2009 Global Macroeconomic Outlook

We have all been lied to. There was no global growth story, it was a unsustainable boom fueled by a bubble mindset that kept throwing money and credit at countries with long histories of spectacular busts such as Russia.

Even Pimco, that are usually market savvy guys, bought into a quasi-decoupling theory. The outlook for the global economy is downright awful, so bad that I will describe my current speculative positioning

Spec's Portfolio
Long SPY puts
Short WFC
Short COF(Credit card lender)
Long OSTK puts(Retailer losing money badmouthing short sellers)
Long Fed Funds Futures(they rise in value as the fed eases)
Long C 2014 bonds(A too big to fail bet)
Short C(hedge for the bonds)
Long VLO(beaten down refiner)

I'm also long two penny stocks which shall remain nameless

There will not be a Great Depression I can assure you. Anybody who's read Ben Bernanke's book 'Essays on the Great Depression' can figure out New Yorkers will be swimming in dollar bills printed by the Fed, Broadway Ave will be greener than Central Park before persistent deflation is allowed to happen

The gold exchange standard and bank runs that were so crucial to the 1930's deflation are not present due the current fiat US dollar standard, FDIC insurance and TARP bailouts. We do have a financial bust of spectacular proportions which can create deflation through the Velocity factor of a version quantity theory of money(Prices = Money x Velocity / Real GDP), so one of the most important indicators for 2009 will be the velocity of money(how often money turns over in the economy)

How much the shadow banking system collapse and the widespread fear of banks,consumers and companies and a 'Reverse Minsky Journey' will affect V and whether the fed prints enough money to offset the collapsing V is one of the most important questions for current year
I'm not optimistic about it because economists, which is pretty much the entire FOMC and Fed board, are too backward looking, they use a version of Value At Risk to measure macroeconomic risks.

They could look back in the last 20 years and think 'Velocity doesn't drop all the much in recessions, we cant risk to overprint, lets keep M1 growing at the current rate', this could lead to deflationary disasters of epic proportions because a financial bubble of this size that is bursting could lead to unforeseen consequences the past is not a good guide, we are in uncharted waters. I dont necessarily think this scenario is likely but one should monitor these kinds of tail risks because the consequences will be so large

Another very disturbing factor is the global collapse in the trade sector. I know all the economists and pundits says 'this time its different' because politicians know the damage of protectionism, they 'learned' from mistakes in the past. Where they are wrong in that the idea that free trade is good was a consensus in the US in the 1920's. That did not stop US politicians with a short sighted view to embark in protectionism so they could buy more votes. The Doha rounds failed even during one of the biggest booms in the global economy, I willing to go as far as to say there will be no significant free trade agreements(bilateral or not) in the entire world the next 10 years
The collapsing credit for the trade sector also makes more likely global trade is in for hard landing. A government can engage in protectionism by simply refusing to help importers through government credit

5 Predictions for 2009

1)The SP500 will test and break its lows
Currently investors are engaged in quasi fantasy that everything will be fine after the magical last day of Q2 ends. There is little doubt they are betting in a soft landing scenario for financial crisis which would be an anomaly
aftermanth.pdf
What investors don’t realize is that testing the lows is the rule not the exception
http://www.bloomberg.com/apps/news?pid=20601087&sid=ak7FQQWIAF5k&refer=home

2)Emerging Markets(equities and debt) will get another round of spanking
When the US tanks EM always go with it, the decouplers were betting in a 'New World Economy' they got it wrong in 2008, they will be wrong again in 2009, if you think there is value in some EM out there will till you see late in the year. You just can't get US equities down 20%(from current levels) and sustain global risk appetite, even IF some EM will whether this downturn well the bottom line is that trading and speculations is a greater fool game and there wont be a significant sustainable rally in EM equities year, at least not before they tank again

3)The Fed will not raise rates for the entire year of 2009
Economists polls say fed raises by the middle of the year, fed funds futures are pricing a similar outcome(thus providing value for speculations). Its simply not going to happen when Velocity of money is tanking, and deflationary expectations are sweeping the nation. The FOMC minutes show how worried they are about not letting Joe and Jane delay purchases to get a bargain down the road

4)The US stimulus package will help but will NOT lead to recovery
Look at the kinds of pork they attached to TARP legislation. US politicians are pushing for the package because the US apparently needs money for the 'crumbling infrastructure', this is like giving beer to an alcoholic because he is 'chronically dehydrated'. There is little doubt that the package will prop up the numbers(such as GDP and perhaps employment) and provide some kind of help for a while but the long-term fundamentals of the economy will not improve

5)The US Credit Card industry will be blown away on how bad things will get
Which is why I'm short COF. These guys were the lenders of last resort on the credit bubble, the worst consumers maxed out their credit cards just before one of the world economic environments the industry will ever face

The US credit card lending industry has not been historically tested, they have been around for 30 or 40 years, they give credit cards to pretty much anybody who can read and write, they raise rates on consumers behind payments, ask mortgage lenders whether that is a good idea. Credit Card lending is very similar to Pay Option Arms that have destroyed all the banks that engaged on it. Of course they lend a lower amount as a % of income but the borrowers can choose to make minimum payments and get more and more underwater, they can borrow from one card to pay another one. Credit card lenders commit all the sins of bad lending yet they somehow think those principles dont apply to them because they charge a higher rate and can raise it at any time, just how squeezing borrowers even more makes the lending sounder?

To summarize I believe this is one of the most rich global macro environments for trading and speculations in many years since the imbalances are so big and yet the market is still complacent about it. Humans seem to have a 'prosperity premium' in them and are not willing to accept bad scenarios could come true

Anyone with brokerage account, internet and willingness to read bloomberg can and should profit handsomely from the existing large global imbalances in 2009