Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Friday, October 24, 2008

What does Bill think about the crisis, recovery, stocks?

I maintain my view that there will be an rally in US stocks going into the end of the year. Then, 2009 will open out into a long, grinding bear market going into 2011, with of course the occasional violent bear market rally. Housing will be moribund until well into 2011.

Why so dour? If one has been reading this blog, one will have gotten the drift.
  • The economy will be down for the count for a long time due to the credit problems primarily.
  • The US financial system, led by Investment Banks and Hedge Funds created the totally unregulated "Shadow Banking System" whose notional valuation, leveraged 30-100 times, is still, at this date, several times larger than the US's GDP. That is,
  • The financial system has broken apart and as of now no one knows how to construct another one. Treasury is trying A, trying B. So are banks, etc. It will take a long time to get to the part of the alphabet that actually works, and achieves the right balance of regulation and free-market incentive.
  • Unemployment in the US is headed towards 8% according to pundits, maybe more.
  • Housing is still falling despite some upbeat signs, such as lowering (slowly) mortgage rates and the occasional hopeful statistic, such as improving (lower) year-over-year housing inventory. At the margin, people can get loans, but without securitization - the engine that drove the financing of housing since the mid 80's (and thus housing itself) - home financing will just not be available in any known time frame at the scale the world has known since at least 1990.
  • All global economies are following the edict that if the US economy sneezes, everyone else gets the flu. Currently the US has the worst kind of flu itself. Everyone else is going to be carried out on stretchers for the most part.
  • (Dubai will do ok, but will be sitting there with a bunch of empty buildings on their palm tree island.)

Blah blah. All the above will take years, not weeks or months, to "work out", whatever that can mean. If the world can survive four to six years of a deflational environment, by 2014 things should really start to look up, esp. housing. But there will be tremendous global political-economic stresses during this process. Unexpected wars will no doubt erupt, and we can pray that they do not turn into WWIII.

Long term, stocks are of course the place to be. What's the long term. I don't know. Maybe 20 years? And of course, as Keynes said, in the long run we are all dead.

I continue to think gold has the best chance of retaining value in this very wild and woolly environment for at least the medium term, ie, 4-6 years. Year to date, it is down about 11%, whereas the S&P 500 is down about 40%.

Well, that's what I think, based on my readings of quite a few books, articles, blogs, etc. Could I be wrong? Not a chance...

Bill Northlich

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