by Addison Wiggin & Ian Mathias
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2009 to be “really bad” says IMF… will the recession exceed expectations?
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The second wave of the housing crisis… commercial real estate pros already plead for bailout
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John Williams on last week’s stunning money supply growth
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Asia faring no better… Japan, China slash lending rates
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The two commodities up for 2008… and those set to rise next year
“We see 2009 as really being a bad year,” Dominique Strauss Kahn, chief at the International Monetary Fund (IMF), warned yesterday, “with recession for most advanced economies and growth decreasing for emerging economies.”
Big D. Kahn then joined the chorus of economists, politicos and Wall Streeters in agreement: only massive global stimulus can stave off a long, dark downturn, they say. He called for a global fiscal stimulus of another $1.2 trillion — 2% of worldwide GDP.
"Our forecast, already very dark… will be even darker if not enough fiscal stimulus is implemented.”
With that cheery launch of this Christmas week, we begin our 2008 retrospective… and our forecasts for 2009. We’ve polled our editors… badgered our colleagues… talked to analysts… saddled up to a few bigwigs… beguiled those in the press who will talk to us… we’ve even asked our spouses…
Over the next two weeks, you’ll get a healthy smattering of the retro and formative, the mystifying and idiotic, sagacity and simplicity… as we try to establish what the *&^% happened in the past year and a half… and where we’re likely to end up by this time next year. With any luck, we’ll be able to help you plan your investments wisely, and maybe even make a buck or two in 2009.
You received your first salvo in this morning’s Rude Awakening. We continue this afternoon with a little history from our macro-historical hawk:
“U.S. recessions since 1858 have averaged 18 months in length,” writes Rob Parenteau. “Investors appear to be grabbing on to this rule of thumb, using it to project a recession end by mid-year 2009. Since equity markets are believed by similar rules of thumb to bottom roughly six months before the recession is over, this makes the recent rally from late November appear to have more potential than just another short covering exercise.
“This all strikes us as a bit too mechanical. The drop in manufacturing production growth has already surpassed that of the prior two recessions, and with Chrysler shutting down for a month and housing starts dropping to new historical low levels, Q1 2009 is likely to show production cutbacks surpassing those of the 1980-2 recession. Most long-only U.S. equity portfolio managers are unfamiliar with terrain as tough as that one. Come to think of it, automakers went hat in hand to the government back then as well — history does rhyme, after all.
“While most investors think of the United States as a service-based economy, business cycles are still intimately tied to manufacturing activity. As displayed below, the current plunge in manufacturing production is consistent with a 2-3% year-over-year contraction in real GDP, which again will rival the two sharpest U.S. recessions in the past half century. Buckled in yet?
“So even if we did not have a view about distress in the banking and credit system, or we thought the fix was already in on that front, there is no good reason to treat this recession as if it would follow the historical average rules of thumb.
“Working our way out of this episode of financial instability is going to take time, especially if firms and households wish to reduce debt outstanding. We feel Q4 2009 is the earliest we might expect to see real GDP growth with a positive sign in front of it.”
In the last few months of 2008, mortgage rates will have been seen to plummet to 37-year lows — at least. The average rate on a 30-year fixed is 5.19% this morning, the lowest since Freddie Mac began keeping track in 1971.
Rates have been falling for the last seven weeks, but plummeted 27 points in the wake of the Fed’s rate cut and plan to buy up mortgage-related assets, reiterated last week and first announced in November.
We’re still skeptical this is going to be enough to halt the historic rate of foreclosures achieved this year.
And now, not wanting to disappoint, one of our ’08 predictions looks like it’s ready to begin in earnest: Commercial real estate finally looks ready to pop. We started writing about this “second wave of the housing tsunami” in mid-2007. Today, we hear a rumbling out at sea.
“Unlike home loans,” explains today’s Wall Street Journal, “which borrowers repay after a set period of time, commercial mortgages usually are underwritten for five, seven or 10 years, with big payments due at the end. At that point, they typically need to be refinanced. A borrower’s inability to refinance could force it to give up the property to the lender.”
$160 billion of commercial mortgages will come due for refinancing in 2009, $20 billion more than this year. Another $380 billion comes due in by 2011.
“We believe there is insufficient systemic capacity to refinance expiring, performing commercial real estate loans," a consortium of commercial real estate gurus wrote to Treasury Secretary Hank Paulson last week. "For many borrowers, [credit] simply is not available,"
Of course, the real estate giants aren’t writing Paulson as a friendly “heads-up.” They’re seeking a bailout… a $200 billion loan program designed to prop commercial property while the frozen credit market thaws.
Delinquency rates on commerical mortgages leapt rom 0.6% to 0.9% over the last three months.
The U.S. stock market suffered some typical volatility last week, but ended mostly unchanged. After a week of choppy trading, the Dow fell only 0.3%. The S&P 500 rose 0.3%, while the Nasdaq inched up 1.5%.
Heading into this shortened trading week, we’re tempted to expect much of the same. If there will be any real drama, it’ll likely fall tomorrow, when fresh data on existing home sales, new home sales, the Michigan consumer sentiment survey and final third-quarter GDP all hit the tape.
The greenback remains around Friday’s levels today . After its incredible 10-point plunge to a score of 78, the dollar index has stabilized around 80.
M2 surged at an annualized rate of 63% last week, reports government stats watchdog John Williams. M2, if you are unfamiliar, is the sum of currency in circulation, banking accounts, institutional money funds and time deposits at commercial banks. It accounts for about 90% of M3, the most common measure of money supply.
“The growth here,” explains John Williams, “reflects a surge in demand deposits (checking accounts), savings accounts, institutional money funds and resumed growth in large time deposits. While these measures may reflect some impact from movement of personal funds out of Treasury bills back into the money supply accounts, greater impact is likely from some flow-through of the extreme systemic liquefaction launched by the Federal Reserve, and of increased bank lending, into the normal stream of commerce.
“The good news is that the system may be starting to return to more normal functioning. The bad news is that the cost of systemic salvation remains higher inflation, irrespective of the sharp, short-term impact of collapsing oil prices on consumer prices.”
Might be a good time to check out Bill Jenkins’ Master Forex Options Trader , yeah?
Strangely, the dollar and oil have been trading in tandem over the past few days. The January contract closed Friday at a stupid-low $32 a barrel, a five-year low. But as with the greenback, oil has rebounded since. A barrel will set you back $41 as we write.
The Chinese Central Bank is taking stock of the past year too. This morning, they came up with a game plan that is all too similar to that being pursued here in I.O.U.S.A.. The People’s Bank cut its main lending rate for the fifth time in three months.
Their target rate has been reduced 25 bps, to 5.31%. Ouch. Mortgage rates are lower here.
Japan followed the IMF plan of attack too. Unfortunately, like a ghost of Christmas future, the Nipponese central bank is all but out of bullets. They’ve lowered their prime lending rate to an anemic 0.1%. Still, as with the lost decade late last century, nobody wants to borrow…
In Japan, exports plunged 26% over in 2008, their Finance Ministry reports today. That’s the biggest annual fall on record (going back to 1980), and far worse than the consensus expectation. Shipments to the U.S. are down 34% year over year.
Gold is hanging tough today, around $850. As we’ll comment on more this week and next, its been a rough ride this year for commodities. We felt the gold community’s loud sigh of depression last month when the metal failed to skyrocket during the market collapse.
But still… for a year when even the most “stable” equity indexes were cut in half, gold is on track to break even for 2008.
Another likely commodity winner for 2008:
Hogs, despite commodity pullbacks across the board, are up 6.6% this year, according to the Reuters/Jefferies CRB Index. As we forecast over the summer, the Bush administration’s aggressive ethanol policies caused a feed shortage for livestock producers. Coupled very high energy costs in early 2008 and rising global demand (pork consumption is expected to rise 1.3% next year), hogs are very much in vogue.
“In the middle and latter stages of recession, energy and base metals markets tend to underperform,” reads Barclays Capital’s 2009 commodity outlook report. “Gold, agriculture and livestock tend to outperform other commodities, and it is these sectors that could prove most robust in early 2009.”
Only one other commodity ended up performing better than hogs in 2008: cocoa.
Steven Wynn has been reading tea leaves all his own this year. He must be. Would you want to open a super-sized hotel and casino in Las Vegas? One that’s identical to the one you recently built across the street?
That’s “Encore” on the left, Steve Wynn’s latest Las Vegas resort. The $2.3 billion beast opens today, a chip shot away from “Wynn.”
Perhaps he’s right and outright gambling is all the global economy will have left to offer in 2009.
“Just walked into a retail shop in Vegas,” writes a reader. “Times must be tough, as the premium for all products in the showcase, whether 1-ounce Eagles or 10-ounce bullion… 100% over spot!!! Of course, they will pay only 15% over on the buy!!!
“I guess the right strategy is take delivery on futures positions… only need about $11K for a mini. Any lenders out there?”
“Having retired from 30 years of government work,” writes a reader, responding to Friday’s reader suggestion that union management is a matter of survival of the unfittest, “this is EXACTLY the practice within all parts of the federal workforce that I have been associated with. The good-old-boy (or girl) network is alive and well, especially with the protections of the civil service system and consistently compliant human resource offices.
“I believe the genesis of the union movement had valid roots to address serious abuses. But there is no single ogre in the current state the of overpaid and underworked employees at all levels. The culture of greed is universal.
“As a union representative and negotiator, management made it very clear that there would be concessions and benefits as long as complaints of their flagrant violations and excesses were not addressed and their power was maintained without reference to any inspector general’s office.
“Obama can change the rules on the auto bailout,” writes another, “as soon as he steps into the Oval Orifice. He will. This will evolve into a permanent bailout of the UAW. Meanwhile, the debt just keeps on growing. Hyperinflation is the only way this debt will be paid back.”
The 5: And there is our first reader forecast for the New Year. We respond with our first:
Turkish shoes become the new Italian in 2009. The Istanbul-based shoemaker , who produced the shoes that were hurled at the president’s head last week has had to hire 100 new workers to make all the new shoes ordered since.
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. The film has gone mainstream. “I.O.U.S.A.” was the answer to the No. 2 down clue in yesterday’s NYTimes crossword puzzle.
P.P.S. The Tribeca theatre also showed the film over the weekend, among a list of “Oscar Hopefuls.” Heh… we received a Christmas card over the weekend from Patrick and Christine, the director and producer of the film, in which, by way of holiday cheer, they paraphrased our first conversation when we pitched the idea to them: “You want to make a film about what!?! The federal debt!?!”
You can still get the DVD and companion book, along with a subscription to Capital & Crisis, here. It makes a great holiday gift for children.