Eerie Echoes of 2008

 | Jan 10, 2012 | 5:00 PM EST
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I was interviewed yesterday on a radio show in Warsaw, Poland. The host is a U.S. expatriate and good friend of mine. The topic of the show was the outlook for the global economy and capital markets, with a concentration on Europe, specifically the Eastern member states of the European Union: Hungary, Estonia, Latvia, etc.

I briefly discussed my outlook for the economic environment in the U.S. and Europe, which is recessionary for both. And we discussed my expectations for various capital markets, concentrating on stocks, sovereign bonds and commodities in Europe and the U.S.

The general trend I discussed for 2012 was for traders to increasingly move away from risk as they realize the severity of the recession and its implications in Europe. I told him that a reduction of roughly 50% in equities and commodities was likely, with the capital driving sovereign yields in Germany and the U.S. down to the level of those of Japan. Asked to clarify, I stated that 50% down for the S&P 500, oil and gold was probable, and that we could expect similar reductions for European equities, with commensurate movement to sovereigns there.

Germany, earlier in the day yesterday, had a completed a sovereign offering with negative yields; I used this to support my point.

We didn't have time to get to the implications for China, but before the show ended, he said, "It sounds like you're looking for a replay of 2008." After the show ended, he said he didn't agree with me.

Indeed, I am looking for the European and U.S. markets to experience a something similar to the events of 2008, but I can understand why few would agree with that expectation right now.

2008 started out in much the same way as 2012. There were still consensus expectations that the housing market and mortgage fallout would be contained and that the worst had passed. Bear Stearns had not yet failed. Gold and oil prices were rising. U.S. equity values had traded sideways throughout 2007, and the consensus among institutional investors was that 2008 would be bullish as the subprime mortgage crisis of 2007 was left behind.

This optimism began to crack, however, when Bear Stearns failed in March of that year.  But even then, the markets went higher, convinced that Bear Stearns was the last step and that policy makers would not allow for any other such mishap.

By May, though, even as oil prices continued higher, the continuing housing crisis took center stage for traders and investors alike, and stock prices slid all the way into the failure of Lehman Brothers in 2008.

Running into the Lehman failure, the commodities markets also experienced a selloff. Gold fell from about $1,000 an ounce to about $750, rebounding to about $900 after the bailout, only to reverse almost immediately to about $700.

Oil prices, of course, set a record high of about $145 a barrel on U.S. Independence Day in 2008 before rolling over to decline a staggering 75% to about $35 at year's end.

It seems like a lot longer than three and a half years ago. But the same attitudes expressed at the beginning of 2008 about the outlook for the U.S. economy and financial markets are being expressed today about Europe, and to a lesser extent about the U.S. again.

The meme concerning Europe is that now that the monetary and fiscal stimulus has begun, the worst has passed, along with concerns about sovereign defaults and bank failures, except perhaps for Greece.

In the U.S., optimism is everywhere. Consumer and investor confidence is increasing along with employment, and unemployment is decreasing.

But as I look at the economic numbers more closely, the consolidation or rebound is very weak. The increase in optimism appears to me to be less about anything positive and more a reflection of released pent-up anxiety concerning expectations of worse reports.

If I'm right, that anxiety will exhaust itself very quickly, and investors will expect even better economic reports very soon. And I don't think that is going to happen.

Income and consumption stagnated throughout 2011, just as equity values did in 2007. Sideways movements do not always indicate consolidation phases in preparation for upward movement in anything.

As the old saying goes, buy low, sell high. Investors who bought oil, gold and equities at the lows of 2008 have booked some nice paper profits. As Europe continues on the path toward its Lehman moment and the U.S. growth continues to be anemic, 2012 is looking set to rhyme with 2008.

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