Will 2009 Be Even Scarier?

Great Depression II…15% drop in home prices…Food riots…9% unemployment…Another 50% drop in the Dow

My how the world has changed?

A year ago, the bulls were off and running. Many were “buying on the dip.” Commodity prices were soaring. Farmers were making a killing. Emerging markets consumers couldn’t get enough of anything.

It seemed like the boom would never end. Any talk of a full scale global depression or 50% decline in the Dow would have been laughed off. This year, it’s a totally different story. The bears are out in force and the leading opinion-makers in the investment community couldn’t be more bearish on the economy.

It’s a tough time to be an investor. Hundreds of thousands have already thrown in the towel. Over the next few months, ongoing volatility will cause even more to jump to the sidelines. But there isn’t a more important time than now, as we close the books on the “Year of the Crash,” to look forward.

The doom and gloomers see nothing but bad news ahead. Others (your editor included) see most of the bad news priced into the markets already. In the end, no one really knows anything. However, there’s always a few people worth listening too. That’s why Fortune magazine’s latest effort, “8 Really, Really Scary Predictions for 2009,” really caught my eye.

Fortune gathered the likes of commodity bull Jim Rogers, bond king Bill Gross, turnaround artist Wilbur Ross, and NYU’s Nouriel Roubini to offer some predictions for the year ahead. None of them are overly bullish on anything over the near term.

Jim Rogers: “This may turn into the Great Depression II”

The man credited with calling the commodity boom a decade ago hasn’t changed his tune.

Rogers says, “Virtually the only asset class I know where the fundamentals are not impaired – in fact, where they are actually improving – is commodities.”

You gotta admire his conviction and that he’s probably spot on (over the long-term).

Will he be proven right in 2009 though? Only time will tell. I’ve got to tell you though, I’m right there with him when it comes to agriculture. In the interview, Rogers cites, “The inventories of food worldwide are already at the lowest levels they’ve been in 50 years.”

Bill Gross: “Investors need to be…content with single-digit returns…”

The always rational and thought-provoking Bill Gross was a bit less ominous than most of the others. It shouldn’t be surprising when you consider Gross and his PIMCO colleagues have $700 billion they’ve got to put to work somewhere.

Gross really didn’t offer much up by way of firm predictions (i.e. housing prices would drop 20% or the Dow was going to 4,000), but he did offer one piece of critical advice. He said, “Investors need to recognize these titanic shifts in market and public policies and be content with single-digit returns in future years.”

That’s the key point that we can’t forget about the markets right now. Now is the time you should have two goals: survival and planting the seeds of wealth. Although it may not seem like it with unemployment rising, consumers cutting back, etc., there will be a time to reap the rewards of all the seeds planted prudently over the next year.

Nouriel Roubini: “Things are going to be awful for everyday people.”

Roubini has earned quite a reputation for his brand of well-researched (and, quite often, correct) gloom around the world’s financial markets. This time is no different.

Roubini warns of another 15% decline in home values and “all the advanced economies are at the beginning of a very hard landing.” Worst of all, he says the recovery (if it does come) will be a very weak one.

His advice is simple, avoid risky assets and conserve capital.

Wilbur Ross: “…more aggressive action is needed to turn things around”

Ross has become one of the world’s leading experts in getting things turned around. For years he has been buying up failed businesses and breathing new life into them. He takes the unsustainable and makes them sustainable.

He warns we’re in a “serious recession and more aggressive action is needed to turn things around.”

Ross, one of the most outspoken proponents of a Detroit Big 3 bailout, is still quite negative and keeps his focus on unemployment. Sound familiar?

The Silver Lining

I realize these predictions are pretty ugly. It’s bad and getting worse. Just the thought of food riots, high unemployment (we’ve been expecting 8% to 9% next summer but don’t really look forward to see what it looks like), and another year of economic uncertainty isn’t anything any of us really look forward to.

There is, however, a silver lining here. It’s tough to see, but look at it like this. A couple years ago these predictions would have easily been brushed away. That has all changed. Now they’re analyzed with close scrutiny.

As we discussed the other day, the bottom will come when everyone quits looking for it. With this year’s round of predictions so dire, there’s clearly still a lot of people looking for it.

For now though, it would be a pretty safe assumption that most of the bad news has been priced into the markets. For instance, the P/E ratio of the S&P 500 is below its long-run average of 15 for the first time in a decade. The dividend yield on the index is up to 3.48%.

That’s only the 500 largest publicly traded companies. If you look at smaller companies and riskier sectors like emerging markets, it’s practically a disaster zone. The Russell 2000 Growth Index is off 45% and the MSCI Emerging Markets Index is off about 55% this year.

There are a lot of cheap stocks out there and most stocks are priced for a recession…even a bad one. Stocks are fairly priced given the rough shape of the economy. In Tuesday’s Prosperity Dispatch we’ll take a look at an asset class where double-digit returns could be the norm over the next few years. More importantly, they’re priced as though we’re already in a depression. In fact, these assets haven’t been this cheap since 1932.

By Andrew Mickey

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