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Financial Predictions for 2009
Please remember that these
predictions are for fun. If I knew what was going to happen, I certainly
would not share that information with others! You must make your own
decisions regarding your financial future and not hold others, including me,
responsible for your own results. Enjoy!
These predictions were made in
- Economy: the political
cycle, with Barack Obama about to be inaugurated as President of the
United States, has led to a guarded sense of optimism. I think there is
reason for hope, but the volatility and tough times will continue for a
while. Obama will need to make some tough decisions, and the tone he
sets regarding personal accountability versus political expedience will
last for years. World economic cycles play out over many years. While
the US has had many financial missteps lately, there do not appear to be
other countries doing better. We are entering an era where saving will
become more popular. This is a positive long-term development, but in
the short-term could lengthen the tough times. Fiscal spending will
help, but these funds will need to be spread around. The economy is
likely to contract until someone figures out a way to loosen the credit
markets. Businesses need loans to grow. These loans need to be available
for small businesses as well as large, publicly owned, firms. The budget
imbalances will require future tax increases, and there will need to be
a balance between tax collection and incenting people to work. The
Beatles wrote Tax Man for a reason. British rates were 90% at the
highest levels and there was not much incentive to work. There are many
physical disasters that could happen, and one could stimulate the
country to work together and move past the current crisis. I continue to
be worried about unintended consequences of actions today, with the FHA
and FHLB on the radar. I expect the economy to struggle but start to
recover by the end of 2009, with the stock market starting to recover in
the second half. Inflation will remain low, although the seeds of
inflation are already planted.
- Volatility will stay
above long-term averages, although it should fall back from the current
40. The new norm will be about 20 versus the historical 15-16.
- Oil will rise above
the current range of $40 per barrel. I believe its long-term mean
reversion rate is in the $80-110 range, but recent volatility has made
any predictions very risky. If oil prices do not rise, political
instability in Russia and South America will quickly follow in the next
couple of years.
- Credit risk will
continue to play out – commercial mortgages and junk bonds will
especially impact smaller firms, while CDOs and credit default swaps
continue their negative cycle. Hospitals are at risk in 2009, along with
municipalities who have offered more than they can pay in benefits
(especially defined benefit pension schemes and post retirement medical
benefits). Junk bonds might be worth looking at by the end of 2009 as
spreads will be wide and the credit cycle may be about to improve.
- Thoughts on Credit
- Why didn’t the
government place capital in the shells of insolvent banks? By
giving the money to undercapitalized banks, it was not
surprising that they used the money to maintain their ratings.
The new leaders at Treasury (mainly Geithner) need to think
outside the cube.
- AIG – why were
these CDS contracts not allowed to go belly up? Anyone who
entered into them accepted counterparty risk. The American
taxpayer has already paid in $150 billion. Certainly closing the
contracts at the point of bailout could have been done. Who will
feel badly for the hedge funds that would have made more
profits? The problem is that banks also were heavy buyers and
the government was already committed to keeping them solvent.
The government seems to operate as if defaults are not part of
our system. Capitalism needs defaults in order to work. This
does not mean that workers should not be given help to be
retrained. Personal auto industry story – growing up in Detroit
and hearing that people were making lots of money to turn a
wrench, I was always amazed that they did not save more money or
work on other skills for when the gig was finally up. It was not
sustainable, and the car companies deserve no sympathy from the
American public. The movie Tucker shared a typical example. John
Dingell (Democrat from my home district in Michigan) married a
Ford lobbyist yet claimed this did not impact any of his votes
in Congress. Also, why were employees from Goldman Sachs present
at high level Treasury meetings in 2008? The perceived ethics
are questionable, especially when Treasury Secretary Paulson was
formally Chairman and CEO at Goldman Sachs.
- Bank consolidation
will continue, with mid-sized and smaller banks merging to gain
economies of scale and consumer trust.
consolidation will accelerate, with household names as well as smaller
firms being merged into other firms. Larger, supposedly sophisticated,
firms accepted the investment and product risks knowingly, and many
smaller firms were led along with the crowd to the cliff by statements
like “all the sophisticated insurers are doing this”.
- The dollar will revert
to its trend and fall based on imbalances in our trade and borrowing
policies. Other scenarios focus on countries heavily invested in
dollars, such as China, Japan, and the oil exporters, choosing to dump
them. US Treasuries would then spike and the US economy could find
itself in a vicious cycle resulting in stagflation. This would take
several years to play out and would impact the stock market heavily.
Various energy subsidies will play out here, from ethanol subsidization
to wind farms, with unintended consequences following the well
intentioned efforts of politicians (latest example is forcing auto
makers to make “green” autos). Watch for others to make vehicles that
people will buy, making it even tougher for the auto industry to
- Political instability
throughout the world will be a problem, driven by the liquidity crisis,
price of oil, and/or terrorism.
Emerging Risks - Concerns
- Can an internal CRO be
strong enough to stand up and be counted, or will fears for their job
keep them “in line”. Every firm needs a Chief Skeptical Officer.
- Tort reform needed –
the world continues to become more litigious at its peril
- Infectious disease -
increased resistance to antibiotics (e.g., tuberculosis, staff
infections or pneumonia)
- Global warming –
unexpected side effects like new viral/bacterial attacks, along with
coastal flooding and increased hurricane activity
- Earthquakes – the US
is overdue for a major quake on the west coast and other areas not
normally expected for seismic activity are well into their cycle
capital in the financial services industry will be abused by some and
not always caught initially by peer review. Currently it is doubtful
that the US will have a major influence on PBA worldwide due to the
NAIC’s political games
- Home building sector
will finish bottoming and level or slightly improve over the next couple
of years depending on interest rates (up would be worse). It is probably
time to buy stocks in materials firms that serve this market and have
low debt. Discussion will start in the next couple of years about a tax
overhaul that could include a reduction of the mortgage deduction.
Perhaps the AMT will form the model tax law and many deductions will be
eliminated. While this might be good incentive, it will hit the home
- US political
environment – can they say no to anyone requesting a bailout?
- Malthus – too many
people, not enough food – will good intentions of the rich to save lives
in the 3rd world lead to mass starvation or unstable regions?
- Economy – risk of
stagflation and the lack of an internal hedge for investors holding both
equities and bonds – bonds seem particularly challenged right now as
rates are low
- Pandemic influenza –
business continuity, impact on small businesses, combination with
malaria/AIDS in Africa, Tamiflu overuse – watch for the first cluster
that involves a doctor or nurse to implement a preconceived plan
- Counterparty risk –
will losses be allowed? AIG showed where the credit default swap market
concentration was to be found. Many hedge funds were swimming naked as
the tide went out. Bernie Madoff led a Ponzi scheme right under the
noses of many of the world’s largest investors. Much of the economy
continues to be concentrated in a few parties, and now the American
taxpayer is one of them. This is not a positive consequence and will
lead to more contagion in the system and more correlation in the tails.
More qualitative analysis needs to be done by financial experts rather
than relying on models that aren’t accurate in the tail or focus on top
line rather than bottom line growth. Relying on Black-Scholes models to
both determine value and confirm prices has been a disaster. If you
can’t understand a risk without complicated mathematics it should be
Top Actuarial Issues
- Defined benefit plan
valuation – needs to reflect marketplace economics. Actuaries from other
disciplines should be welcomed, along with those from outside the
profession. Focus should be on cash flows rather than regulatory issues.
An estimate of fair value of these liabilities should be calculated and
shared with stakeholders. Firms had the opportunity to get out of DB
schemes when the stock market was up for 5 consecutive years. Why more
did not do so shows how little scenario planning was being done.
Municipal plans especially are going to default.
- Demographics –
designing products that are economically sound to both policy owner and
- Obesity – how will the
various drivers of mortality and morbidity interact (some good, some
- Lack of rudimentary
knowledge of assets and how to value them – need teaching sessions that
are short of stochastically based financial economics. Focus on
transparency and peer review.
- Peer review – how to
make it extend beyond a regulatory requirement to help manage the
business by identifying and exploiting advantages
- National health care –
need actuarial solutions – this may move in 2009 as part of the fiscal
Warning: The information
provided in this newsletter is the opinion of Max Rudolph and is provided
for general information only. It should not be considered investment advice.
Information from a variety of sources should be reviewed and considered
before decisions are made by the individual investor. My opinions may have
already changed, so you don’t want to rely on them. Good luck!