Saturday, January 24, 2009

GammaBoy's 10 Outrageous Predictions for 2009

Saxobank published a list of 10 outrageous predictions every year. "Outrageous" as in unlikely, as their call in 2008 that Ron Paul would win the election. Here are their 2009 calls. In the spirit, I have decided to create my own list of 2009 predictions. These are relatively low probability, or at least, if probable, are far from being conventional wisdom. Most likely I am setting myself up for well-deserved ridicule on January 1, 2010, but here goes...

A major riot in a U.S. city

I made this prediction for end of 2009 way back end of 2007. It sounded crazy then. Not so much now. There are numerous potential drivers for a riot (shortages, bank runs, dollar collapse, general shock and disappointment that Obama is not the messiah), but I am thinking the odds are good several come together to drive people into momentary insanity. It is already happening in Iceland, Greece, and the Baltics. Iceland has been the canary in the coal mine for this whole global crisis. Odds are good the contagion of violence spreads to the the UK first, and from there to its former colony. Just pray China doesn't catch the bug.

Shortages of Goods/Supply Chain Breakdowns

Between the turmoil mentioned above, waves of bankruptcies, and a breakdown in global credit finance, there is a very significant risk of breakdowns in global supply chains. Either suppliers in a specialized niche of a supply chain will disappear, or as has already happened in a few cases, buyers will be not be able to get the credit necessary to complete a purchase. Considering the complexity of modern supply-chains, a few broken cogs can lead to unexpected and chaotic outcomes. The risk of goods shortages is high, particularly in agricultural goods.

Pensions are the #1 financial crisis story

Pensions will be to 2009-2010 what the mortgage crisis was to 2007-2008. Most pensions are ridiculously underfunded, and the market events of 2008 destroyed what meager hopes some pension managers had for recovery. Public employee pensions, which have been much more generous to employees than their private counterparts for years, are in particular peril. CalPERS, the California Public Employees' Retirement System is a textbook case. There is simply not enough money in pensions to pay out anywhere close to what retirees are expecting. A battle is brewing between working people/taxpayers and retirees. Somebody is going to get the shaft. The media is still pretty silent on this crisis, but that will change, and pensions will start to steal the headlines. [The only good news is that most retired people are not up for rioting.]

Inflation/Deflation mix

If you follow economic blogs, there are ongoing debates about how this crisis will unfold. Will the government start printing money to make up for all the shortfalls leading to inflation (and maybe hyperinflation) or is the destruction of wealth so complete that we are headed for massive deflation? Personally, I have no idea. The wild card is the federal government, and since their economic initiatives seem to change daily, you need to be a Kremlinologist to even begin to discern the way things are going to play out.

Nonetheless, as a trader, you learn to think in terms of "spreads", the comparative price difference between two separate things. In that framework, it matters less whether the absolute price of A and B go up or down but how they behave in relation to one another. So here is my inflation/deflation theory. The price spread between goods is going to follow Maslow's hierarchy of needs. The more basic a good is for survival the better it's relative value is going to hold up. The more inane, luxurious, or superfluous a good, the more the relative value of the good will decrease. For example, the price spread between a used Ford F-150 and a new BMW 7-series will decrease. And so with a penthouse in Manhattan and a flat in Oklahoma City. A Cartier watch and a Seiko. Granite counters and laminate counters. Etc.

In short, I'm not sure if the price of gasoline will go up or down. But if it costs 25,000 gallons of gasoline for a BMW today, rest assured, the price of the BMW in terms of gasoline will drop over the next several years.

Russia goes nuts

Russia is going to step back on to the world stage in a big way in 2009. Their affair with Georgia and their recent tiff with Ukraine are just initial feints in what I expect to be a crazy and tragic year for Russia and its neighbors. Even as the country continues to hollow from the inside out, I expect it to become much more aggressive with its ex-satellites. Their tanks will roll again this year.

The Euro crumbles

2009 will be the beginning of the end of the Euro as a functional currency. I expect at least one country currently using the Euro to pull out. Once the first country (perhaps Italy) has the courage to do it, other countries will fall like dominos. This will set stage for a new era of intra-European squabbling, as the Irish realize they actually dislike the French and the Polish rekindle their fears about Germany and so on. The framework of the EU will slowly fall to pieces (although not until after 2009).

Crude trades above $100 again

If I was more certain of this one, I could make a lot of money, but my sense is that the recent fall in crude prices is a short-term anomaly and prices will rise again. Along with all other commodities actually. This again is a spread view - commodities, which are always needed and a limited resource, versus fiat currencies, which are being printed by the wagonful in Europe, and shortly, the U.S. I realize this contradicts my "no idea" statement above, and admittedly, this is very speculative. Nonetheless, given the choice now, I would trade my greenbacks for gold, an oil company, or a future delivery of food.

War and more war

If history is a guide, times of economic despair often breed militancy, and I expect that pattern to re-emerge in 2009. There are plenty of candidates (India/Pakistan, Russia/Ukraine, China/Taiwan, countless civil wars, and even (gasp), U.S./Mexico), but somewhere on this planet, recession, shortages, and the political expediency of deflecting the resulting anger at a foreign country, are going to lead to violence. 2009 will be a violent year. Bonus prediction: Crime levels explode in the United States.

Ron Paul movement strengthens

The Ron Paul arm of the GOP will gain traction and begin to become a larger presence on the political scene. He was virtually blacked out by the media during the campaign, but as the recession has deepened, he is starting to become a fixture on cable news. I would expect that presence to grow throughout 2009, although this may just be wishful thinking on my part.

Secession discussions begin

Of all the unlikely happenings suggested above, this is by far the least likely, but it will eventually happen, just maybe not in 2009. As it becomes increasingly apparent that the federal government cannot meet its obligations, or conversely, as the tax load required to meet those obligations explodes, there will start to be discussions in states about secession. At first, it will be quackery, but as the situation worsens, it will gain traction with people. It is unlikely to actually happen, but the thought alone that people might start to take the idea seriously is by itself remarkable. The most likely candidate, of course, the Republic of Texas.


Restless Native said...

Wow. Where's the US/Mexico war coming from? Drug lords there buying guns here and shooting up their side of the border? While I could see some joint-police action on both sides of the border, I have a hard time getting to armed conflict between Mexican and American soldiers, against one another.

Secession is also a tough one to swallow, with the exception of Alaska.

GammaBoy said...

The US/Mexico war is the longest of long shots, but it would require Mexico to effectively become a failed state, which is a possibility. There is zero chance of a "real" war, but if Mexico collapses and effects are felt at our border, you might see U.S. troops there. [The odds of Mexico/US conflict are less the 2%, but it's worth keeping an eye on the situation.

Secession will not happen in 2009. But discussion of it might no longer be considered completely absure.

T Floyd said...

Wow, if you're going to go this way, why not predict a nuclear blast from a terrorist group, or another major terrorist attack on US soil now that Obama is going soft.

Aztec Tomb said...

You forgot No. 11: Dogs and cats living together.

LPJ said...

Very disappointing list. I came here to get the latest on 2009, and it's all like "pensions, hyperinflation, riots, war." How can you expect this to be taken seriously, when so much is left out? Not one item on the new season of American Idol? Nothing about upcoming iPhone product release dates? And aren't we all looking forward to the "Twilight" sequel?

Once again, I have to rely upon USA Today and my weekly Parade magazine to get news that matters to most Americans ...

Yo Gabba Gabba said...

MX is teetering. Of improbable probables, that one didn't sound as far fetched.

GammaBoy said...

I don't know who LPJ is, but he is damn funny.

As for US/Mexico, here is a column from today's WSJ. Sending in U.S. special forces to assist the Mexican government attack the drug cartels is quite possible. See crappy Tom Clancy/Harrison Ford movie for details.

Restless Native said...

I read the articles attached. Perhaps obviously, the whole Mexico thing is near and dear to my heart. While I agree that the situation with respect to the drug cartels and, especially, the border areas is dire, I have a tough time getting from Point A (the current situation) to Point B (a failed state). Was the US a "failed state" in the late 60's? Or in the era of Prohibition? Maybe, but my sense is that the current violence is still a looooong way from what I would characterize as a failed state. Somalia? Yes. Haiti? Certainly. Mexico? I don't see it. Incidentally, I will be in Mexico City this Thursday through Saturday, so I will bring back first-person anecdotal analysis and tequila for ebberrrry-buddddy!

Also, this clearly begs the question of "What to do? What to do?" We sell them guns. They sell us drugs. While certainly not laying 100% of the mess at our own doorstep, I think we may be part of the problem.