Ten Themes for 2009
This ain't no garden variety, one-and-done recession.
"A year has passed since I wrote my note. I should have known this right from the start."
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.
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 firstname.lastname@example.org.
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