Update January 4, 2010: Just over one year ago, I discussed year-end prediction pieces like Fortune's "8 really, really scary predictions." As I surmised back then, the vast majority of these calls would be proven wrong and the common sense advice from folks like FDIC chief Sheila Bair and veteran money manager John Train would serve investors far better. Read my commentary below to see that. And, keep all of this in mind as you read 2010 prediction articles.
Major media outlets like to run year-end pieces wherein they
interview various sages and pundits for their prognostications regarding what
will happen to the economy, stock market, bond market, real estate market, etc.
in the year ahead. The premise of these pieces is that the wise folks who are
interviewed can tell you how to profitably position your finances for the year
ahead. Greed sells and so do hyped magazine and website headlines.
Increasingly common is Fortune's recent published, 8
really, really scary predictions, in which they asked 8 different
geniuses what will happen in 2009. The headline is designed to grab your
attention and the subtitle attempts to whet your appetite and explain why these
experts were selected. "Dow 4,000. Food shortages. A bubble in Treasury notes.
Fortune spoke to eight of the market's sharpest thinkers and what they had to
say about the future is frightening."
I'm not quite sure about the expression "sharpest thinkers."
If I was foolish enough to believe that anyone could accurately predict what's
going to happen with the economy and financial markets over the next 12 months,
I can assure you that I would first look at their track record of previous
predictions and how those turned out. The reality is that no one knows what the
near-term will bring and besides, those investing in stocks, bonds, real
estate, etc. should not be thinking about a one year time horizon anyway. They
should have a much, much longer-term span.
The Fortune writers clearly didn't do that with the first
sage profiled in the piece, NYU economics professor Nouriel Roubini, who
repeatedly claimed throughout 2008 that he saw and called all of the events
that took place. A historical review that I conducted of his previous
predictions shows that's not even close to the case and in fact he has a terrible
overall track record with predictions.
For the record, Roubini predicts the following for 2009 (and
beyond), "Things are going to be awful for everyday people. U.S. GDP growth is
going to be negative through the end of 2009. And the recovery in 2010 and
2011, if there is one, is going to be so weak - with a growth rate of 1% to
1.5% - that it's going to feel like a recession." My prediction is that this
prediction is very likely to be wrong. The reason: recessions, even sharp ones,
don't generally last that long.
As for investments, a field in which the Iranian-born
Roubini has no experience, he says, "For the next 12 months I would stay away
from risky assets. I would stay away from the stock market. I would stay away
from commodities. I would stay away from credit, both high-yield and high-grade.
I would stay in cash or cashlike instruments such as short-term or longer-term
government bonds. It's better to stay in things with low returns rather than to
lose 50% of your wealth."
This is profoundly awful advice which Fortune should be
ashamed to publish. The fact of the matter is that the best time to invest in
stocks and other seemingly risky assets is after they've suffered major
declines as they did in 2008. There are some good values in the bond market so
Roubini's advice there is wrong-headed as well. (Bill Gross the next expert in
the piece does know bonds and disagrees with Roubini). Roubini's advice to
invest in cash-like instruments and longer-term government bonds is also likely
to be poor counsel. Worried investors piled into these assets in 2008 causing
their prices to soar and yield to plummet. In fact, Jim Rogers, one of the
eight experts, sees this sector as being the next over-priced bubble!
I remember after the 1987 stock market crash all the publicity that gurus got who supposedly predicted the
stock market's crash (which Roubini didn't really do in advance but that's another matter). Among the most famous (at the time) was former Shearson stock market analyst
Elaine Garzarelli (photo below). Garzarelli's fund, Smith Barney
Shearson Sector Analysis, was established just before the crash. Supposedly,
Garzarelli's indicators warned her to stay out of stocks, which she did, and in
so doing saved her fund from the plunge. Shearson quickly motivated its brokers
to sell shares in Garzarelli's fund. Thanks to all the free publicity she got
from being interviewed just about everywhere, investors soon poured nearly $700
million into this fund.
These investors ended up being sorry. In 1988, Garzarelli's
fund was the worst-performing fund among growth stock funds. From 1988 to 1990,
Garzarelli's fund underperformed the S&P 500 average by about 43 percent!
So even the few investors who were in her fund before the crash in 1987 (when Garzarelli's fund outperformed the
S&P 500 by about 26 percent) still lost. What she saved her investors by
avoiding the crash she lost back (and then some) in the years that followed.
Bill Gross, founder of bond behemoth Pimco, has a solid
long-term track record investing in bonds. He predicts for 2009, "Investors
need to recognize these titanic shifts in market and public policies and be
content with single-digit returns in future years. Perhaps the most lucrative
pockets of value are in high-quality corporate bonds and preferred stocks of
banks and financial institutions that have partnered with the government in
programs such as the Troubled Assets Relief Program (TARP)."
Gross actually has a poor track record making stock market
predictions. Among his major blunders, in late 2002 with the Dow trading around
7,500 and suffering a major decline, Gross predicted the Dow would sink to
5000. The Dow didn't go lower and in fact Gross' dire prediction coincided with
a major stock market bottom and over the next five years, U.S. stock
prices approximately doubled.
Gross rounds out his 2009 prediction by saying, "Above all,
stick to high-quality companies and asset classes. The road to recovery will be
treacherous." Again, he's likely to be wrong. In fact, seemingly riskier stocks
like emerging market stocks are likely to produce the heftiest returns in the
next bull market, which may well have begun at the end of 2008.
Robert Shiller, professor from my alma-mater, Yale, opines
the following, "In terms of the stock market, the price/earnings ratio is no
longer high...But after the stock market crash of 1929, the price/earnings ratio
got down to about six, which is less than half of where it is now. So that's
the worry. Some people who are so inclined might go more into the market here
because there's a real chance it will go up a lot. But that's very risky. It
could easily fall by half again."
Shiller is correct about the price-earnings ratio falling recently
and no longer being high. However, saying that stocks could easily fall by half
again from their greatly depressed values in late 2008 seems more extreme than
likely or easy.
I think some excellent advice in this piece comes from of
all people a government agency head - Sheila Bair, FDIC chairman (photo below). Part of what
makes it good is that she intelligently redirected the question away from a one
year time frame. "My 87-year-old mother is a native Kansan who grew up in the
throes of the Great Depression and the Dust Bowl. She is a classic ‘buy and
hold' investor who would make Warren Buffett proud. Her investment returns
always exceeded those of my father, to his eternal consternation. He actively
traded his stocks and produced decent returns, but nothing like those my mother
achieved by simply buying stocks of companies she understood and liked, and
then holding onto them."
Well said! And, her parents sound a lot like mine. My mom is
a buy and hold investor, largely following the advice I have given her over the
many years regarding mutual funds and exchange-traded funds. My dear father, on
the other hand, a retired mechanical engineer, charts stock prices and trades,
not invests and his returns suffer accordingly.
Jim Rogers, a former hedge fund manager is a smart man but who too often
provides obtuse comments when interviewed and peppers them with all the
supposed smart trades he completed recently. To the Fortune reporters' credit,
they actually got Rogers
to say what he's investing in now. "What I've been buying recently is
agricultural commodities. I've also been buying more Chinese stocks. And I'm
buying stocks in Taiwan
for the first time in my life. It looks as if there's finally going to be peace
in Taiwan after 60 years,
and Taiwanese companies are going to benefit from the long-term growth of China."
As I said earlier, emerging markets stocks should do well
over the long-term but they certainly are volatile. Interestingly, Rogers says, "...I'm now selling long-term U.S. government bonds short. That's
the last bubble I can find in the U.S. I cannot imagine why anybody
would give money to the U.S.
government for 30 years for less than a 4% yield. I certainly wouldn't. There
are going to be gigantic amounts of bonds coming to the market, and inflation
will be coming back." I too am puzzled why some investors apparently think
30-year Treasury bonds paying less than 4 percent are a good (or safe)
investment.
Regarding U.S. stocks, Rogers is far less optimistic, saying, "In my view, U.S.
stocks are still not attractive. Historically, you buy stocks when they're
yielding 6% and selling at eight times earnings...For stocks to go to a 6% yield
without big dividend increases, the Dow will need to go below 4000." It seems
unlikely that we're going to see U.S. stocks selling at such bargain
valuations that haven't been seen in decades. Could it happen? Yes, anything
could happen but it doesn't seem very likely.
John Train, who is chairman of Montrose Advisors, a money
management firm, has five decades of investing experience and perspective and
like Bair, focused on the longer-term in his comments. "Investment opportunity
is the difference between the reality and the perception. And since many
equities are priced as though a depression might be on the way, many of them
are attractively priced." This is well said and the reason why stocks may prove
to look undervalued in late 2008 when we look back on this period unless we do
end up having an unusually long and deep recession.