They Called It Right
These eight experts tried to warn Wall Street about the storm. And they see more bad tidings in 2009.
By Elizabeth Ody, Associate Editor, Kiplinger's Personal Finance
December 22, 2008
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Who saw the financial meltdown of 2008 coming? Why the bears, of course. Kiplinger's Personal Finance went back to see which investors, analysts and academics made the right predictions about the market and economy in 2008 and asked each for their 2009 outlook. Although some, like Jeremy Grantham, see hope for 2009, these Cassandras remain a dour bunch. As for us, we expect that the recession will end in mid-2009 and that stocks could gain 5% to 8% for the year (see Outlook 2009).
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SLIDE SHOW: Bad Media Calls of 2008 | ||
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STORY: Bad Media Calls of 2008 | ||
NOURIEL ROUBINI, chairman of RGE Monitor and professor at New York University
WHAT HE SAID: There is going to be a recession next year ... The bursting of the housing bubble -- we have not seen it yet -- is going to lead to broader systemic banking problems. It is going to start with the subprime lenders ... and then it is going to be transmitted to other banks and financial institutions all over the country. -- September 7, 2006, speech to the International Monetary Fund
HIS PREDICTION FOR 2009: I expect that the recession will be very severe and that it won't be over before the end of 2009. And even though we might technically be out of recession in 2010, annual growth could be just 1.0% to 1.5% for several years if the credit crunch remains severe. I think there is a further 15% to 20% downside risk for global and U.S. stocks, and a further 15% to 20% downside risk for commodity prices. So 2009 will be a year of recession and deflation.
PETER SCHIFF, president of Euro Pacific Capital
WHAT HE SAID: This is going to be an enormous credit crunch. The party is over for the United States ... [Subprime] is not a tiny [problem], and it's not just subprime -- it's the entire mortgage market. -- August 18, 2007, Fox News
HIS PREDICTION FOR 2009: The dollar is going to resume its fall, leading to a resurgence in the bull market in commodities. That will pierce the bubble in the bond market, causing interest rates to go up. So we're going to be in a depressionary environment, but with rising prices and rising interest rates. Our economy will be a mess for years and years to come.
MEREDITH WHITNEY, analyst at Oppenheimer & Co.
WHAT SHE SAID: We believe that over the near term, Citigroup will need to raise over $30 billion in capital through either asset sales, a dividend cut, a capital raise or a combination thereof. We believe such a catalyst will pressure the stock significantly lower. -- October 31, 2007, research note [Citigroup announced a 41% dividend cut on January 15.]
HER PREDICTION FOR 2009: We believe we are now entering a new era in the financial landscape that will be characterized by expanded forced consumer deleveraging, with a pronounced downshift in consumer spending ... Specific to the credit-card industry, we believe that well over $2 trillion of lines [of credit] will be pulled over the next 18 months. -- November 30, 2008, research note
DAVID TICE, chief equity strategist for bear markets, Federated Investors, and former manager of what is now called Federated Prudent Bear fund
WHAT HE SAID: Corporate profits, household incomes, asset prices and economic performance have all evolved to the point of acute dependency on ongoing leveraged speculation and rampant credit inflation ... Mortgage finance is tightening, with negative portents for inflated housing prices, the overleveraged consumer, scores of exposed debt instruments and financial institutions, and the highly maladjusted U.S. bubble economy. -- March 2007, letter to shareholders
HIS PREDICTION FOR 2009: The dollar will decline, and it's very possible that inflation will pick up. The S&P 500 index could easily fall to 450 or so [it closed December 19 at 887.88]. This will be a longer-term decline -- you'll see fits and starts and significant rallies, which will be selling opportunities. But it's likely going to take four to five to ten years. Investors should be selling equities and conserving cash. I think gold represents a phenomenal opportunity right now.
Reader Comments (23)
Posted by: Bob at 12/23/2008 10:10:36 AM
Interesting article but I'm not impressed. They ignored the average working man's perspective. The average worker has been under tremendous downward wage pressure and increased debt for several years. Since housing is the biggest expense, it's no surprise that the bubble started to burst three years ago. Increased gas and energy prices came next which forced many people to shift more debt onto their credit cards. Then came $4/gal gas which was the final blow to many budgets along with a totally uncaring and unconcerned Congress. Business leaders were to busy counting their commissions and bonuses to pay any attention to the rest of the Country. Now that the house of cards is falling down, it's amazing how out of touch with reality most of our leaders are. Greed at the top gave us the Great Depression. History does repeat itself.
Posted by: gloomboom.com at 12/23/2008 11:03:40 AM
Wow, such prescient people. We need to listen to them in 2009 too. I wonder if we will!
Posted by: BJ at 12/23/2008 02:18:58 PM
Bob, I'd think the 'average' working man could budget just fine through this environment. I believe the average working family has come to 'need' many luxuries that shouldn't be part of an average person's budget. Keeping up with MTV, and the Jones' next door seems to be a large problem. Big TV, Cable TV, 5 year or younger cars, cell phones, designer clothing, starbucks... Maybe you're not in this group but I'm SHOCKED at what the average public expects to be able to buy to "survive".
Posted by: wolf at 12/23/2008 03:56:17 PM
these are last years soothsayers ..they are never right a second time....
Posted by: Dan Rossini, The Cat at 12/23/2008 04:46:03 PM
Wow, what sages! Seriously, this was obvious in 1999, when we saw the national savings average dip to below 0% for the first time in history. Some of us thought the dot-bomb would bring about the death of the credit market, but it took Greenspan's decision to deflect that recession in an expanded, prolonged bubble, so that we can have an expanded and prolonged near depression now. Thanks a lot Alan! Your lack of foresight will never be forgotten...
Posted by: Fortunato at 12/23/2008 05:34:56 PM
I am always amused when people finger gas prices as the culprit. The avg person drives 10k/yr...do the math. Does that break a budget? More like people blowing tens of thousands on autos, home improvement and lifestyle. For years I saw people living really really well and wondered how'd they do it. Now I know!
Posted by: Rob at 12/23/2008 06:02:25 PM
I couldn't agree more...people today suffer when can't watch their latest "Friends" or "Simpsons" episodes, or when they can't buy a new car every 2-3 years- heaven forbid having to own an 8-year-old car, or having to make your own coffee in the morning. Or the ‘need’ to spend $150/mo to send videos/txt from your phone to stay “connected” with people. Morons willingly move into houses 7-8x their income, then cry when having to downsize to a "normal, and small" house. Wah. Give me a break, society is so friggen spoiled today.
Posted by: Spunky at 12/23/2008 06:06:27 PM
Peter Schiff for President.
Posted by: Klaatu at 12/23/2008 06:50:06 PM
Since the stock market is a casino only with the odds in your favor, to assume that one will be correct again in a market prediction is naive. Only way to profit over the long term is stay diversified and take financial magazine opinions lightly. They're trying to sell you something, after all.
Posted by: Mike at 12/23/2008 08:16:02 PM
The average American is just as much to blame as the banker. We can choose to sign for the big house with the balloon mortgage or we can think for ourselves. Blame should not be just on the banker, but shared with the person in the mirror. That goes equally for all the "toys" we must have, just charge it, then transfer debt to another credit card. Not very good economics. Greed by government, wall street and our own personal wants are the root of this problem. Our leaders throwing Billions at the problem is not going to fix anything either, just delay the inevitable. 2009 could be a very bad year for a lot of people. I think next Christmas is going to be very different, I think the US will be very different. This could make us stronger as a nation to slow down the foreign debt we owe, but it will cost the average worker far far more than the banker. Sucks to be on the short end of this deal. I work in Michigan, unemployment is double digit, it's going to get bad here soon. Last one out, please turn off the lights....
Posted by: Bob at 12/23/2008 09:20:38 PM
Well BJ, if you can buy an average $160,000 house, put a couple kids through college, and pay your grocery bill and taxes on $10-$14/hr(average worker wage)without your wife having to hold down a second job and going into debt up to your ears, I'd say you are quite a frugal person. Now throw in increased healthcare costs and $4/gal gas for two people to drive to work and see how you do. ...Now that those working families are being forced to give up those "luxuries" you will really see our economy fall flat. The worst is yet to come. I don't need the eight experts in this article to tell me that.
Posted by: dave at 12/23/2008 10:06:04 PM
BJ, you hit the nail on the head. Huge numbers of people do not know the difference between NEED and WANT. Which is fine with me until they start financing their WANTS by taking out home-equity loans or refinancing their mortgage and then whining that they can't make their mortgage payments!?! Worse yet, they finance the WANTS by carrying large credit card balances and paying exorbitant interest on the balances. Perhaps this "crisis" will reduce the unfettered spending using credit that runs rampant in this country!? Well we can hope for that at least, can't we?
Posted by: kevin at 12/23/2008 11:38:44 PM
Hello!! Does anyone own a friggin calculator out there. Add up our total national debt, bailout debt, loans, medicaid, medicare, social security (click, click, click) then multiply that by 3% (click, click, click) Then deduct that from or gross national tax revenues (click, click). What do you got? I got fuhgedabouit!!! We're done folks. You know how I know? Because most of the morons out there can't even do that simple equation with their own finances.
Posted by: ricecake at 12/24/2008 12:45:12 AM
Speaking of inflation, the experts who worrying about the future inflation forgetting that the worst inflated prices people have paid during the housing bubble period. They are: 1) High mortgages - more than half of the household income wiped out by paying the mortgage 2) Property tax inflation, if you buy at the high price, only to pay property tax alone is huge burden and pain...yearly 3) Gasoline price was twice as much as now...So now when the bubble (has) burst, it's possible the worst inflation period has been over... except if you have to borrow money of course. Because the high interest rate is a form of inflation too. I'm not one of those people (who) benefited from the bubble booming economy and I'll be OK as long as I still have a job. Nothing change too much for me. Whatever happen(s) in the future, I actually like quieter city street, less traffic and slower life pace. I think during the bubble period, lots of people were just busying rushing around like no head flies basically doing much about nothing. Now it proved my feeling was right. Grasping grasping, then bang all are gone.
Posted by: RobL at 12/24/2008 01:26:02 AM
OK, calm down folks. We're not "done" (whatever that means), as some on this board say. The sky is ALWAYS falling in Peter Schiff's world, so I wouldn't put a lot of stock in his outlook. He seems to think the U.S. is alone in this, but far from it. The "decoupling" theory is pure B.S., as we're seeing now. We are in for an extended period of difficulty, but we came through the depression in the 30s and we'll do the same again. Tighten your belt and keep your wits about you and you'll be fine. Stop with all this Chicken Little crap and grow some cojones!
Posted by: julia at 12/24/2008 02:10:26 PM
Don't need a calculator. I just checked my wallet (again.) I still don't have enough money to cover anybody's bailout other than my own....
Posted by: AggieMike at 12/25/2008 07:57:43 PM
What is even scarier than what Kevin mentioned is that our leaders is that the solution is to borrow and spend.
Posted by: P.J.Andros at 12/25/2008 08:12:31 PM
Christmas Day, 2008, Everyone, so-called experts and blogger-smucks alike, agree 2009 will be deplorable; so, now I'm convinced only that buying (affordable) equities individually or in funds is at least as likely to be a (bull) positive outcome in 2009...
Posted by: Dave at 12/26/2008 07:29:21 PM
for each one of these people that forecasted the downturn there were many more that didn't. Monday morning quarterbacking in this lookback. Good article, but I've doubled my purchasing of equities every month starting a couple of months ago. American companies (and some internationals) are in a 'fire sale' right now with bargains similar to retail holiday sales with 60% OFF!!
Posted by: MHH at 12/29/2008 04:32:46 AM
You don't put a lot of stock in Peter Schiff's outlook? He's been 100% right even in the face of 2-3 other so called "economic experts" over the past few years (You-Tube "Peter Schiff was right"). I agree this country needs to grow some cojones... it's called stop spending money you don't have and begin saving for the future. Also, let companies that make crappy products fail and stop with bailouts. Lets take the medicine now and get this country back on track!!
Posted by: jam at 12/30/2008 04:29:10 PM
I agree with MNH. People have to learn how to stop spending. People can't continue to have a buffet mentality towards money. American people need to get back to the basics of needs first and wants second. Even with low interest rates and depreciated home values people are not spending. What a joke after Christmas sales. In fact some items have increased in price. 2009 doesn't seem to be better and maybe this is a learning lessen for Americans to think about.
Posted by: raford at 12/31/2008 12:15:46 AM
C'mon people. When you constantly predict doom and gloom you are bound to be right at some time in your life. Did it really take a genius in finance to see that the housing bubble and its ancillary chicanery would not bring about the situation we see today? And all this talk about the U.S. turning into Cambodia while the rest of the world shrugs off this crisis is risible.
Posted by: Jason at 03/21/2009 07:40:36 PM
The credit must loosen back up.They've gone from ridiculously loose to ridiculously tight.Cutting limits and raising rates on credit cards will further criple the economy and small business. Government spending is just outrageous. They've bailed out the banks and they're sitting on the cash. Congress,rep or dem, are all just a bunch of incpmpetent idiots with no accountability.We need to start over.They might as well have just sent everyone one big fat check. We're the ones who will have to pay for it anyway.