Happy New Year - and predictions for 2010

I wish everyone on this forum a very happy new year.My two cents worth of predictions for 2010:

Q1-Q2 2010:

US will see recession and a stock market collapse.

China will see RE and stock market collapse.

Indias stock market will top out by Feb 2010 and will start falling after budget and keep falling throughout rest of 2010. RE prices in India will stop rising and there will be few sales after budget. New launched projects will stall. Prices will stay steady or dip 5-10% (in affordable apts) or 10-20% in luxury apts.

Gold will rise 20-40% in dollars (1400 per ounce)

Q3-Q4 2010: We will see Shanghai 2000, Dow 8000, Sen 12000.

Commodity prices will collapse. Metal stocks will do badly (exit by Q2).

Gold might slowly fall, but I am not sure - might keep rising - unpredictable.

RE companies will face fresh liquidity problems as interest rates will rise. There will be no more buying in RE.

End 2009 marks the end of lift in RE sales and prices, reflecting pent up demand and 6th pay commission arrear related sales.Fresh launched projects of Dec 2009 will see no sales and will take a long time to build too.

The phony recovery will be over in 2010 and the return of bear markets and recession seems unstoppable.

I think Dow will fall for the next 20 years. I expect it to fall 20% in the next 6 months, rise and then then keep falling with lower tops and bottoms for maybe 3 years. It will go to sleep in a dungeon after that.In real terms, Dow will fall more. Because of inflation, which will keep the dollar price for shares at the same level even as poor economy will lower share value, nominal Dow will fall less.

There is a possibility that US might go into a deflationary spiral. But I am not at all sure, gut tells me stagflation.

In US RE, I am sure of 20 years deflation though.

Short term interest rates will be kept as low as possible by the fed. Its a delicate balance. US fed action will be ineffective, but easing by ECB, China, Brazil/Russia (bothered by falling commodity prices) will prevent global deflation.Stagflation is my bet.

India will see higher interest rates and high inflation (no deflation in India, I am 100% sure). We are the only country without overcapacity in anything (RE included).USA has many million homes more than number of households (1.8 million or 18 million empty houses from what I remember. Anyone have exact data?).

China has no slums - it also has more homes than households, although many are two room hovels (better than juggi). These homes are all that the Chinese can afford though - they cant afford to live in the palatial flats they have built. Banks which have financed Chinese RE will go belly up. Most Chinese banks are now Zombies, people just havent seen the dead eyes of the zombie yet, that is all.

Despite low fed short term rate, bond yields will go up. Idiotic 401 K investors who sold stocks after the crash and went into bond funds will lose half of their capital values, as yields will double. Americans have been total idiots this decade. They have fled to the safety of treasuries through bond funds - a good trade when fed was lowering, a really bad investment to hold as rates rise, no safety there at all! Total total idiots. I expect them to watch their 401k fall further as bonds crash, then exit bond funds after they have taken their fall, shift to equity which will shore up values for a while in 2010 and early 2011 and then stare at further erosion as their shares in broken companies yield nothing.Americans are so badly screwed, so solidly screwed. Their capital (of 50 years of work) is now burnt to ashes.

The baby boomers have crapped on their dinner plate.Equally doomed are Indian IT and other outsourcing ventures. Stay away from their stocks.

I base all predictions on gut feeling, on data absorbed here and there on the internet. Nothing more. I am not an analyst, I am a consumer of analysis. So Wiseman, 8000 is a guesstimate. Could be 6400 too. But I prefer 6400 for 2012, 4000 for 2015 for the Dow.There can be no more bailouts. Not possible, USA is bust. The more it prints, the more US pensioners will get screwed and blame Obama for it. No way Obama will print more money, not if he wants to win the next election.

In any case, Obama will lose the next election. He is going the way of Jimmy Carter.

I agree, my predictions are based on bits and pieces gathered here and there in internet and dont mean anything. Except that I personally believe them and put my money where my mouth is.I post them here because I get your counterpoint, that helps me refine my viewpoint and avoid costly or stupid mistakes.

Dow will fall next 20 years. Let me give 5 reasons.

1. Populations dynamics. Just like the Japanese baby boom aged, American baby boom is also aging. The most productive members of USA are the whites and their population is in decline. US population is increasing because of immigration of less productive MExican population. Terminal decline.

2. Currency devaluation. American companies selling in America will do poorly. American exporters and multinationals will do well.Yes, Dow may change its composition to multinationals and be at 20,000 also. But existing Dow will be zilch. Nobody can predict.

3. Terminal decline of RE. Currently houses outnumber population. With decining population, they will remain unfilled or be filled with immigrants who will pay less/pay in depreciated currency

4. Decline in commercial RE for next 5-7 years. Depreciation of current built property will erode values further.

5. What happened in Japan is echoing in USA. Japan had 20 years of recession. They had 120 million high quality workers. USA also has 150 million high quality workers and another 150 million poorer quality workers. Mean wages will fall. I can see no reason why things wont repeat in USA and have 20 years of recession. They will go the same way. Stagflation will wipe out the savings of American old people and they will be dependent on their younger workers to be alive/healthy. Youngsters will have to support the old for 20-40 years, or old people will have to work till 80 or their health fails.

That is not the prognosis for healthy wealthy or wise!!!!

401K of most Americans is weighted currently towards bond funds. This is after switching out of stock /stock fund in 2008 after markets fell, after 25% loss of capital. Now if they remain in bond funds, they will lose another 25% of capital.Rest of capital will depreciate anyway due to inflation. Average American retirement fund of around 50,000 dollars is grossly inadequate. They need at least 1 million per person. That is 300 trillion for their total population.

Current world wealth is around 450 trillion including all assets. It includes 70 trillion of assets whose value is not clear and can be anything. Total US wealth is around 150 trillion dollars, half what they require.And their capital assets are depreciating faster than replacement. Of course the Americans are screwed.

As I said, I am not an analyst. I consume other's analysis. Much of what I believe is already posted in this site in various places. Click on my name and read previous posts to gather what I believe in. I cannot reproduce it all over againTry reading a blog called Of two Minds. Much of what I have been reading is summarised on this site (though I dont believe everything there, but much data is encapsulated for easy reference).

]http://www.oftwominds.com/blog.html[/url]

As posted on Real Estate Discussion forum

Cutting politicians down to size

Vir Sanghvi has once again given expression to the anguish of the middle class over extravagant politicians. One way to "socialise" politicians is to build a single multistory apartment complex of 543 flats where every single MP will live in the same kind of flat. There will be no more fighting over bungalows and no need for renovations. It will markedly reduce security needs by confining to one place, instead of spreading thousands of policemen in bangalows all over Delhi. A bulk of the security policemen will be released to provide protection to the common man also. Special armoured bulletproof buses with the best security can provide transport from this apartment complex to parliament every hour - eliminating hundreds of cavalcades holding up traffic. It will also cut the bloated ego of our politicians down to size.

Second look on Market Timing

On February 3 I wondered when to get back into the market with my successful exit cash. To cut a long story short, I did not get in, when I could have doubled my money in 3 months. I kept waiting and then it was too late. All I could do was book a little more profit for some holdings at Sensex 15000. Good timing for the exit. Again, this only reinforces my earlier belief (see Feb 3rdpost) that it is easy to exit but difficult to enter well.

I console myself with the thought that nobody could have predicted such a great election victory. And the lesson learned is that 3 months of pessimism wipes out all weak hands who sell and exit. Markets in oversold territory will bounce up after 3-4 months of pessimism. Even a 20-25% gain from 8000 to 10000 Sensex or so would have been worth it.

Now I am hoping for a rerun of the 1931 second dip after the bear market correction, so that I can get in.

Sensex 6000, where are you?!!!

Musings on Real Estate

(Post from India's housing bubble discussion board)

My point of view nowadays is that it is better to buy now before inflation wipes out the Rupee.

There is oversupply in the markey for real estate.But if you research the market, you will find that oversupply is in the premium/luxury market (>50Lakhs). Nobody built affordable i.e. 20-30 Lakh flats in the last 5 years. Demand in this segment is inexhaustible for the next 50 years. Also rent as a proportion of cost is favourable in this price range. One can think of getting a renter for 15000 bucks for a 30 Lakh flat. Nobody will pay 30000 rent, even if the flat is a 60Lakh luxury one. Even if they do, they will think of renting close to work, not in the boondocks where the flats have come up recently. I doubt if anybody is going to rent the luxury flats built recently (those who can afford such a rent have purchaed 3 flats each!). If one is thinking to buy a luxury flat now, I would say OK if you are going to live in it. Not OK as investment - wait for at least one more year.

Affordable range flats are not going to correct any more. Builders have been bitten once - they wont oversupply this time. They will trickle in small number of new projects for the next 2-3 years and will slowly start raising the prices as inflation (cement, steel, tiles) kicks in. They have purchased land at high price for luxury flats with high margin. They will not want to build cheap flats on them if they can avoid it. They will keep as much land as possible with them for 2-3 years, waiting for market to improve, then launch more luxury flats at even higher (inflatin adjusted) prices.

Just to satisfy my curiosity, can anyone tell me how much is the EMI per 1 Lakh loan (for 15 years) currently? I need it for calculation. At Rs.1000 pm EMI for 15 years, repayment is of 1.8 Lakhs on a 1 Lakh loan. In India's history, a 10 Lakh flat has always been worth more than 18 Lakhs after 15 years - not forgetting rent received/saved which hasnt been accounted. Will a 30 Lakh flat be worth over 60 Lakh after 15 years? I have no doubt. It is a great leverage play. But I dont want to spend all my salary on an EMI for something that will be valuable when I am old/dead. So I never leverage.

If you have 30 Lakh in hand, it will double in 9 years in a safe bank FD at 8%. Will a flat bought today for 30 Lakh double in as many years?

I am not sure.

SIMPLE RULE: Rent or Buy?For self occupation, in USA, the simple rule is that if the property is priced more than 200 times monthly rent, it is better to rent than buy.So if you can get a flat for 5000Rs rent, you should buy it only if it is for 10 Lakhs or so. If it costs 20Lakhs, you are better off renting.India traditionally has high RE values. I wonder what the multiple should be? I stick to the same 200 . At 15000 PM rent, 30 Lakhs is what I am willing to pay. I can buy a juggi. Or a flat 50 KM away.

Shubh Chintak, while I am in agreement with you, I think the deflation (as regards RE) has been happening for the last 6 months. Rest of the deflation in RE is going to be relative - to galloping inflation in essentials (I expect that to start in 2010 and last till 2014). RE prices will stay the same till 2012 while everything else will go up in price. 2012 onwards RE prices will also go up as cement, steel and tile prices also go up.So 2012 will be the time to time the market with built up property. For upcoming projects, the time to time is NOW!

Real Estate scenario: India vs USA

I have often wondered about the reason for real estate price disconnect between India and US. Median house price of 200,000 $ will get you a lousy three bed room flat in India with poor services. Some possible reasons are:

1. Houses in USA are built of wood and last 20-30 years
2. Taxes are high for the services
3. Land is cheap.
4.If Indians took their currency to USA, it would depreciate massively to a level where you would no longer be able to afford a house

There are two issues between India and USA. First house prices in USA are very cheap compared to Japan (where land prices are much higher and quality of construction is very good- for 200,000$ you will get a tiny apartment), England (where land is slightly higher priced, for 200,000 $ you will get a small wooden town house), Germany and rest of Europe (land prices are higher, zoning laws very strict, very good quality houses are built - to survive a tank blast :-), $200,000 will get you a one room apartment, a million dollars will get you a slightly bigger two room apartment). All these countries offer good services and connectivity.

In India we have very high prices. Reasons are

1. Urban land cieling act (raises land price),

2.Agricultural land cant be used for urban land without notification (raises land price)

3. High stamp duty (raises cost of ownership and encourages black transaction

4. Poor law enforcement (increases transaction cost due to legal hassles)

5. Tenancy laws - they are so regressive that nobody wants to build for rental income, especially since law enforcement is so poor. Hence rents are high and house supply is low, increasing house prices

6. Political parties want to peretuate poverty (i.e. Congress). It wants to keep slums as such, so that they are given a Hobson's choice - vote for us and only then we will let you live in this lousy slum, which is illegal, but surviving because we let you be. That is why parties prefer to have reasons 1,2,3 and 5 - they benefit middle class directly. They would benefit the poor indirectly, but poor see their slum home demolition as a direct hit on their livelihood - they are too stupid to know better. They dont know that living in a slum is not their lot in life, with good tenancy laws they can all live in better housing. Politicians get away with it because it IS possible to live in a juggi. In the developed world, you would freeze to death.

7. Extremely poor connectivity. The moment one gets good roads, the prices of houses would plummet because rural land prices are extremely cheap. So that is why politicians dont want roads - their illegally amassed urban property would collapse in value.

It really makes sense for Indians to buy abroad. The moment they realise this there is going to be a likely flight of people and capital

Though it would be one hell of a commute from Delhi to NewYork! :-)

On Protectionism

As a person from India, I must say that potectionism for USA makes sense. Its bad for India, but good for USA for a couple of decades at least.

With free trade, the poor and less able American worker will be reduced to 3rd world standards. The only way to keep him rich like he is now is through protectionism.

Without barriers, people will be paid according to ability. Some 2 million Indians will earn well like top technocrats of USA. Some 20 million Chinese will too - in manufacturing jobs they will take away from Japan and others. But 100 million average Americans who dont have brains to do real quality work will lose their standard of living - they will earn minimum wage and will have no hope.

If there is justice, these dumb Americans deserve to live in their level of (in) competence. If there is justice, top Indian technocrats and hard working Chinese factory workers will get their due in salary, reaching developed world standards.

But 100 million Americans will lose their standard of living for this justice.

It would be stupid of the American govt not to protect them, thinking only of abstract justice - and I dont think US will stay away from protectionism, they are too smart for that. They know which side of their bread is buttered.

Musings of a China Bear

Chinese growth was more extensively investment driven than people realise.

A lot of Chinese capital investment will have to be written down - that has not happened yet. It is my belief that the exposure of overinvestment in China and loan defaults there, will herald the nadir of the current economic and stock market downturn.

If the Chinese govt tries to cover up bad loans, it will probably evaporate the 2 trillion dollars they have accumulated. Not all of that is a trade surplus, a big chunk is dollar investment made in China after conversion to local currency. There will be flight of capital out of China in such a situation.

Chinese inductry is also heavily energy dependent. If they resume their growth path, it will push up energy prices with sudden spike in oil prices, which will ensure that the growth in China and everywhere else is nipped in the bud. A growing Chinese economy is synonimous with rising oil prices - no wonder Buffet invested in energy recently. Unfortunately a standstill Chinese economy is also bad news because Taiwan, Japan and USA along with other world banks have made heavy investments in China and their investment returns will suffer.

China is between a rock and a hard place. It cannot grow anymore. Its choice of being the manufacturing factory for the whole world means it is dependent on other people buying what it produces, to push its population from agriculture (under/un-employment, basically) to manufacturing jobs. This model cannot employ more than 4-500 million people. It is already close to this level.

Any further increase in factory employment will mean taking unacceptable levels of jobs away from US and Europe. It also requires heavy investment in training and high tech manufacture - that means high wage jobs, not going to be ceded so easily by USA and Europe. China will have no cost advantage in this realm - training a high tech worker will cost the same in US and China, so why move to China.

The next 20 years are going to be hard for China. The easy growth they have witnessed will now be more difficult to come by. They will have to be a lot smarter in producing what people want, and things people cannot do without. Most of the gadgets they currently make, are unfortunately the first useless expense that people are going to cut back.

The whole world is switching to a more sustainable economic model, where there will be less waste. Thats the only way 3 billion people in third world countries can become globalised - the earth cannot sustain 1 billion Indians, 1 billion Chinese and 1 billion from other countries in an American style of life. America itself will move away from it, this recession will force the issue. Life style will change in unprecedented ways. Old ways of analysis will not be valid anymore in the new economy.

Most of the investment made in China assumes that the current lifestyle will sustain for 20 more years. They have made massive infrastructure investments on this assumption. These investments are never going to bear fruit - people are not going down this road anymore - after they just finished building the road! :-)

So all those investments are down the toilet. So far, only their stockmarket has tanked some 60% from the highs. Where is the rest of the bad news?

It is my belief that the Chinese are keeping things quiet so that they dont precipitate a crisis like what happened when Lehman went under. They are shit scared, but are playing their cards close to their chest. The Chinese have mastered the capitalist game as well as anybody could - and they know that one whiff of failure will mean massive flight of capital, since people will want to cut their losses.

Are you kidding me that Chinese banks made only good loans and that they will continue to be services. No way!

Capitalism doesnt work that way. After the binge comes the hangover. A poker face is not going to hide the massive splitting headache in the Chinese economy.

I am a China bear. But I am also worried. China is likely to respond to any really bad downturn in their economy by attacking their neighbors. They may figure that the only way to give employment to their millions is as cheap cannon fodder - the same way USA got out of the depression!

I thought a world recession would be caused by spiking oil prices. I was wrong - bad loans did that.

A combination of bad loans and spiking oil prices can still be the triggering factor for a really bad Chinese recession. which it would export to the world.

Be Foolish, not foolish. The writing is on the wall
As posted on The Motley Fool