Better late than never, Macro Man is happy to reveal is list of non-predictions for the new year. And so, without further ado.....
1) Last year's lows in the S&P will NOT hold. Consensus looks for 2009 earnings to be roughly the same level as 2008. This looks too high. The economic environment in the US and the world is not the worst since the early 80's, it's the worst since the 1930's. And while the end of the Great Moderation will bring with it the end of the uber-leveraged business model, that model will go out with a bang rather than a whimper. The growth of leverage in US corporation can be seen in the chart below; observe how during the period of relative macroeconomic stability (1982-2006), each recession brought about a steeper drawdown in corporate earnings from the cyclical peak. Macro Man expects a substantially deeper drawdown than during the previous recession, both because of the continued unwinding of leverage in certain sectors and because of the execrable macro backdrop. Ultimately, this should lead to 2009 equity lows modestly below 2008's.
2) 2009 GDP forecasts from the Fed, ECB, and the UK Treasury will NOT be achieved. The Fed's last forecast annex expected a mid level of 0.45% for 2009. The ECB staff forecast in December looked for a mid point decline of half a percent in 2009. And Alistair Darling, one of the great purveyors of fiction of modern times, forecasts a fall of 1.1% in the UK. These outlooks are all grossly over-optimistic.
3) The "bond bubble" will NOT pop. The theme of the great exodus from US assets, particularly government bonds, has gotten quite a bit of traction thus far in 2009. A US budget deficit reaching thirteen digits would also seem to be a reason to flee Treasuries. However, given Macro Man's view of an extended period of extremely poor economic conditions, he believes that this will be a 2010 story rather than one for this year. He is old enough to remember when some punters thought JGBs were the "sale of the century" at 3% in late 1995. Yields traded up to just over 3.5% in early '96, then fell back below 3 and have never been back since.
