Tuesday, January 13, 2009

Predictions/Surprises for 2009

I put these together in the week before the New Year. Every year for the last five, I make everyone at my business submit to me their top ten predictions or surprises for the coming year (they should basically be predictions that have an element of surprise/non-consensus to them). Here are mine for 2009 (slightly modified to remove some private details):

[TTB's] Top Ten Surprises / Predictions for 2009:

1) [My company] takes no meaningful new clients in 2009
2) At some point during the year, the S&P 500 is up 30% from the beginning value, but ends the year +/- 10% from the beginning value. Selling at that +30% point will feel very hard to do and excuses will abound as why we shouldn’t/why our issues are behind us. Alas, not selling will have been a mistake.
3) Housing prices cross the -30% peak to trough level (Case Shiller 20-city index). Commercial real estate becomes the watchword as housing price declines begin to slow toward the end of 2009.
4) Our recession borders on a depression as 2009 GDP is -5% or worse (which is on top of 2008’s negative print). Unemployment nears 10%. Unemployment would be worse but lots of companies enact pay-cuts, either explicitly or through reduced hours. The aggregate impact feels like unemployment of 11%+.
5) The U.S. budget deficit blows through $2 trillion in 2009. Socialism becomes a commonly talked about concept and people are increasingly comforted by our move toward it.
6) The credit crisis is not arrested. After having rolled through housing, it begins its attack on commercial and corporate in force. The default rate for HY approaches double digits but bank debt only makes it to mid single digits (5-7%), so far. As I predicted a few years ago, the default wave continues to roll through credit sub-classes. While it was initially in subprime, which had the nearest resets and the lowest quality borrowers and collateral, we see it move into Option ARMs as people begin to reach 115% of their initial balance due to minimum payments and some 3/1 and 4/1 ARMs from the more toxic vintages of 06 and 05 hit resets. New CRE (commercial real estate) financing is unavailable at attractive interest rates and cap rates climb near double digits. That said, the CRE default wave only begins to pick up modest steam in 09 as the 5/25 balloons from 2004 and early 2005 approach or cross through their reset periods. Covenant-lite LBO debt performs horribly, but due to a lack of covenants, the defaults are really a 2010 and beyond phenomenon. Because each of these huge credit asset sub-classes really have staggered aggregate maturities, the credit crisis has trouble getting past us (subprime 2007-08, option ARM 2008-09, jumbo prime 2009-10, CRE 2009-14, full covenant bank debt 2009-10, HY 2009-11, muni 2010-11, cov-lite bank debt 2010-12). All flavors of credit are obviously correlated as the companies and institutions that provide the loans are the same for all kinds of credit and this continues to drive availability of credit down and the price of and standards for credit up. This adjustment hurts many people.
7) We continue to muddle through a deflationary period as the credit contraction continues. By late 2009, inflation starts to replace deflation, initially making Ben Bernanke proud of the success of his famed “helicopter drop”. But inflation’s pace picks up uncomfortably quickly. By late 2009, deflation is the last thing on anyone’s mind (I may be off by a year on this one, but so be it)
8) The dollar ends the year below $.80 on the Yen
9) The US suffers its first major terrorist attack since 2001
10) Hedge funds, in aggregate, suffer redemptions that exceed 50% of their AUM during 2008 and 09 combined, forever changing the business model. Certain strategies will increasingly require private equity style lock-ups. Fees will come down. A big NY property REIT/institutional CRE owner stares into the abyss.

Happy New Year.


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