2009 Year in Review and 2010 Predictions By: David Overfield January 2010 2009 Review Before I share with you my 2010 predictions, we should first take a look back at the prior year’s predictions and the actual results. The main thing I keep in mind is humility. It is extremely difficul t to predict the future in regard to specific targets and t ime ranges. Instead it is much easier to make general predictions based upon the fundamentals. This reminds of one of Warren Buffett’s well known quotes, “In the short term the market is a popularity contest; in the long term it is a weighing machine." What Happened in 2009? Stock market bottom and recovery o Intraday low on the S&P of 6 66 in March and year finish at 1115. Real estate prices fall but show some stabilization o Residential prices plummeted but leveled off in most mar kets. Some price appreciation at the very low end in growth markets like Phoenix and San Diego. o Commercial real estate price continued to fall because rents and occupancy are down and loans are difficult to qualify for. Unemployment rose above 10% (from just 4% in only 2 years). o Any decrease in unemployment is due a reduction in the workforce participation rate, not new people actually getting jobs. Credit crunch still in place but has loosened some. o The main question is what will happen when the Federal government stops all support of the credit markets (Fannie & Freddie, FHA, commercial paper, FDIC), and many other programs to buy debt. The Federal government has a trillion dollar budget deficient and of course over 10 trillion dollar debt. State governments have deficits and debts and the problem got worse. TBTF – Too Big To Fail - became mainstream language "Privatize the profits and socialize the losses" became apparent to the public Failure to pass sweeping national health care reform DavidOverfield.com Page | 1
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2009 Year in Review and 2010 PredictionsBy: David Overfield
January 2010
(Chart from Calculated Risk Blog)
Last year I predicted that home prices would take 10 years to recover and I still hold that
perspective. I also predicted 20 years to recover for place like Bakersfield (CA), etc. It may takemore than 20 years for those inland markets (in California) like Fresno, Bakersfield, maybe even
Sacramento.
It does shock me that home prices in the most desirable San Francisco Bay Area neighborhoods
like Palo Alto and Cupertino remain in the $1 million to $2 million range (for “normal homes”).
I guess there is just a lot of demand for certain school districts, commuting distances, and quality
of life that I underestimated. It doesn’t hurt that salaries are high and tech stock options provide
big down payments.
Commercial
Commercial real estate prices have fallen and the transaction volume has plummeted, indicating
a frozen market just as I predicted. Rents are lower, there are fewer tenants, there are few loans
available, and there is rampant overcapacity. I expect this market to continue its decline and it
will finally get more attention from Main Stream Media. In the end, we could see this crisis
rival the RTC back in the late 80’s and early 90’s. At some point, there will be amazing deals in
commercial real estate available.
Interest Rates
Rates are still at historical lows just as they were last year.
Fed Funds
They are at zero and should remain there for 2010. Remember, Japan had zero interest rates for
10+ years. It can happen.
10 Year Treasury
The current rate at around 3.6% is quite low. Would you tie up your money for 10 years at even
4%? It doesn’t make intuitive sense but with uncertainty so high, investors are really just
parking their money in the safest asset they can find.
I expect the 10-year treasury rate to stay in the 3% to 4% range all year. Perhaps a run toward5% is possible if there are not any more crises and the Fed starts talking about raising rates.
2009 Year in Review and 2010 PredictionsBy: David Overfield
January 2010
Gold
Gold has remained above $1000/oz. Certainly the major bull market is getting old now after
almost 10 years. If the economy doesn’t suffer a major meltdown and doesn’t recover either,
then gold prices will probably flatten and possible show downward bias.
Silver
Who knows, is it an industrial metal running out of supply or a “poor man’s” gold?
Commodities
I’d really like to see safe, clean and domestic alternative energy sources. Wind and solar seem
popular now but haven’t had the roll-out to significantly cut into hydrocarbon based energy.
Oil
Oil prices remained in the $60 to $80 range for most of the year. I expect more of the same anda downward bias too. Apparently there is plenty of stored oil, overcapacity, and reduced global
daily consumption since the peak a couple of years ago. On the other hand is the Peak Oil theory
and political tensions in the Middle East.
Coal
Stable or falling prices.
Natural Gas
Stable or falling prices.
Political
Federal
I love my quote from last year:
“When a management with a reputation for brilliance tackles a business with a
reputation for bad economics, it is the reputation of the business that remains intact.” –
Warren Buffett
No matter who won the Presidency, we’d have had an economic crisis and collapse because weover consumed and incurred more debt than we (globally) can service.
Read my predictions from last year below, which came true as predicted.
2009 Year in Review and 2010 PredictionsBy: David Overfield
January 2010
The latest budget proposal includes something like a $1 trillion one year deficit so that
we can “spend our way out of the recession.” This further proves the short term focus
and lack of economic understanding by most politicians. (Hey, I voted for Ron Paul)
Will Obama get nationalized health care passed, will he restrict Wall Street
significantly? I doubt it. I must admit that after watching him on Charlie Rose
( http://www.charlierose.com/view/interview/171 ) before he even wanted to run for
President, I thought he was a different, even authentic politician like Ron Paul. I was
wrong.
State / Local
State, county and city budgets will run negative and some will have to make very difficult
decisions. Is there the political will to make these decisions? No! But there are fiscal realities
and my hope is these municipalities will NOT get bail outs but be forced to align expense with
income. The best start is removing unsupportable commitments to expensive healthcare andretirement benefits to government employees. See Mish for a complete detail on this.
The Blame Game
The current crisis has not seen a large amount of public trials and scapegoats. Yet, I sense we’ll
see more and more of them in 2010.
Wild Cards
These are events that are unpredictable and uncertain in outcome/effect. They could have a
significant effect on all the predictions.
Economic
A market collapse (like Sept. 2008) would shift all predictions to the worse side. Some
significant collapse on the global scene would not surprise me. Will it be a flight to the USD, the
collapse of Greek government bonds, or a terrorist induced slowdown like 2001? I don’t know,
but all seem possible.
Russia
I still don’t see much changing here. There is a declining population and a lack of economic
independence and entrepreneurism. Sure they have oil reserves and decent military but there
2009 Year in Review and 2010 PredictionsBy: David Overfield
January 2010
China
Economic growth may be slow but positive. Will their spending increase and savings rate
decrease and thus create a strong enough domestic economy to stop complete reliance upon
exports? Nope.
I have spoken to people who have bought real estate in China and from what they tell me, prices
are too high to be paid by the local populace and there is significant over-capacity. At some
point (2010 or 2011), Chinese real estate prices will fall and banks will need a bailout.
The US just approved a large sale of military arms to Taiwan which was not “approved” by
China. At some point, these weapons may end up in the hands of China after reunification.
Interesting thought isn’t it?
Middle East
All the same issues as last year remain. There are internal conflicts and external conflicts, and
these will not be resolved this year. Why do you suppose there are US troops in Iraq and
Afghanistan? There are 2 major conspiracy theories:
(1) Iran has no intention of stopping the final fueling of their nuclear power plant capable of
producing weapons-grade uranium, despite their leaders claim that the plant is used solely for
power generation. U.S. troops were placed on both sides of Iran to put pressure on them to
yield to international requests and to not bring the nukes online.
(2) Iran had stated they were going to sell their oil priced only in Euros and would not accept US
Dollars as payment. This idea has been around for a few years and threatens the USD's status
as the global reserve currency – and thus the world's (especially the U.S.) financial system.While it's questionable whether the other oil producing nations would follow suit, the U.S.
could not take the risk of Iran rocking the boat.
Terrorism
It seems to me that there will be a major terrorist event in 2010. Remember terrorism is "cheap"
for the perpetrators.
End Game
I’ll just reuse last year’s quote because we're still in the same situation.
“True prosperity comes from savings and investment. Not from spending and
consumption. We can’t spend our way to growth and prosperity.”
Just because we survived the crisis (so far), doesn’t mean the root causes are resolved. Just the
opposite is true. Our short term fix has been to create more debt to pay for the old debt.
Actually we are worse off now than before. The only solution is "debt jubilee". (Google it)
2009 Year in Review and 2010 PredictionsBy: David Overfield
January 2010
Solutions
Now that the horse is out lose (deflation, credit contraction, recession), closing the barn door
won’t help. So how do we get the horse back?
There isn’t an easy solution to the current problems. Which people or government would wantto pay down the existing debts and reduce consumption now? Would a political candidate win
an election by promising to cut spending, salaries, benefits, services AND raise taxes to bring
expenses in line with revenues?
I doubt it. Thus the only option we seem to have is to “muddle through” this crisis and react to it
instead of proactively preventing future problems.
Problem Prevention
We have to agree that preventing problems is worth the short term costs in order to reap the long
term gains. Also, let’s get rid of the silly notions that markets are efficient and markets canremain in perfect equilibrium. These ideas may sound nice to economists and make their math
work, but they are NOT the real world as proven by thousands of years of human history (fear
and greed, boom and bust).
See these posts:
Is Economic Stability a Myth?
What Bubble Are We In Now?
Market Cycles – From Euphoria to Despair (and back again)
Changes I’d like to see:
Debt free money – the US dollar should be issued directly by the government not through the
Fed (which is neither federal, nor has a reserve).
Re-implement a better form of Glass-Steagall Act
o Separate commercial banking from investment banking
o End privatizing of profits and socializing of losses
Limit leverage on Wall Street to lower, safer levels.
Limit home loans to 30 year fixed with 20 % down payment on full doc only.
o Ok, for starter homes under say $150,000, allow something like a 10% down payment