Only about 60% of the bad news is out, 40% bad news is yet to come (in my estimate). Some of the bad news still waiting to happen are:
Short Term (for 2009):
1. Earnings degrowth in Chinese companies, leading to loan defaults, Chinese bank failures and depressing commodity prices. There is a deafening silence from China right now, the bad news is likely to be humongous.
2. Earnings degrowth in Indian companies - though most companies will ride out the storm
3. Low commodity prices decimating the remaining value in Russian and Brazilian companies with loan defaults and more trouble for International banks
4. Slow grind down in USA with increased job seekers (fresh grads, laid off people and old people who are unable to make ends meet in retirement, all running after the same pool of shrinking jobs), causing marked reduction in salaries - bad news gadget makers and retailers and credit card companies
Long term (for 2010)
5. Collapse of the education market, since the fees are not commensurate with subsequent earnings prospect. There will also be student loan defaults, since high fees paid will not yield returns in the job market
6. Saturation in the computers and techno gadget markets will lead to poor performance by companies manufacturing these, since people will no longer buy useless gadgets when they already have a gadget which does similar work.
7. Decline in dollar value with low interest rate coupled with high fiscal deficit as the govt pump primes the economy will make imports expensive. People will stop buying cheap crap from Chinese companies because they dont need them and they get expensive. Chinese companies manufacturing useless articles will (and are already) going broke.
8. European high tech manufactures and high tech services will have a slowly shrinking market. The grind down there will be slower than US but equally prolonged.
9. Credit card defaults will continue through 2009 and 2010, putting presure on financials. It will also put severe pressure on retailers as is happening now.
10. Unexpected political events (wars) causing reduction in economic activity, effect of demographics in USA as the baby boomers age and the increased cost of medical attention are all risks not yet factored in.
My expectation:
The time to invest in India, China, Brazil and Russia is after their markets come down about 30-40% from current levels when more of the bad news comes out. Maybe later half of 2009 or first half of 2010
The time to invest in US markets is probably never in our lifetime. At least not for the next 15-20 years. If at all one has to invest, then after markets come down another 30-40% from current levels (Dow 5000 levels) in sharp downturns and trade actively, getting out on every sharp upturn.
Long term hold strategy may be to buy into low cost mutual funds at every downturn (Dow 5000 to 6000 levels) for young people. Old people are not able to hold for 10 years, so stay away from this strategy.
Stock selection will be very difficult in the next 10 years, since there is a change in the pattern of world economic activity, similar to what happened in the sixties and seventies. The tree will bear fruit in 2020, which tree nobody knows.
Old people should invest in debt securities for regular income.
Remember:
1. The time to invest long term in stocks after the 1929 crash was 10 years later in 1939.
2. The time to invest after the recession of the seventies and early eighties was 10 years after 1974
3. Stock selection after 1929 and 1974 was successful in the hands of just one or two super investors. And we dont know how much of that was luck siding with them
4. The world was changing in the 1930s. And the 1960s and 70s. The old ways died and nobody anticipated how things would be.
5. The world is on the threshold of unanticipated change, just like the 1930s and 1970s. The old ways will die. New patterns of living will emerge. The rules of investing will of course remain the same. And they are screaming - WATCH OUT! BE CAREFUL! DON'T GET TOO GREEDY!
We live in intersting times. Watch with curiosity, but keep your money safe, dont jump in too eagerly and with too much expectation.
(my post on The Motley Fool website)
Short Term (for 2009):
1. Earnings degrowth in Chinese companies, leading to loan defaults, Chinese bank failures and depressing commodity prices. There is a deafening silence from China right now, the bad news is likely to be humongous.
2. Earnings degrowth in Indian companies - though most companies will ride out the storm
3. Low commodity prices decimating the remaining value in Russian and Brazilian companies with loan defaults and more trouble for International banks
4. Slow grind down in USA with increased job seekers (fresh grads, laid off people and old people who are unable to make ends meet in retirement, all running after the same pool of shrinking jobs), causing marked reduction in salaries - bad news gadget makers and retailers and credit card companies
Long term (for 2010)
5. Collapse of the education market, since the fees are not commensurate with subsequent earnings prospect. There will also be student loan defaults, since high fees paid will not yield returns in the job market
6. Saturation in the computers and techno gadget markets will lead to poor performance by companies manufacturing these, since people will no longer buy useless gadgets when they already have a gadget which does similar work.
7. Decline in dollar value with low interest rate coupled with high fiscal deficit as the govt pump primes the economy will make imports expensive. People will stop buying cheap crap from Chinese companies because they dont need them and they get expensive. Chinese companies manufacturing useless articles will (and are already) going broke.
8. European high tech manufactures and high tech services will have a slowly shrinking market. The grind down there will be slower than US but equally prolonged.
9. Credit card defaults will continue through 2009 and 2010, putting presure on financials. It will also put severe pressure on retailers as is happening now.
10. Unexpected political events (wars) causing reduction in economic activity, effect of demographics in USA as the baby boomers age and the increased cost of medical attention are all risks not yet factored in.
My expectation:
The time to invest in India, China, Brazil and Russia is after their markets come down about 30-40% from current levels when more of the bad news comes out. Maybe later half of 2009 or first half of 2010
The time to invest in US markets is probably never in our lifetime. At least not for the next 15-20 years. If at all one has to invest, then after markets come down another 30-40% from current levels (Dow 5000 levels) in sharp downturns and trade actively, getting out on every sharp upturn.
Long term hold strategy may be to buy into low cost mutual funds at every downturn (Dow 5000 to 6000 levels) for young people. Old people are not able to hold for 10 years, so stay away from this strategy.
Stock selection will be very difficult in the next 10 years, since there is a change in the pattern of world economic activity, similar to what happened in the sixties and seventies. The tree will bear fruit in 2020, which tree nobody knows.
Old people should invest in debt securities for regular income.
Remember:
1. The time to invest long term in stocks after the 1929 crash was 10 years later in 1939.
2. The time to invest after the recession of the seventies and early eighties was 10 years after 1974
3. Stock selection after 1929 and 1974 was successful in the hands of just one or two super investors. And we dont know how much of that was luck siding with them
4. The world was changing in the 1930s. And the 1960s and 70s. The old ways died and nobody anticipated how things would be.
5. The world is on the threshold of unanticipated change, just like the 1930s and 1970s. The old ways will die. New patterns of living will emerge. The rules of investing will of course remain the same. And they are screaming - WATCH OUT! BE CAREFUL! DON'T GET TOO GREEDY!
We live in intersting times. Watch with curiosity, but keep your money safe, dont jump in too eagerly and with too much expectation.
(my post on The Motley Fool website)
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