January 20, 2009
An important goal for Advisor Perspectives is the collection and analysis of independent research about the economy and the markets. As we enter what promises to be a very challenging year for advisors, we are taking this opportunity to synthesize that research into a coherent forecast for the markets. We then translate this forecast into our recommended asset allocation.
Independence is a key criterion when we assess the reliability of analysts’ forecasts. We are skeptical of forecasts from analysts and economists who represent investment firms, whose views can be tempered by the interests of the firms they represent. Our second guiding criterion is accuracy. We have selected individuals with proven track records of accurate predictions. Moreover, their predictions were backed by the data-driven analytical approach which we support. They were right for the right reasons.
The analysts whose forecasts we used are the following:
- Nouriel Roubini – Roubini, a professor of Finance at NYU and founder of the web site RGE Monitor, emerged from obscurity when, beginning in 2006, he predicted the collapse of the housing market and the subsequent credit crisis. His pessimism earned him the nickname Dr. Doom, but his forecasts have been extremely accurate, and they have been accurate for the right reasons.
- John Mauldin – Mauldin is a consultant, author, investment advisor, and runs the web site Front Line Thoughts. He correctly forecast the housing crisis and many of the subsequent problems in the financial markets. His 2008 forecast for the economy and US equities markets was optimistic, but we believe his overall track record establishes his credentials as a reliable forecaster.
- Woody Brock – Brock is a consultant and his firm, Strategic Economic Decisions, advises many of the largest hedge funds, private equity funds, and institutional investors. Brock has been warning his clients for many years about the housing markets and the risks in the US equity markets.
- Niall Ferguson – Ferguson is a historian, a professor at the Harvard Business School, and the author of the best selling book The Ascent of Money. Like those above, Ferguson saw the problems in the housing markets and the risks to world financial markets years before problems began to escalate.
- Peter Bernstein – Bernstein is a consultant, author, and publisher of the highly-respected newsletter Economics and Portfolio Strategy. In our interview with him on January 29, 2008, he correctly forecast the risks in the market over the ensuing year.
- John Williams – Williams runs the web site Shadow Government Statistics, which critiques government reported data for the CPI index and related statistics. While Williams’ forecasts not have proven to be as accurate as those above, we believe understanding and considering his views are essential to properly assess the risks in the market.
In addition to these experts, we incorporate the opinions and analyses of a number of other individuals we have interviewed over the last year.
The Economy
Forecasts for the US economy fall into three broad categories:
- A 3-4% GDP contraction with the economy turning around in the second half of 2009. The current recession would last approximately 18 months, similar to most post-War recessions.
- A 5% GDP contraction with a recovery in 2010, making the current recession significantly more severe than any other post-War recession.
- A contraction greater than 5% with a possible GDP contraction of 10% or more, which would be classified as a depression.
The consensus of the independent analysts we surveyed falls into the second category - a 5% contract with a slow recovery starting in 2010. The forecasts from the broader economic community fall into the first two categories, but a few economists forecast a depression.
Nouriel Roubini forecasts negative GDP growth through the end of 2009, resulting in a cumulative output loss of 5%. He sees a weak (1%-1.5%) recovery in 2010 and 2011. In December of 2008, he said, “The worst is not behind us; 2009 will be a painful year of global recession, deflation and bankruptcies.”
In January of this year, John Mauldin forecast that “the US and much of the world are going to see their economies shrink for at least another year. And when that new, lower level is reached, the economy will slowly start to grow again. … This recession is going to be the longest in anyone’s memory.”Display article as PDF for printing.
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