Friday, January 2, 2009

2008 - Review of the Worst Year in Modern History

This article details what people like Peter Schiff did not foresee: the U.S. collapse was indeed inevitable, but the rest of the world is coming down with it. He was incorrect about non-domestic investments, but he was correct about gold. A new world economic order will result eventually, but it will be quite different than what we see today. China and Japan will be forced to retrench their economies, as will the U.S., once the world gets off the dollar as the reserve currency.

Anyone who predicts a turnaround in 2009, demand specifics. So far, in reality, there are absolutely zero signals that a turnaround is near. In fact, all signals are still pointing downward. People saying a turnaround is near, are engaged in purely wishful thinking, or trying to mislead you for their own gain.

My advice: powdered milk is at an all time low, buy now and stock up. You'll need it during the upcoming food riots.

After a catastrophic year for global markets, dazed investors are emerging from their shelters to ask if 2009 will be any better. The consensus among professionals? Do not expect the big rebound that usually follows a sharp downturn. Stocks lost 42 percent of their value in 2008, as calculated by the MSCI world index, erasing more than $29 trillion in value and all of the gains made since 2003. Just about the only assets to prosper were government bonds of developed countries and gold, where prices rose as investors ran for cover. Nouriel Roubini, an economist who call the 2008 market disaster correctly, argued in a recent commentary that in 2009, global recession “will morph into a stag-deflation, a deadly combination of economic stagnation/recession and deflation.”

Philippe Gijsels, senior equity strategist at Fortis Global Markets in Brussels, predicted that 2009 would be “the year of the big shakeout, a year of financial Darwinism, where the weak get weaker and the strong get stronger.” Many retailers, banks, commodity producers and pharmaceuticals companies ended 2008 barely hanging on, Mr. Gijsels said, making them ripe for acquisition. “The people with the cash and the balance sheet strength will be able to do what they want,” he said. In the long run, consolidation will help to create the conditions for the next bull market, he said, because it will mean that capital is being redirected to its most efficient uses.

Mr. Gijsels said it was possible that the market could begin to stabilize by late 2009 if there was clear evidence that the financial crisis was ending and there were signs that the United States housing market crash was nearing an end. [Yes, it all begins and ends with the housing collapse, yet our government continues to overlook it. Amazing.]

The year began with a shock, but only a previously lonely group of bears predicted the disaster to come. Many economists held out hope through the first half of the year that because of the rise of China and India and the growing might of the European Union, the rest of the world would escape the fallout of the American subprime mortgage crisis. That hope — ultimately dashed — was never reflected in the markets. Even as economic data from Brussels and Beijing looked better than that from Washington, stocks in Europe and Asia were falling faster than their counterparts in the United States, partly because panicked dollar-based investors were repatriating their overseas investments. By the end of the year, the global economic picture was almost uniformly bad. The Dow Jones Euro Stoxx 600 index, a measure of the broad European market, finished the year down 46 percent. The MSCI Asia-Pacific index fell 43 percent. United States stocks were not much better, with the Dow Jones industrial average falling 33.8 percent, its worst year since 1931, while the broader Standard & Poor’s 500-stock index fell 38.5 percent. The last four months of 2008 stand out as truly terrible. Bank lending all but halted, and markets went into a tailspin that ended only when governments agreed to spend trillions of dollars bailing out the global financial system. If the news from the developed world sounded bad, it was even worse for many emerging markets. The Shanghai composite index fell 65.4 percent, the Russian RTS index fell 72 percent and the Sensex 30 in Mumbai fell 52.4 percent. Looking for someplace comparatively safe? You would have needed the foresight to put your money into Bangladesh, where the main Dhaka stock index lost only 7.4 percent last year, or Venezuela, down the same amount. With credit markets thawing a bit but still operating far from normally, economies around the world are still deteriorating.

Where will the first signs of growth emerge? Some analysts predict that the United States economy, which fell into recession in December 2007 and is poised to receive a stimulus package from Washington of as much as $1 trillion over the next two years, might actually start to lead the world out of the downturn in the second half of the year. But the continuing deterioration in the United States housing market, the struggles of the auto industry and layoffs almost everywhere serve as a reminder that the outlook for 2009 remains grim.

The International Monetary Fund forecasts that developed economies will contract slightly in 2009, while overall world output will grow only 2.2 percent. The fund defines a global recession as growth below 3 percent, because that is far too weak to keep up with the demands of a growing population in emerging markets for jobs. At the same time, deleveraging — the winnowing down of banks’ troubled balance sheets — continues to crimp lending. Consumer confidence in the United States and Europe has fallen to record lows. A shrinking economic pie is bad for stocks because corporate profits tend to fall, making equities appear more expensive. Analysts say corporate profit forecasts are probably still too high to accurately reflect the dimming economic prospects of 2009.

Still, Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management in London, said that investors were sitting on unusually large cash reserves, “so if the news is bad, but not devastatingly bad, then you might well see a rally.” Unfortunately, he added, any rally will likely turn out to be a “false dawn” until the economic picture begins to clear up. “The real bottom in most bear markets is when you go from capitulation” — when most investors simply give up hope — “to disinterest,” he said. “We haven’t quite gotten there yet.”

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