Just an FYI...8 Mega Themes for the Future

Here are some current headlines from three of the premier mainstream media publications dealing with business and the economy:

The Wall Street Journal

March May Be Quite Cruel
Top Bankers Defend Pay Packages
MBIA Dislikes Fitch's Ratings Models
Markets End Week With A Slide
Margin Calls Throttle Thornburg
U.S. Payrolls Shrink Dramatically
MTV Reveals Computer Breach

The New York Times

In California, A Generational Tale Of Real Estate Boom And Bankruptcy
As Foreclosures Rise, Investors Pull Back
Aversion to Risk Deepens Credit Woes
Apple To Encourage iPhone Programmers
Alabama County Facing Deadline On Sewer Debt
Discounters Led Retailers Last Month

The Financial Times

Fed Expands Lending To Attack Liquidity Crisis
Chips Are Down As Las Vegas Feels Pinch
Fickle Investors Shun Debt-Laden Stocks
Malaysian Stock Market Reforms

My sense is that we are going to see almost exactly these same headlines again and again and again for the next 2-3 years. They capture what I consider to be a representative mix of short- and long-term trends, trends about which investors and all citizens should be aware when trying to get a grip on what the future holds.

1. The economy sucks now, and will continue to do so well into 2009 and perhaps beyond. This isn't because I'm a bear; it's because I'm a pragmatist. The types of deeply embedded problems facing the U.S. economy (and, therefore, impacting economies the world over) don't resolve themselves in a matter of months. We're talking years.

2. The real estate bust is a major reason for our despair. While the problems in California are acute and perhaps among the worst in the country, they are indicative of problems across the U.S. and the stories we are hearing and being played out in dozens of markets. Further, the ripple effect on Wall Street and Main Street are not only hitting the banks and investment banks, but the bond insurers, investors, employers and the broader economy.

3. Fears across the financial sector will make things worse, thereby fueling more fear and making things worse, and on and on. This negative feedback loop will continue until the excesses are stripped out of the system, excesses of such a magnitude that it will easily take 2-3 years before the depths of despair have been wrung out of the myriad toxic portfolios and balance sheets out there. It is what it is, and what it is really, really sucks.

4. Municipalities will be hurting, placing tremendous financial strains on states and the Federal government just as tax revenues are declining. Increasing funding costs and reduced tax receipts will threaten cities that overspent while times were good, leaving them with difficult debts to service when times are bad. And with an economy encountering general malaise, its not as if state coffers have the resources to help out much. That leaves our already debt-stretched Federal government. Terrific. Just what we needed. Not.

5. Computer security will continue to be a pressing issue. As more of our lives move online, and as richer and richer data is out there to be used appropriately or by bad actors, we'll see more and more examples of data theft and security breaches. It is somewhat analogous to the steroids users and steroid testing; the labs coming up with designer drugs are always at least one step ahead of the testers. Similarly, the bad guys, their resources and impressive collaboration represent a real and present danger to our data security now and in the future.

6. Previously closed systems will become increasingly open. Apple's release of an SDK for the iPhone is only one example of formerly proprietary, "walled gardens" becoming open, seeking to leverage the collective intelligence and creativity of developers everywhere. Facebook is doing it. MySpace is doing it. Microsoft is starting to do it. It is a megatrend that will not be stopped.

7. Seemingly recession-proof sectors prove not to be recession-proof. When things are going badly the "vice stocks" do great, right? Well, maybe not. Casino expansion has occurred at a break-neck pace, with stock prices and market caps rising in parallel. My guess is that the casino business will fall on hard times, as all those marginal gamblers will stay away while the merely wealthy (versus the mega-wealthy) gamblers will cut back their "leisure gambling." Conversely, discounters should outperform retailers as consumers pare back spending to deal with their lack of job security and high debt levels.

8. Emerging markets will continue to progress, driving convergence with the developed markets. This is a megatrend that has moved in fits and starts, but seems to me to be moving forward at an inexorable pace. It is just not stopping, and this is good for the global financial markets and investors everywhere.

There are certainly others to be mentioned but I think these eight are pretty good. I feel like I don't need to read the paper until after 2010. I'm pretty confident of what it will be saying between now and then.

Comments

[howard lindzon]

today we lost wellpoint and humana - supposed recession proof stocks :)

great stuff bud

[Paul Rubillo]

Hi Roger,

Good post. I see no mention of what your outlook is for commodities. We are focusing a lot on the commodity bull market in the "What's The Trade?" part of our site. Do you believe commodity prices will continue the steady up trends? Our work is showing gold and silver as the leading areas to make money for traders and investors, second followed closely by the fertilizer and seed companies/indexes.

[Roger]

LJR, gee, thanks for the sage words. I know what positive/negative feedback loops are. 99% of my readership understand exactly what I meant the way I wrote it, which is really the point. The issue isn't ignorance, but intent.

Your comment is not unlike those of the managers of several of the largest financial institutions, more worried about the greeks than they are the big picture. I mean, I appreciate your desire for precision but give me a break.

Roger

[LJR]

"3. Fears across the financial sector will make things worse, thereby fueling more fear and making things worse, and on and on. This *negative feedback loop* will continue until the excesses are stripped out of the system, excesses of such a magnitude that it will easily take 2-3 years before the depths of despair have been wrung out of the myriad toxic portfolios and balance sheets out there. It is what it is, and what it is really, really sucks."

Look, if you don't know a positive feedback loop from a negative feedback loop you shouldn't be talking about them! Just to educate you a little, a positive feedback loop is self-reinforcing and a negative feedback loop is self-cancelling. To call a positive feedback loop negative just because you don't like the outcome is - ummm - ignorant. I submit that it is sloppy thinking like this that causes a lot of our problems. Properties of feedback loops are treated in a first year electronics engineering course. Apparently they are NEVER taught in economics.

[s]

If you believe convergence is a trend that will continue if not unabated, then the convergence will come in the form of GDP per capita compression, which a standard of living devaluation for the United States. The question becomes at what point does China feel confident enough to make the break at which point he implications for a fiat dollar system become clear. As Yves writed not a subprime bua securitization crisis. Actually I think that understates the problem dramatically. What we have s a failed experiment in financial globalization and all of these inputs are just part of the crumbling mosaic. The future will change as aatidudes change and priorities reorder. Americans haven;t yet figured this out but but like most things they will be the last to know. The annoucnement that China is entering the jumbojet market could be said to be the roundhouse to the US manufacturing industry. We have gne from wanting to be the leader to being thankful for some global scraps. US hegemony is ending in almost every quadrant. That in my should top the list. Everything else is symptomatic.

[Paul Denlinger]

An excellent post which has spurred me to question the true size of the American economy compared to the Chinese economy following the cleaning out of highly-leveraged instruments which are now being gradually written off.

I wonder if the US will now have a "lost decade" in the same way that Japan had one in the nineties following the bursting of their bubble?

I have posted more about this question at http://www.chinavortex.com/2008/03/the-shrinking-us-economyhow-much-will-it-shrink/

[Madalin]

One point to mention is that data theft is directly related to borrowing. There could be some effects due to getting a loan becoming harder for some.

[ProbTrader]

Roger,

Although your view on the US market is one of the scenarios that could play out in the next 2/3 years, I wonder how did you calculate the entity of the damage. You call yourself a pragmatist, so let me ask you some data-related questions:

Assuming the amount of loan write-downs will total a trillion, what percentage of the US GDP would that represent?

What will be the impact of technology on the US economy over the next 3 years? And what about the effects of global economic growth on US exports? Can you quantify?

But then again, you are not an economist (nor am I). I understand you make the best of your knowledge and experience. Just wondering what makes you so confident about the negatives and skeptic about the positives.

Thanks,
PT, regular reader