that which are needed to pay off other counterparties, who in-turn, can no longer pay off others, etc.

- Complete US Banking System Nationalization and/or Banking System "Holiday" (shutdown); hundreds of new bank failures will likely lead to public panic, banking runs and gvt imposed withdrawl limits; which will ultimately lead to nationalization and/or a banking system holiday. If a holiday IS imposed, ATM machines, banks and electronic commerce will be shut down across the nation (as the government tries to figure out what to do). People will grow anxious as their credit/debit cards don't work and they're unable to buy food, gas - anything. It may be wise to keep some cash under the matress (just in case). link to banking system shutdown?

- Gold crosses through $1,200 on it's way to meet its 2010 or 2011, one-to-one ratio with the DOW.

- US Economic Depression is declared; it took a year of looking at backwards data for the "experts" to finally declare that we've been in a recession the whole time - a year now! If we experience just four more months of the same, it will be an economic downturn and predicament not seen since The Great Depression. Well folks, the ingredients are already baked into the cake...

Closing:

Ultimately, 2009 will be quite bad as that first tsunami wave crashes ashore, but it's only the first of many and once the waves end, we've still got flooding, carnage, destruction and cleanup to deal with. Let's just hope that these events don't lead to a complete breakdown in society. link to Social Implications of a Significant Economic Downturn

Best Regards

Randy

25 Comments:

At 12/22/2008 11:10 PM, Anonymous Anonymous said...

Great analysis and look forward to seeing more forecasts/analysis from this site in the near future.

I have some comments on the and inputs:
1. US job statistics
I think the real jobless rate will easily pass the 10% announced. As the statistics is based on number of people looking for jobs during last 6 months, the number of people who are still after the first 6 months are still looking for job falls out of the system. Therefore as the effect of the crisis is now getting longer than 6 months, this will not be shown in the statistics. Besides that the unemployment rate during a servere recession/depression follows an exponential pattern rathter than a linear, therefore I think we will see a sharp increase of that rate.

2. Housing market will plummet as the number of foreclosures will increse dramatically. If the government does not intervene with "yet another bail-out" people will have difficulty to refinance their mortgages and therefore the increse in foreclosures. Besides that as the real-estate is no longer seen as a "cash caw" people will not rush out to buy extra homes as investments (which was the trend lately). This basically means the supply will well surpass the demand and the negative price spiral will take a dive.

3. The bail-out party will continue even with the new administration in the White House.

4.I think the DOW will easily touch the 6000 line. If you look at the index of certain other countries around the world, which by the way are in much better shape than US, the DOW is surprisingly 10-15% above the level it should be at right now. Part of the reason is that many foreign investors believed the US market was the "safe heaven", so they chose to invest in it during the early phases of the crisis. I think this will change during the next year and it will pressure the DOW down.

5. The US dollar will be the real issue here. I think as the bail-out party will continue and as the number of dollar bills will increase infinitely the real value (against gold) of each of those dollar bills will decrease (start the journey to zero). The USDX is actually a good measure for that. Some of the currencies in that basket has followed the US dollar on its value loss journey against the Euro during the last few weeks. This is an indicator that anything tied to the US dollar (as the case here with some of the currencies in the USDX basket) will be under heavy pressure. Besides that the Chinese and the Arabs will soon stop investing heavily in the US T-bonds and go instead for real assets, this will also put pressure on the dollar beyond imagination. So I think if nothing extra ordinary happens, the US dollar will lose a great portion of its value during the coming year.

6. You are absolutely right on the treasury bubble!

7. I am happy to see someone is touching the derivatives market. Your estimate sounds realistic, however I think no one really today can calcualte the real loss of the 1.4 quadrillion dollar market. You are right about the nominal value being less than the figure mentioned above, however it is hard to calculate the effect of this "expiration" in today's market. The reason to that is very simple as there is a "transformation mechanism" of these "virtual instruments" into the real economy as "assets". As there is minimum SEC regulation (real supervising, not only nice policies on paper), many firms have repackaged these highly risky virtual instruments and sold them as real assets. So it might be very much the case that lots of these instruments actually end up on the "assets" column of the balance sheet of some companies without their own knowledge. Many of the so called "Ponzi" schemes which have been (and will be) exposed follow this pattern.
I think the derivative market which is a card house will fall apart and it is the most significant issue we should watch during the coming years. Remember the entire modern economy, especially after the DotCom crash is based on this structure of false wealth creation, if that falls apart, what will replace it?

8. I have some difficulty to see the US nationalizing the entire banking system in 2009, but that is an intereting point you have raised.

9. Completely agree with you on the price of gold.

10. The reason depression has not publicly been declared is to avoid the mass panic it would create. US is indeed in a severe recession which is diving into a depression.

Closing:
As all of the above starts happening you will see some trends:

A. Social unrest
B. The escape of the super rich abroad together with a big portion of their wealth,,,this has already started, you just need to check the nr of new arrivals in Switzerland from the US during the last year...
C.The escape of some failed figures in the US financial market abroad (like Madoff). These people have already realized they are going to fail, so they have hidden the money in the secret bank accounts abroad in the names of relatives and friends. Some of them will try to escape to countries which have no extradiction with the US, like Dubai in the UAE. Hmmmm,, Dick Cheney is already there together with Halliburton...so he has certainly arranged for the arrivals of some good friends

As the above happens the US goverment might take tough measures to stop the outflow of the capital from the country, this might include regulation on the amount of money being sent abroad or the request for seeing secret Swiss accounts held by US citizens.

That was all for 2009. Enjoy!
by SERR GRANDI

 
At 12/22/2008 11:41 PM, Anonymous Anonymous said...

The US dollar will benefit from the deflationary depression we are now in.

Moneyandmarkets.com
AlMartinraw.com

These two sites have articles about the dollar's current and future strength. I do agree with most of the other points in this article.

Keep up the good work.

 
At 12/23/2008 11:16 AM, Blogger Steven said...

Randy: Thanks for all of the great commentary throughout the year. Congratulations on getting posted on SafeHaven.

In this article you are dead on. Thanks for putting it in a form that will help many to understand.

Steve,
Reno NV

 
At 12/23/2008 5:35 PM, Anonymous jerry said...

Randy, you forgot to discuss the collapse of the commercial real estate market and currently, they are asking for a bail-out, too. That collapse will bring the stock market down. Just as you have seen on the Vegas strip, projects coming to a halt. We will see buildings emptying out of commercial renters, and communities not seeing a dime of the tax abatements they granted these developers. Airports will begin to shrink, too. There will be empty shopping malls. Downtown stores will blight many downtowns around the country. Empty auto dealership buildings.

China has already said publicly that they will be stopping the purchase of US Treasuries. That is over for us. I read that 10,000 factories have already shut down in China. That was just one piece I read. It has not been substantiated, thus far.

 
At 12/23/2008 5:41 PM, Anonymous jerry said...

"An export slowdown amidst the global financial crisis has contributed to the shutdown of at least 67,000 factories across China in the first half of 2008. The social problems arising from the slowdown have stirred anxiety in China's government, which has unveiled a $586 billion stimulus package to help create jobs, mostly by building transportation infrastructure.

Due to the mass layoffs, many migrant workers are heading home early for the Chinese New Year, in late January. Many of the 7,000 workers who lost their jobs when a Hong Kong-owned toy factory called Smart Union shut down last month have returned home. Many such factories were run by Taiwanese or Hong Kong managers who fled the mainland.

- Looking back in history, the sudden closure of the Smart Union toy factory leading to 7000 job losses, together with the plunge in global stock markets in the Oct 2008 period, would probably mark the point at which the global economic collapse started, kicking off the Second Great Depression."

67k in just the first quarter. It is hard to find real accurate and up-to-date figures.

I meant to say that there are 100,000 factories already shut down. Not 10,000. My typo.

 
At 12/23/2008 6:22 PM, Anonymous Nick said...

How many of you guys have heard of Lyndon LaRouche? The only person (to my knowledge) that forecast this 10years ago of a hyperiflationary depression. And he's not even an economist!!!!

 
At 12/23/2008 7:22 PM, Anonymous Anonymous said...

In addition to everything mentioned here, there is also going to be a downside.

Angel of Death

 
At 12/23/2008 8:08 PM, Blogger Randy said...

Just returned home from work. Appreciate the feedback from everyone.

SERR GRANDI,

Wow, what can I say? Really appreciate the time you took to analyze my post and reply to each point... Again, lets hope the Social unrest part is averted.


Anon 11:41, I'm familiar with Martin Weiss, Ph.D. and think he's an extremely bright man and I agree with many of his points, but just like I agreed with many of Peter Schiff's points (who I highly admire), yet disagreed with his "world decoupling" philosophy, I similarly disagee w/Martin's take on the dollar, yet highly respect the man.


Steve,

My pleasure and thanks for your compliment. Note: This is not my first for Safehaven - they have quite a few of my older articles archived. Just click on my name in blue hyperlink when reading this post there (Randy) and it will take you to the archived list.


Jerry,

BINGO! Damn - I knew I would forget something - Commercial Real estate. That's why I really enjoy having you around - someone needs to keep me straight!

Holy Crap! 100,000 closed factories in China? This is big folks...

Nick, I've read many of his works and you are 100% correct. Lyndon LaRouche, another very bright individual who I hold in high regard.


Angel of death - you're killing me!
:>)

My best regards to all - and again, thanks for taking the time to comment here

Randy

 
At 12/23/2008 9:03 PM, Anonymous G Money said...

The scary thing is... I think you are right on the money with your predictions including the commercial real estate market crashing...

There has been this calm in the stock market lately, which I can only explain as the "calm before the storm!" I think the sh*t is about to hit the fan very soon.

Randy, are you protecting yourself with investments? Such as short ETF's?
SRS & SKF seem to be bargains at the prices that they are now. They have dropped significantly since the November highs. I feel with all the gloom & doom coming, they will reach those highs again. What do you think?

 
At 12/23/2008 9:53 PM, Anonymous Anonymous said...

Randy,

You lost me there in the Derivatives decline from 1,000 Trillion to 770 Billion. Don't you mean 700 Trillion???

Interesting read otherwise

Tealeaf

 
At 12/24/2008 8:03 AM, Anonymous jerry said...

The world's entire derivative bubble inflated $1000 trillion.

The worth of the global derivative market as stated by bawdencapital.com (Denise McCosh) is $700 trillion.

One source stated the value of derivatives, as of a year ago was $548 trillion.

Now, as of May 2008, Bloomberg News, Abigail Moses wrote that the BIS stated the derivative market expanded to $596 trillion, or 44% above a year ago.

Wikipedia 12-08 entry stated that the worldwide derivative value is now at $62 trillion.

I am going with the WIkipedia entry as the most current figure.

I wish you all out there in Randy's cyber world, as well as Randy, a merry Christmas and happy new year. I hope you all can make it unscathed through this coming firestorm. Let us hope that the "firefighters" out there can drench the flames.

 
At 12/24/2008 8:21 AM, Blogger Randy said...

Tealeaf - Good eye & catch! You are correct and I have fixed the error.

G-Money,

I have a Scott-Trade account that I dabble around with, but nothing of weight and I've not been too successful with it. I'm away from my computer for much of each day (while working), so daytrading is not my forte.

Much of my portfolio revolves around PHYSICAL METALS (was buying gold at $400 and silver at $6 a few yrs ago), Inverse currency funds and Treasuries (very limited options through my work 401K and 5% match - I know, but the match and tax break make it worthwhile).

With that said, I would agree. Based on our gloomy outlook, SRS and SRK look to be bargains right now. 1yr chart at link below, but I'm really too conservative and unfamiliar with their application to employ.

SRS-Ultrashort Real Estate ProShares

SKF-UltraShort Financials ProShares

I'll close this reply with a new article from Seeking Alpha posted just today: Seeking Alpha Today: Why You Need to Be Careful With Leveraged ETFs

Randy

 
At 12/24/2008 8:47 AM, Blogger Randy said...

According to the latest BIS Data (8 Dec), Notional amounts of all types of OTC contracts stood at $863.0 trillion at the end of June 08 - No available data could be located -showing what they stand at today.

BIS Quarterly Review, December 2008

Trading on the international derivatives exchanges retreated in the third quarter of 2008 . Total turnover based on notional amounts decreased to $542 trillion from $600 trillion in the second quarter. Most of the contraction took place in derivatives on short-term interest rates. Turnover declined slightly in derivatives on long-term interest rates. By contrast, it increased in derivatives on stock indices and foreign exchange. Turnover in derivatives on commodities, measured only in terms of the numbers of contracts, dropped although year-on-year growth remained quite high at 37%.

In the global over-the-counter (OTC) derivatives markets, notional amounts outstanding continued to expand in the first half of 2008 . Notional amounts of all types of OTC contracts stood at $863.0 trillion at the end of June, 21% higher than six months before. By volume, credit default swap (CDS) contracts registered their first ever decline (-1%), compared with an average six-month growth rate for outstanding CDS contracts over the last three years of 45%. The fall was due largely to a significantly higher number of multilateral terminations of CDS contracts, as a result of the financial turbulence. Meanwhile, markets for interest rate and FX derivatives, as well as equity and commodity derivatives, recorded significant growth.

Borrowing in the international debt securities market lessened sharply in the third quarter of 2008 amid the continued turmoil in financial markets. Net issuance of bonds and notes decreased to $247 billion, down substantially from $1,086 billion in the second quarter. The decline was well in excess of normal seasonal patterns, and resulted in the lowest level of net issuance since the third quarter of 2005. Money market borrowing also stagnated, with net issuance falling into negative territory in the third quarter. By currency of denomination, the largest decrease in bond and note issuance came from the euro-denominated segment, followed by the dollar-denominated segment, while the breakdown by nationality of issuers indicates that the largest contraction in net issuance came from US borrowers, down from $308 billion in the second quarter to $46 billion in the third quarter.

Outstanding claims in the international banking market diminished sharply during the second quarter of 2008 . BIS reporting banks' international claims fell by an unprecedented $1.1 trillion, with sizeable declines recorded across claims in most currencies of denomination. While a significant decrease in interbank claims (-$812 billion) accounted for most of that decline, international claims on non-banks also fell for the first time since 1998, mainly vis-à-vis the United States, the United Kingdom and Japan. At the same time, residents of emerging markets and many central banks around the world reduced their placements of funds with BIS reporting banks.

 
At 12/24/2008 9:43 PM, Anonymous Anonymous said...

Regarding inverse ETFs SRS and SKF....I dumped both and now own inverse ETFs
DEE and a lesser stake in BOM. Both DEE and BOM have greatly outperformed both SKF and SRS. DEE and BOM bet on deflation, falling commodity and base metal prices.
A very recent interview with super-successful trader Al Martin is on at erskineonradio.com.

 
At 12/25/2008 1:19 PM, Anonymous Anonymous said...

Interesting reading, wish I new that a year ago :(

What do you think about the oil price in 2009?

Today, it is ridicules low, and I do not believe it can be kept that low.

Crude oil to US$70 a barrel is more realistic, but it depends of the US Dollar. If the US Dollar goes lower, what I do expect, then the price of crude oil will go higher too. However, the US Dollar can go up, if USA enters a depression.


I wish you all the best,
Peter, Denmark - Europe

 
At 12/26/2008 10:27 AM, Blogger Hysteria said...

Randy,

Excellent summary on your views for the coming year. I am pretty much right with you on it all.

The one thing I differ with you on is the nominal price of the stock market. In a hyperinflationary environment (not saying we will experience the hyperinflation yet, but with the money supply continuing to grow exponentially) it is possible for stocks to be used as something of an inflation hedge. In nominal terms, Zimbabwe has the best-performing stock market in the world for years running.

In real terms, of course I agree with you that the majority of US businesses, as represented by their stocks, will have lower real earnings and decline in real value. John Williams, for example, in his Hyperinflation Special Report (http://www.shadowstats.com/article/292), makes the case that stocks will decline 90% from peak to trough in real value in the coming years. Yet he proposes that this could just as well happen with the DOW at 1,000 or the DOW at 100,000.

I suppose it all depends on just how quickly people lose confidence in the currency.

Anyway, I am not proposing trading, but have you ever thought of adding some upside potential to your investments by owning a basket of unhedged gold and silver producers? As they have been pummeled in the last few months along with the overall stock market, the risk to reward ratio in my opinion, for companies with proven metal in the ground, is quite low.

Best wishes for a prosperous 2009,
Chris

 
At 12/26/2008 12:17 PM, Anonymous jerry said...

Randy, I think your 700 billion figure was correct. As I have discovered from search sites, that the current worldwide value of all derivatives is under $100 billion due to write offs and other deflationary factors.

 
At 12/26/2008 12:22 PM, Anonymous jerry said...

Another error of mine----worldwide derivatives have declined to $62 trillion, not billion as I had posted. Sorry.

 
At 12/26/2008 12:38 PM, Anonymous jerry said...

To Peter, I watched a video on the Charlie Rose show where he interviewed an expert in oil, and he stated that he thought oil prices would likely settle around $70-76 per barrel. That would be around 75% higher than they are today.

Regarding the stock market--I surely am no expert. I consider myself a novice by all accounts, but I do believe small manufacturing companies which are making small profits and exporting essential items around the world, will likely be good investments.

My guess, companies with high skill laborers, such as machine fabricators, makers of solar panels, and oil extracting machines, technically advanced rail system companies, etc. maybe good investments.

Here I am making suggestions when I have totally left the market except for some shares in Comcast.
It is my assumption that even if people find their incomes evaporating, they won't give up their cable. For me, I gave up TV 25 years ago! But I am an oddball.

 
At 12/27/2008 11:52 PM, Blogger jupiter family said...

Happy New Year!
2009 Fireworks Show

http://fireworks2009.blogspot.com/
http://vitas-vitas.blogspot.com/

 
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At 3/05/2009 9:39 PM, Blogger HegdeS said...

Randy,

Very nice of you. Many many thanks for this blog...Wish you all the best...

 
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At 11/23/2011 10:26 AM, Anonymous Moris said...

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