Ten Themes for 2009
“A year has passed since I wrote my note. I should have known this right from the start.”
–The Police 
2008, with all the twists and turns and credit burns, will be remembered as the year when perception finally caught up with reality.
The writing was on the wall for all to see as the cumulative imbalances steadily built since the back of the tech bubble. As time and price are the arbiters of financial fate, it was simply a matter of time before the wheels fell off the wagon.
As we edge into a tense twelve-month stretch, pundits are furiously offering fresh predictions, prophecies and price targets. While we at Minyanville pride ourselves on adapting rather than conforming, we’re happy to toss our hat in the ring and gaze across the financial horizon.
We did so last year with some success but know all too well that you’re only as good as your last trade.
Alas, without further adieu and in no particular order, I humbly submit ten themes for this coming year.
The Not So Quiet Riot
The age of austerity has officially arrived and we’ll see a steady stream of social strife as the rejection of wealth increases in size and scope. While societal acrimony began to percolate last year, this dynamic will manifest through social unrest and geopolitical conflict as we edge ahead.
This is, without question, the single biggest socioeconomic risk as we stand at a critical crossroads. On the one side, there is orderly debt destruction that will ultimately pave the way for true globalization. On the other, there is isolationism and protectionism as sovereign nations protect their interests at any cost. 
If calmer heads don’t prevail and the global community takes a turn for the worse, history books will likely point to Shock & Awe as the beginning of WW3. You don’t have to agree with this assessment; you simply have to respect it.
Hedge Fund Overhaul
Once upon a time, in the early 1970’s, the mere mention of Wall Street was taboo at cocktail parties. The more things change, the more they stay the same as Main Street casts blame, in many cases rightfully so.
Early last year, I opined that 50% of existing hedge funds would cease to exist. The perfect storm of 2008 will expedite this process, as will reactive regulation following the Bernie Madoff scandal.
Typical hedge fund terms are “one and twenty,” or 1% management fee and 20% performance fee. Expect industry standards to shift to a three-year aggregate performance structure that eliminates the annual payout and weeds out the excess capacity in this space.
Seismic Readjustment
Entering September, we offered that the disconnect between equity and credit would manifest as a car crash or a cancer.
Four months later, despite lower equities and massive government intervention, the equilibrium between equity, credit, commodities and currencies remains elusive. 
In a free-market system—such as the one we used to have—these inefficiencies would be naturally resolved by supply and demand. In the current world, a “man made” readjustment, such as a meaningful currency move that significantly devalues the U.S. dollar, becomes increasingly likely.
Motion and Movement
When asked about my year-end price target on the S&P, my answer is constant. Tell me what the dollar will do and I’ll offer an educated guess on stocks. Indeed, since the beginning of 2002, our financial machination has operated through the lens of “dollar devaluation vs. asset class deflation.”
My sense for 2009 is that—all else being equal—we’ll see wild movements and a wide range, perhaps with S&P 600 as a nadir and one (if not two) 20% bear market rallies filled with false hope and empty promises.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.
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maybe there really is hope, past the fire flood and hurricane still ahead :-)
While perception may be catching up with reality, it's still lagging by a wide margin because reality is accelerating. Over the past few years I've spent a great deal of time learning about human behavior with the goal of becoming a better money manager. My studies lead me to believe that two characteristics of human nature rise above all others.
People will believe what they wish to believe until circumstances beyond their control force a perception change or their own desperation compels them to see the world as it really is.
And there will always be men who will take advantage of this human vulnerability.
This is why history repeats, or at least rhymes.
Their mission, which they have to accept (sorry, Mr. Phelps), is to keep those dollars from being rendered worthless by inflation, while also not letting the US slide into a depression where we'll stop buying their manufactured goods and they'll be in a depression of their own. I guess we have to wish them luck, don't we?
The price for their 'help' probably consists of one word: Taiwan. I'm guessing the US abandonment of the defense of Taiwan will occur in Obama's 2nd term. Just a thought....
Great article. Please post up-front in the next few days.
"If calmer heads don't prevail and the global community takes a turn for the worse, history books will likely point to Shock & Awe as the beginning of WW3. You don't have to agree with this assessment; you simply have to respect it. "
I think this is the point at which it was realized that cheap energy was a thing of the past. But we will have to get through this crisis first to realize it. Expensive energy=tax on growth+inflation
The age of Austerity ideed.
Does this mean when chasing "models and bottles", it is time to substitute Miss New Jersey, for a Victoria Secret supermodel, and Moet for Cristal? I am not sure they really are that much of a trade down.
There's an old saying in banking. If you owe the bank $10,000 and can't pay, you're in big trouble. If you owe the bank $100,000,000 and can't pay, the bank's in big trouble.
Considering how much we "owe" the rest of the world (China, Japan and Saudia Arabia in particular) who do you think is calling the shots?
I say the customer, particularly if the bank wants the customer to lend them more "deposits" or in the case of the Fed and Treasury, buy more worthless USgvt Bonds.
When they stop buying bonds, or rather sell more than they buy, get ready for the printing presses to work 24/7/365.
Even then, they don't have to "print" the money anymore. It's all just a journal entry away from creation.
Thank you. Bill
Every now and then a professor will mention a long term hold, but it would be very useful to have a dedicated posting where all the professors would "list" their buy and holds with a much longer time horizon.
I think there are plenty of people like me trying to decided which ones-- I'm torn but from just a few , there are many others-- DIS, MSFT, INTC, JPM...
The latest intrade on whether US economy will enter a depression in 2009: 41%
Look at contract rules:
This contract will settle (expire) at 100 ($10.00) if quarterly GDP figures show the US economy has gone into a depression in 2009.
The contract will settle (expire) at 0 ($0.00) if quarterly GDP figures DO NOT show the US economy has gone into a depression in 2009.
For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters. This is calculated by adding together the published (annualized) GDP figures (as detailed below). If these annualised figures add up to more than -10.0% over four consecutive quarters then the contract will expire at 100.
Expiry will be based on official quarterly GDP figures reported by the U.S. Department of Commerce (Bureau of Economic Analysis, Table 1.1.1, "Percent Change From Preceding Period in Real Gross Domestic Product") as reported by the BEA.
The final quarterly GDP figures will be used for expiry - not the advance or preliminary numbers. Any revision of the final figures will not not affect the original expiry.
I believe we all should be looking really hard at how our money is being, and will be spent. A loss of confidence has been rendering all stimulus measures ineffective, but I believe it will get much worse.
There are a limited number of people creating wealth in this country, and the number is dwindling. Meanwhile, worthless initiatives (like the "war on drugs") continue to drain public (the fewer producers) resources. This is not to mention the monies paid to government agencies that do not even understand the businesses they are supposed to oversee.
For my part, I am trying to visualize what a greater than 10% reduction in GDP is going to look like on the street. Not all suffer equally.
That is my view.
Just One Fix. the words of the prophet are written...
by Ministry....
pre-millennial... but prescient. check it out on youtube
<http: snipped due to the 'word too long' prohibition of the editor>
http://www.youtube.com/
watch?v=4HqoWdFNaGY&
feature=related
---
its curious how the environment and the economy now are starting to mirror each other.
the "wishbone world" [harrison, et al 2008] is one of the best descriptions of what is called "global warming" that i know of.
what each lacks however is *cachet*.
-- what is the wishbone world? what is global warming?
it is the rapid change from one extreme to another.
unpredictabily so.
chaotic in the mathematical sense of slight changes to the input variables resulting in vast changes in the *modeled results* over a relatively short period of "time".
english translation: that's f*ed up [weather | economy] dood
schitzo weathonomics?
extreme freakanomics[ref, freakanomics]?
non-euclidean ecology?
still to obtuse....
freakology?
weather woe?
econ begone?
WOMBAT? [ weather of mysterios baffling ad-hock torment? ]
maybe the old military acronyms are better?
SNAFU? FUBAR? FUMTU?
anitdisestablishmentarianism? rolls of the tounge, no?
antinihilipilli<add latin infixes>ism...
a better soundbite is needed! something that really brings it... fast and furious... but what???
As Todd put it,
"Now that the equity epitaph has been written for the âbuy and holdâ strategy, it may be time to begin looking for babies in the bathwater. There will be deep value opportunities in small and micro-cap stocks, creating an environment where real value investors step up and stand out.
This will not come easy and it will require due diligence. Debt free companies with strong balance sheets, free-cash flow and trustworthy management will trade at a premium. Integrity, as a whole, will be a commodity in the coming years as distrust in the system permeates.
As a savvy seer once told me, âI don't invest in companies, I invest in people.â Look for the cream of corporate America to rise to the topâand the entrepreneurial spirit to awakenâas once trusted companies fall by the wayside."
Personally I wouldn't invest in the names you mention. "Return OF capital is more important than return ON capital." "Lost opportunities are more easily made up than lost capital."
As I am 62 years old it is likely my investment horizons are shorter than yours, of course. On a thirty or forty year scale one might look at potential inflation hedges and, very selectively, mining exploration companies. The consumer electronics thing is over. Ignore companies that are mature bureaucracies and those whose "moat" is provided only by government regulation. Health care as a percent of GDP can only go down but I think we will see some real changes from biology-biochemistry.
Conceivably we will see the dam blocking technological change collapse as established financial elites are destroyed. A "real" as opposed to a "financial" economy is becoming possible. This is the light at the end of the tunnel.
Wow, how I wish that to be true. We are two self employed people with four children. Our health care is equal to an average mortgage on a monthly basis, and it goes up by 20 percent ANNUALLY. We have to have it, there is no question, but within two years it will exceed the cost of our mortgage and for what? Health care costs will absolutely bankrupt the average citizen.
Consider this. If you would have been better off without insurance (payed cash for all services, ie, medical bills, and you spent less than you would have spent on insurance), you are contributing to the profits of the insurance company. How do you perceive that?
If not (your costs have exceeded what your premiums were), then you are a PROBLEM for the insurance company. How compassionate are you to their loss?
Health "Coverage" will NEVER be affordable as long as there are TOO many unhealthy people in the equation.
I have always been self-employed, and every dime I sent to insurance companies was wasted.
Security is a fallacy that costs a bundle, yet remains a fallacy.
My son break his ankle in two places, which needed pins, 6 months of physical therapy a second surgery to remove the pins, and THEN we discovered when he broke his ankle he disrupted his growth plate which resulted in ANOTHER surgery, 6 more months of physical therapy and potentially a third surgery in 12 months.
Our daughter was misdiagnosed by her pediatrician and wound up in the hospital with an abscess on her tonsil that required 5 days of stay and constant antibiotic drip and a surgery.
Then my husband needed a stent (just the stent alone cost $6000).
So yes, when I say health care I include the insurance and the deductible. We have Blue Cross and Blue Shield and they have not denied a single claim. Is it expensive? You bet, could we have done without it? Up until 18 months ago I would have said "Yes." Now, I'll pay the insurance before I pay my mortgage.
BILD it, and they will come.
No more secrets.
