In 2008 we saw some of the most dramatic financial events in a century:
* $trillions of subprime mortgage implo sion, which bankrupted the entire
US banking system .
* Lehman's fallout with entangling positions in equities, futures, real
estate, and derivatives in the $hundreds of billions . The magnitude dwarfed
LTCM.
* Biggest squeeze on the dollar . D espite worsening fundamentals, dollar
rallied 20% in the second half of 2008 as banks refused to loan and assets are
sold to pay dollar debts.
* Largest de-leveraging process . Margin calls caused severe corrections
(-50% or more) in broad equities and commodities.
* Un precedented intervention with multi-$trillion financial bailouts and
record - low interest rates o f near 0% .
W hat's in store for 2009?
We will make our calls with the aid of following charts
Gold:
Case for:
Gold is liquid, compact, universally accepted, and can not be created or
diluted at will. As investors face zero% yield, uncertain economic times, and
daunting deficits, it's no surprise that gold came through 2008 unscathed.
Case Against:
Gold has faired very well while all other asset classes endured severe
correction in 2008. Gold right now is near its historic high compared to oil and
copper. It is an emotional investment, which makes the top and bottom difficult
to call.
Verdict:
I look for side-way action for gold between $700 and $1,000 / oz as markets
battle through fears of depression to come to gri p s with inflation.
US Dollar:
Case For:
US A is the world's largest economy by far. US dollar is the most liquid
currency and de-facto settlement currency for global trades. As we go through
the deleveraging process, dollars will continue to be raised for debt repayment.
Comparatively speaking, currencies that make up the dollar index basket are in
no better shape.
Case Against:
US budget deficit will exceed $1 trillion /year, well over 5% of GDP for the
foreseeable future. This puts a strain on the dollar. There are also record
amount of dollars ab road yet to be diversified and spent .
Verdict:
The factors that drove up the dollar are temporary; therefore a dollar
correction could be underway soon. I see dollar index between 88 and 72 for
2009.
S&P 500 :
Case For:
S&P 500 dividend yield is on par with interest rate yield; something not
seen since 1950's and provides support for equities. Globalization helps
Americans tab into new markets (for example, there are 350 million smokers and
net-users in China ) and enables international investors tab into US equities.
Lastly the financial sector has been decimated and is weighted minimally in the
index.
Case Against:
The world economy is slowing down. Many companies are straddled with debts
and phased - out products, and likely won't survive.
