Byron Wien: Ten Surprises for 2009
As the New Year unfolds, it is time for predictions. I have done my part, giving a full account of where I see things headed in 2009 in my post "Top ten predictions for the 2009 global economy" and where I want to see them headed in 2009 in my post "Top ten economic wishes for 2009." I have also mentioned Byron Wien in passing several times because he has done this soarrt of thing every year for the past 24 years, first at Morgan Stanley and now at Pequot Capital. Well, his list for 2009 is now out and I want to show it to you – along with my usual commentary (in parenthesis) of course!
WESTPORT, Conn. – (Business Wire) Byron R. Wien, Chief Investment Strategist of Pequot Capital Management, Inc., today issued his list of Ten Surprises for 2009. Mr. Wien has issued his economic, financial market and political surprises annually since 1986. The 2009 list follows:
1. The Standard and Poor’s 500 rises to 1200. In anticipation of a second-half recovery in the U.S. economy, the market improves from a base of investor despondency and hedge fund and mutual fund withdrawals. The mantra changes from “fortunes have been lost” to “fortunes can still be made.” Higher quality corporate bonds, leveraged loans and mortgages lead the way.
(I do NOT see the market rising here. The consensus view is for a rise in equities as the recovery takes shape in the second half. Even Richard Bernstein, the most cautious equity strategist on Wall Street, sees stocks up 7.9% in 2009. The average on Wall Street says we’ll be up 17% with Barclays the only firm seeing another loss. I am going for -10%.)
2. Gold rises to $1,200 per ounce. Heavy buying by Middle Eastern investors and a worldwide disenchantment with paper currencies drive the price of precious metals higher. In a time of uncertainty, investors want something they can count on as real.
(I am a gold bug of sorts. But, first, it’s the deflation, then the inflation. The question is when. I say the global economy will be flat on its back all through 2009 so gold is not going anywhere. Let’s put gold at $850 and wait for its rise in 2010).
3. The price of oil returns to $80 per barrel. Production disappointments and rising Asian demand create an unfavorable supply/demand balance. Other commodities also rise, some doubling from their 2008 lows. Natural gas goes to $9 per mcf.
(I have already said I see a fall to $25 – which is looking less likely now,oops – followed by a rise to$55 for oil. So, I will stick with that. Natural Gas is trading at $6 per mcf, so $9 seems a fair bet here.)
4. Low Treasury interest rates coupled with huge borrowing by the Treasury send the dollar into a serious downward slide. Overseas investors become concerned that the currency printing presses will never stop. The yen goes to 75 and the euro to 1.65.
(Currencies are trouble. But, Wien seems to be a bit of a dollar bear. He and I see eye to eye. Let’s call the yen peak at 80 and the Euro at 1.55. )
5. The ten-year U.S. Treasury yield climbs to 4%. Later in the year, as the economy shows signs of recovery, economists and investors shift their mood from concern about deflation to worries about inflation. A weak dollar, rapid growth in money supply and record-setting deficits (over $1 trillion) are behind the change.
(Here’s where Byron and I part ways. I see the ten-year at 1.75% and the 30-year at 2%. That’s an enormous upside move and a very risky call, which I would not necessarily bet on. Basically, I am betting the bubble will extend itself to everyone’s surprise. 2010 is when the carnage will result.)
6. China’s growth exceeds 7% and its stock market revives. World leaders credit China’s authoritarian government for its thoughtful stimulus policies and effective execution during a challenging period. The Chinese consumer begins to spend more and save less and this shift is behind the unexpected strength in the economy.
(China is weaker than the consensus believes. Over the long-term, I am very, very bullish on China, India and the emerging markets. But, downturns have a way of synchronizing markets. I believe China will grow only 2% this year, as I have stated.)
7. Falling tax revenues from the financial sector cause New York State to threaten bankruptcy and other states and municipalities follow. The Federal government is forced to step in and provide substantial assistance. The New York Post screams “When will the bailouts stop?”
(I see California as the first to go bankrupt, and I have already said that I would look to Arizona, Nevada or Florida for the next weakest state. Let me amend that by putting my money on Florida and New York.)
8. Housing starts reach bottom ahead of schedule in the fall, and house prices stabilize after dropping 15% from year-end 2008 levels. The Obama stimulus program proves effective and a slow growth recovery begins before year-end. Third and fourth quarter real gross domestic product numbers are positive.
(I agree. House prices falls will also diminish in severity. By June, I see year-over-year comparisons getting better. I believe we have already seen more than half of the declines. )
9. The savings rate in the United States fails to improve beyond 3%, as most economists expect. The concept of thrift seems to have vanished from American culture. Peak job insecurity and negative growth drive increased savings early in the year, but spending resumes as the economic growth turns positive in the second half, making Christmas 2009 the best ever.
(An interesting call here. One could say that continued economic weakness would mean savings MUST remain low as budgets will be strained. In the Great Depression, this is how events came to pass. I had been looking for the savings rate to climb. But, Wien’s comments give me pause — not for the reasons he mentions. Let’s put the savings rate at 3% as well, suggesting an increase in savings, but not enough to revert back to the mean.)
10. Citing concerns about Iraq’s fragile democratically elected government and the danger of a Taliban-controlled Afghanistan, Barack Obama slows his plan for troop withdrawal in the former and meaningfully increases U.S. military presence in the latter. In a hawkish speech he states that the threat of terrorism forces the United States to maintain a strong military force in this strategic area.
(I think Obama is making a big mistake by betting on Afghanistan as the primary front in the war on terror. I anticipate he will double down there as Wien suggests, but that he will not deviate from his plan to leave Iraq.)
Mr. Wien believes these surprises, which the consensus would assign only a one-in-three chance of happening, have at least a 50% probability of occurring at some point during the year. In previous years, more than half of the elements of the list have proven correct.
Whether Wien is correct – he claims to be about half right generally – is beside the point. His list is thought-provoking whether you agree or not. It certainly gave me some interesting ideas.
Update: Below is a CNBC Video of Wien talking about his picks:
Byron Wien Announces Ten Surprises for 2009 – Business Wire