Dead on target at the beginning of the new year, 75-year-old Byron Wien again published his annual list of surprises to expect in 2009. Wien, chief investment strategist of Pequot Capital and one of Wall Street’s best known veterans, has been publishing his list of economic, market and political surprises since 1986.
Reviewing Wien’s 2008 list, he got about half of his predictions right.
He foresaw the US entering a recession “as housing starts stay soft and banks are reluctant to lend to anyone where a whiff of risk is apparent”, and the S&P 500 Index declining by 10%. He also correctly predicted the ECB commencing an accommodative monetary policy, Barack Obama’s US election victory and Russian President Dmitry Medvedev becoming more assertive in world affairs.
However, Wien was quite wrong with his prediction of the US dollar strengthening during the first half of 2008 and weakening in the second half. Also, he expected the price of oil to go down to $80 a barrel early in the year and rising to $115 in the second half.
Wien believes his ten surprises have at least a 50% chance of occurring at some point during the year. Although this is not a very high probability, his predictions nevertheless make for stimulating reading. His list for 2009 follows below.
1. The Standard and Poor’s 500 rises to 1,200. In anticipation of a second-half recovery in the US economy, the market improves from a base of investor despondency and hedge fund and mutual fund withdrawals. The mantra changes from “fortunes have been lost” to “fortunes can still be made”. Higher quality corporate bonds, leveraged loans and mortgages lead the way.
2. Gold rises to $1,200 per ounce. Heavy buying by Middle East investors and a worldwide disenchantment with paper currencies drive the price of precious metals higher. In a time of uncertainty, investors want something they can count on as real.
3. The price of oil returns to $80 per barrel. Production disappointments and rising Asian demand create an unfavorable supply/demand balance. Other commodities also rise, some doubling from their 2008 lows. Natural gas goes to $9 per mcf.
4. Low Treasury interest rates coupled with huge borrowing by the Treasury send the US dollar into a serious downward slide. Overseas investors become concerned that the currency printing presses will never stop. The yen goes to 75 and the euro to 1.65.
5. The ten-year US Treasury yield climbs to 4%. Later in the year, as the economy shows signs of recovery, economists and investors shift their mood from concern about deflation to worries about inflation. A weak dollar, rapid growth in money supply and record-setting deficits (over $1 trillion) are behind the change.
6. China’s growth exceeds 7% and its stock market revives. World leaders credit China’s authoritarian government for its thoughtful stimulus policies and effective execution during a challenging period. The Chinese consumer begins to spend more and save less and this shift is behind the unexpected strength in the economy.
7. Falling tax revenues from the financial sector cause New York State to threaten bankruptcy and other states and municipalities follow. The Federal government is forced to step in and provide substantial assistance. The New York Post screams “When will the bailouts stop?”.
8. Housing starts reach bottom ahead of schedule in the fall, and house prices stabilize after dropping 15% from year-end 2008 levels. The Obama stimulus program proves effective and a slow growth recovery begins before year-end. Third and fourth quarter real gross domestic product numbers are positive.
9. The savings rate in the United States fails to improve beyond 3%, as most economists expect. The concept of thrift seems to have vanished from American culture. Peak job insecurity and negative growth drive increased savings early in the year, but spending resumes as the economic growth turns positive in the second half, making Christmas 2009 the best ever.
10. Citing concerns about Iraq’s fragile democratically elected government and the danger of a Taliban-controlled Afghanistan, Barack Obama slows his plan for troop withdrawal in the former and meaningfully increases US military presence in the latter. In a hawkish speech he states that the threat of terrorism forces the United States to maintain a strong military force in this strategic area.
The video clip below features Byron discussing his predictions in a CNBC interview. Click here or on the image below to view the video clip.
Originally published at Prieur du Plessis’s international investment blog and reproduced here with the author’s permission.