I might do a post later on looking back at 2008, but I'd first like to put down some thoughts on where I see the world going in 2009 an on.
Inflation
With the complete deterioration in the economy over the last few months, there's really no short-term chance of inflation being a problem. Pretty much every indicator you look at is forecasting declining demand for a number of months: the trend line in oil consumption, reduction in business travel, hiring trends, a complete failure of a Christmas shopping season, etc. etc. - they all indicate that we're in for a continued economic decline that will continue for at least a couple more quarters.
However, the long-term chance of very material inflation seems pretty significant to me. Between the $750 billion bailout (making last summer's real estate bailout of "only" $75 billion or so seem penurious), the planned $650 billion to $1 trillion additional bailout that Pelosi wants Obama to sign on January 20th, the tens of billions of dollars (US) that foreign governments are committing to their own bailout plans, there is a huge amount of additional cash being added to the monetary supplies. I realize that to some extent this is replacing the debt (and cash) that's going away in the huge de-leveraging that we're going through now, but the scope of the additional debt the US Treasury is adding far outweighs the debt disappearing through de-leveraging.
I see inflation spiking sometime in 2010, especially since the Pelosi/Obama stimulus plan will be, so to speak, too much, too late - the time the stimulus was needed was last summer. Given that the stimulus from the Pelosi/Obama plan won't trickle into the economy until the third quarter of '09 at the earliest (by which point in time even most pessimistic economists agree that the economy will have bottomed), the next stimulus package will be largely unnecessary and, arguable, not stimulative but inflationary. Between Treasury, the Fed and Congress, they seem determined to make the same mistake supply side economists have accused Keynesians of for decades: having the foot firmly planted on the gas pedal when they should be lightly riding the brakes and then stomping on the brakes when they should be feathering the gas pedal. Pelosi et al are playing a political game and not even paying attention to how long it will take their spending to have any effect.
I also fear that Treasury is financing all this stimulation with short-term borrowing - exactly the same mistake that mortgage bankers made which got it into the subprime problem: borrowing short and lending long. {OK, the mortgage bankers made another mistake - lending to unqualified buyers, as we're finding out now about WaMu's lending practices. Although that was a predictable mistake.]
The US Dollar
Partly as a result of what I described above, I see the US dollar being stable for most of 2009 - we've seen a huge flight to the US $ over the last few months (that I think can be interpreted as a flight to safety), although that's subsided over the last 3 or 4 weeks. Long-term I see the dollar sliding back, although I think the Euro highs of last spring/summer against the dollar won't be seen again anytime soon. It makes sense for the Obama administration to do exactly what the Bush Treasury has done in terms of the dollar: talk a strong US $, but not do anything about it. It helps balance the trade deficit by making US exports relatively more attractive and imports relatively more expensive. In a tight US economy, foreign producers don't have the pricing power to increase pricing, which essentially forces foreign producers to share in our economic downturn (look no further than the EU and China bitching and moaning about the US mismanaging its economy to see how much more dependent on the US economy). Since I don't see material increases in oil prices anytime in the next few years (see below), the oil shock the US economy had from mid-2007 to mid-2008 I don't expect to see repeated.
Oil
I see oil being flat to down over the next two to three years. The problem with cartels, especially OPEC is cheating, and OPEC has traditionally had a massive problem with cheating by its members. Saudi Arabia admitted as much in November this year when it refused to agree to OPEC proposals to cut oil production further, citing rampant cheating by other members in previous months' production cuts.
I'm firmly convinced that a substantial portion of the price bubble was caused by speculators (recent WSJ articles citing statistics showing a single hedge fund trading floor controlled 11% of oil futures contracts at one point last winter/spring are strong evidence of price manipulation - evidence I expect to see borne out in the next year or so as more of the scams are uncovered). That said, speculative bubbles are never sustainable - the smart speculator gets in and gets out quickly because bubbles collapse quickly once the first pin prick happens.
Iran, Venezuela, Mexico, Russia, Dubai, and others have all built $100 plus oil prices into their government budgets - this encourages cheating as prices collapse as oil producers try to maintain their gross revenue by selling more product. Oil can't rebound in price until oil producers start to trust each other again and oil demand stops falling. And oil demand in India & China (cited often last year as the reason for the spike in prices) is cratering.
I think China's economy is much more badly damaged than anyone in China wants to admit. One problem is that there is virtually no transparency in the financial statements of Chinese companies - many large companies are privately held and there is nothing approaching SEC-type review (as bad as the SEC has been in the US over the last two years) of publicly traded companies' financial statements in China. A standardized and transparent system of accounting practices is essential for understanding how an economy is doing and China's system is totally inadequate.
The US Stock Market
I think the US markets are finding a bottom and have been for the last 6 weeks or so. Volatility has fallen pretty dramatically over the last couple of weeks, a precursor to finding a true bottom. One additional good sign is that market has had little reaction to bad news over the last few weeks - capitulation is in the process of occurring (it's a process and not a date-specific occurrence). US stocks are at dividend yield valuations that haven't been seen in a generation (even after taking into account the likely sustainable dividends, not past dividends).
Does that mean I see a V-shaped recovery with a quick spike back to Fall '07 prices? No, capitulation means that trust in the companies is broken and the recovery will definitely be a rebuilding process. That said, I do see a good possibility of a 15% gain in 2009 in the major market indexes followed by another 15% or 20% gain in 2010.
Some thoughts on individual stocks:
AAPL - Realistically I see Apple in a holding cycle over the next 12 to 18 months, mostly related to other things going on in the economy. Similarly with MSFT, Dell and the other tech giants. Apple is especially well situated though, it has metric buttloads of cash, an increasing market share in product lines across the board and new software by third parties (eg., Adobe CS4) that have finally been optimized for Intel Macs.
MSFT - Hopefully Microsoft will be able to release Windows 7 by Fall '09. Vista has never been accepted by businesses and won't be now that Win7 has been slated for '09 release. On other fronts, MSFT has been falling behind other tech companies in new product design (Zune, XBox) & the company needs to take charge of its own destiny on those fronts. Can they? Not if the rumored mass layoffs at MSFT are really happening in January/February of '09. Is this really the time to get rid of product development teams? I see MSFT in a holding pattern in the high teens and low 20 $ range over the next couple of years. Too bad - if Ballmer can't think of a better way to redeploy the $20+ billion the company has, maybe he should send it to the shareholders as a dividend.
BA - I'm not currently an owner of Boeing stock & I'm concerned enough about the 787 delays that I won't buy back in until the company stabilizes the commercial airplane side. An Obama administration doesn't mean anything good for the defense side of Boeing, so there won't be any help on that front. That said, long-term Boeing is an incredible company - I just think the time horizon to realize that value is longer than my personal investment time horizon - this may be a 15 to 20 year cycle.
AMZN - Amazon appears to have been hurt less than other retailers this Christmas season, and, helped by Oprah's endorsement a couple months ago, kindles are sold out again. Incredibly well run, I think Amazon is a cautious buy at today's prices.
Hedgefund Meltdown
I see the hedgefund meltdown continuing. Something like a third of hedgefunds that existed at 1/1/08 won't see 1/1/09 (largely due to clawback provisions on fees). Anyway, it turns out the hedgefund guys have feet of clay & I see this "industry" shrinking. Thank heaven.
CALPERS & Other Retirement Funds
I suspect that in 2009 we'll see more news about CALPERS and other state retirement systems in very serious financial trouble. CALPERS was down something like 30% in the third quarter of '08 and there's just no chance that the fourth quarter was any better. Plus, CALPERS (and other state pension funds) have a ton of money in illiquid investments like hedge funds, private equity deals and loans to people like home builders. A lot of this is hard to value & I suspect as the real value of those investments becomes known, it will turn out that CALPERS needs a bailout from California and the municipalities in the state. Once that bill comes due (unbelievably, CALPERS announced last month that it would not increase scheduled contributions due from state employers in 2009), I would expect more California municipalities will declare bankruptcy as Vallejo did.
