LOOKING FORWARD TO 2010. OR IS IT 2004 ALL OVER AGAIN?
It’s easy for forecasters and amateur statisticians to draw future market conclusions based on select past performance. At every twist and turn of the credit crisis investors have compared and contrasted the current recession with those of the past. In a recent research report Goldman Sachs goes into the many similarities between 2003 and 2009 and the potential for 2010 to mirror 2004. Goldman notes:
As the macro data flow has slowed to a trickle, the weight of the evidence still points to continued, but gradual, improvement. And beyond the data momentum, financial conditions remain supportive for equity risk generally, and for our tactical long positions as well. 2004 contained many similar challenges to what we face on the cusp of 2010: waning cyclical momentum, fiscal drag and exit policy fears.
Based on these similar macro themes Goldman draws some conclusions as to how to play the potential 2010 outcome based on the performance of various asset classes in 2004:
Clear direction emerges earlier in sectors and macro themes relative to the index. Cyclical sectors, and not defensives, were still the right places to be long in 2004, the energy sector was a clear relative outperformer from early in the year, and cyclical macro tilts such as Growth and CHICON
break out on the upside from mid-2004. But in most cases, the overall returns over the year are in modest single digits with several intra-year ups and downs. If next year is anything like 2004 in this respect, then timing entries and exits nimbly will be as important as identifying the right places to be long and short.
For those that remember, 2004 was an extraordinarily mundane year for equities following the excitement of 2003. Volatility slowed to a trickle and equity returns were closer to the historical norm. Goldman believes this, combined with a weaker economy, will make for a much more challenging investing environment:
But in each case, the overall returns over the year are in modest single digits with several intra-year ups and downs. If next year is anything like 2004 in this respect, then timing entries and exits nimbly will be as important as identifying the right places to be long and short. And, with recent momentum at our backs, we do think that culling winners even at modest returns, may be in order.
Of course, as I’ve often pointed out, it’s fairly foolish to base ones investment decisions based on one data point out of hundreds. In my opinion, the current deleveraging process is unlike any recession the modern economic world has ever seen and that means the outcomes are unpredictable based on past data. The challenges ahead of us are numerous and the differences between the business based recession of 2003 and the consumer based recession of 2009 are staggering. But who am I to say that the almighty Goldman Sachs is wrong?
As well, private credit continued to expand after 2000. The only thing expanding now is government liabilities and credit. Actually, maybe it is the same … I think commercial paper increased by ~1T from 2001 to 2007, now it’s the federal and state deficit by the same amount in about 8 months. I’d be very concerned after that first 1T is gone … (soon).
We have to be very careful comparing this crisis to anything we’ve seen since the GD. 2000-01 didn’t topple GM, Bear, or Lehman, companies that had seen and survived the worst of recessions. Nor were all asset classes red across the board in those years as we saw play out in 2008. But Goldman’s bullish bias would certainly have us believe this is 2004 playing out again. How much more will the bonus pool expand if that were the case?
Goldman would have us believe we would all make money whatever asset classes we put our money: the above referenced equity, and recently Hatzius the great cry-wolf squid had us believe it would be sub-trend in 2010 and therefore great year for fixed income. Their commodities people recently scaled back oil price forecast temporarily to ease this week’s almost-record breaking treasuries issue, but insisted oil would be closer to $100 next year than Dec 2009. Needless to say, the only certainity is hat if we believe Goldman, then they would be the people laughing happiest to the bank when next year’s bonus is announced on Wall Street.
Give me a fucking break. If the market goes up in December it will only be because the crooks at that firm continue to manipulate it higher. Die Goldman.
Another way to look at it is that a more extended overbought condition is quite desirable if one is hoping to make the most of a reversal. While Goldman can find ways to make money in all market conditions, nothing is as good as a strong trend, whether on the upside or downside. The most overbought and oversold conditions are the most profitable times to reverse course for the big wins. Considering the fact that December has been an extraordinarily strong month in the past, the rise we’ve seen since March and the universal expectation of pathetic economic growth going forward, most all ducks are lined up in a row for a big reversal kickoff to a nice long downtrend. If only we can turn the current trend into a climactic overbought condition.
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