dollar now has room to fall without sparking a panic, and that no real alternative to USD hegemony is coming into view.  As for the contention that precious metals are a major contender to USD hegemony, we agree that longer term this may be the case although the parties that are funding the U.S.’s borrowing extravagance (i.e. central banks) have not shown the same penchant for gold as private investors.
 
To get a better understanding of why the U.S. dollar will remain ultra-important in 2009 consider that as recently as June 2008 the IMF was giving serious consideration to the possibility of the Russian Ruble becoming a major reserve currency. Only months later, with Russia devaluing the ruble, fears of outright collapse have surfaced.  Also consider that the bloom has come off of the Euro’s rose, the Chinese Yuan is showing no sign of revaluing higher, and the Yen is rising for reasons wholly unrelated to reserve currency considerations.  In short, the question that those calling for the destruction of USD (or the ‘hyperinflation’ crowd) need to ask is: when people run out of U.S. dollars what do (or more appropriately ‘can’) they run into? 

3) U.S. stocks will end the year flat or higher and will continue to outperform on a relative basis. The Fed has done its best to induce risk taking and there is a lot of ‘cash’ that could move back into equities.  These two points alone augur for a rebound in stocks, even if such a rebound proves unsustainable.

For the record, we do not think that U.S. stocks are as ‘cheap’ as many value orientated investors believe.  Rather, from a book value perspective we would argue that stocks are down right expensive! In the case of the Dow, it ended 2008 at 2.01 times book value and if you back out intangibles the Dow would be trading at 4.13 times book (against 1982’s tangible P/B reading of 1.03 - Excel). As for the easily manipulated headline earnings numbers, given the earnings and economic uncertainty leading into 2009, single digit P/E multiples would seem to be called for. Instead the S&P 500 trades at 18-times trailing earnings and more than 20-times forward earnings (“Operating Earnings” - S&P 500)

4) Long-term U.S. interest rates will defy extreme expectations and end the year flat or only moderately higher. The mad rush into U.S. Treasuries is likely over, but this doesn’t necessarily foreshadow a mad rush out of Treasuries. Many supposedly intelligent investors are contending that U.S. Treasuries represent another ‘bubble’ while at the same time arguing that a prolonged and painful global recession is directly ahead. We would argue that unless a viable alternative to USD hegemony suddenly jumps out of the water, these two viewpoints contradict each other.

The Fed has promised that if required to so it will buy Treasuries to try and stimulate the economy. The Fed may do exactly that in 2009. The Treasury ‘bubble’ does not go pop in 2009.

5) While last year’s ‘historic bust’ in gold may prove to be shorter-lived and not as deep as we previously believed, gold will, on a relative basis, underperform most asset classes in 2009. With attempts to reflate the global economy proving only mildly effective, no serious threat of inflation will take root (at least not in the government statistics). Furthermore, with policy makers potentially backstopping further destruction in the financial markets, the risks of a complete financial collapse are remote. Gold is, first and foremost, an inflation hedge and, secondly, a financial crisis hedge.  With the worst of the ‘crisis’ potentially over, extreme inflation/deflation expectations may be required to get gold moving above record highs.

Disclosure: We remain long-term gold bugs and see no reason to reduce exposure to precious metals completely.  We envision ourselves as potential buyers of precious metals at some point in 2009/10.

6) A historic opportunity to purchase crude oil and other commodities will arrive in 2009. The great, and long anticipated commodities bust arrived in full force in 2008, and with it speculative activity has been dealt a serious blow. From a contrarian perspective the meltdown in commodities represents a potential opportunity. Furthermore, unlike common stocks, which can go to zero, many commodities are near levels that are nearing the cost of production and cannot fall significantly further for very long.

As mentioned in our 2009 report, we envision an opportunity to purchase a specific and optionable commodities ETF in 2009 that could produce excellent returns over a 20-year period, even if little or no returns are generated over the next 5-10 years.  In other words, we think that those hoping for a dramatic turnaround in commodity prices in 2009 may have to wait, but it will be worth the wait.

7) China’s painful slowdown may well intensify over the short term, but after being punished in 2008 Chinese stocks have the potential to do better than most stock indices going forward. We would be remiss when mentioning China not to note that this is a unique period in its growth phase that could carry with it lots of surprises. One such surprise we envision in 2009 is a weaker yuan.  

8) A very short run of the data suggests that those Dow components that produce the fewest words in 10Qs and 10Ks outperform those that produce the most.  With some of the shadiest Dow components producing 10Ks in 2009 that may breach 1,000 pages, an investment theory similar to the ‘Dogs of the Dow’ may be born.

9) The Wish List will outperform the markets (again). Not quick to tout short-term performance, we nonetheless believe that the companies we own offer the potential for superior returns going forward.  During the 2000-2002 bear market we favored REITs and gold stocks, while today we like select smaller cap situations and solid dividend/distribution companies.  Entering year 9 this is the second bear market the Wish List has been involved in, and for the first time since 2003 we are growing eager to discover more undervalued opportunities.

Conclusion

Unwilling to let the free market work, U.S. policymakers have adopted the audacious goal of trying to kick-start a deeply flawed financial system; a system grounded upon unsustainable increases in asset prices and debt. Not unlike the 2003 ‘recovery’ that was backed by cheap money and regulatory neglect, these policies are destined to fail. However, there are degrees of failure that are more enviable than others.  One potentially amiable outcome would be to string out the losses over many years, thus avoiding the jarring consequences that would otherwise result from Wall Street (and its global counterparties) imploding inside of a few weeks. That said, we will never know if the hands-off approach to dealing with downturns is preferable to the interventionist path adopted last year. 

Amidst this ongoing period of painful write-downs and much needed U.S. consumer frugalness, investment opportunities are unlikely to be found by throwing a dart at the next hot asset class or stock market sector.  Rather, the theme leading into 2009 is that of being selective; of patiently dropping your line into the water and waiting for a nibble.  Contrast this tranquil activity with that of policy makers frantically casting a wide-net and bottom trawling the lake. While the consequences of overfishing vary, the basic story is that by fishing too much today you reduce the stock of fish available for consumption tomorrow.

Faced with the prospect of his country’s banking system melting down, Iceland Prime Minister, Geir Haarde argued that “We are too small a country to sustain such a big banking system” and “We will be fine. We can eat what we can fish.”  While the solution for the US may not lurk in the bounty of the sea, it most definitely does not lie in further financial machinations and delusions.