In a world where “saving” is a dirty word and “credit” is a match made in heaven, we are seeing some of the toughest financial times ahead of us.
I believe we have 12 to 24 months of continued credit issues and volatility in the markets ahead of us. The reason for this is the continued push to create more financial stimulus. Governments and Central Banks have gone on record to state “we will print money WITHOUT Limitation”. With this continued money printing, we continue down the same path that got us into this mess in the first place.
The concerning issue is that not only the financial system, but also the majority of people, live beyond their means. The continuing push to borrow money to pay debts has created a succession of bubbles, which at the time can create great wealth for the smart investor, but is also throwing fuel onto an already raging fire.
My question is this, when do the “bubbles” stop and when do we see credit contract to a level that is sustainable over the long term. If we look back over the last 10 to 15 years, we saw the “tech” bubble where by speculation in stocks, and widely available venture capital created an exuberant environment in which many of these businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line. At the end of the tech bubble, the US Government, seeing some short term financial issues, decided to lower interest rates to create the “housing” bubble and prior to this was the Asian Financial Crisis.
While major stimulus packages may relieve short term pressure on the economy, I do not believe this to be a solid long term solution. At some point the economy is going to have to cleanse itself from this false solution and get back to basic fundamentals of creating goods and service to create cash flow, not just print because we can.
I am almost certain that the current stimulus package in the US will fail and we will hear statement like, “the previous stimulus package was not large and aggressive enough so we have to create a larger package”. Again the basics of economics are to not lend to a system that is already in financial trouble. So why do they continue to do this? Although the Governments of the world have the ability to print money, which we do not, I compare this to family that cannot pay their mortgage, but saying to them; “here is another $500,000 do some renovations”. As you can see this is absurd.
Just a quick note on oil. The media are continuing their plug on demand destruction based on the current economic crisis. The bigger picture they are not focusing on is supply destruction. Oil is not something that replenishes itself and we are seeing the top oil producing wells now in depletion. Another issue I see is that with the price of oil being driven down so heavily, producers have put new projects on hold. So with the top producers now in decline and no new projects commencing, I believe we are going to get into an energy crisis within the next couple of years.
I do not want to sound pessimistic, but we are hearing a lot of analysts commenting that the first two quarters for 2009 will be slow and we will then see growth is the final two. I do not agree with this at this stage as my belief is that China will slow down considerably more than predicted, and the financial sector is in for a lot more pain ahead. I have no confidence in our current Government, as they continue to sit on the fence and wait for something to happen before they act.
It is impossible to see what lie ahead, but I think we must still watch carefully and see what impact the new President in the US can achieve and if Asia can start to decouple form the US. If we can see some divergence in Asia from the US, then there is hope that we here is Australia may recover from a recession faster than the US. However if the trend continues to follow in the footsteps of the US, unfortunately we are in for a long, tough road ahead.
So following from my above comments I would like to list my 10 predictions for 2009.
1. One of Australia top 4 banks will fail and be bailed out by the Reserve.
2. Oil will be above $75 a barrel.
3. Gold will continue it 8 year bull market.
4. China will have a GDP of less than 5.5%.
5. Australia will go into a recession.
6. America will go into a mild depression.
7. The S&P 500 will close the year lower than 750.
8. The All Ords will close the year lower than 3700.
9. Housing prices in major capital cities will continue to decline.
10. Deflation will turn into inflation.
If you would like to comment or discuss any of the comments above please send me an email to pimjohn@apexpartners.com.au.
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