2009 Not So Fine

I thought today would be a good day to make my 2009 predictions as Obama is sworn in and Bush retreats farther into his delusional world. So here they are.

Obama will be a good president (compared to actual presidents not just Bush) and possibly a very good president (I’m siding with Paul Krugman who said that great presidents arise from facing great crises so let’s hope Obama doesn’t have an opportunity to be great). He seems to understand the depth and breath of the economic crisis with talk of trillons of dollars in real economic investments not just bigger swimming pools. Talk of applying the good/bad bank model to the entire economy can be interesting but so far seems more focused on applying a bigger bandaid/bankaid than a systemic cure and there has been little said about how to address the moral hazard issues of a bail-out without consequences for those who caused the problem (after all responsibility is for pregnant teenagers not the masters of the universe or politicians who find the law overly constrictive).

Like all presidents, he’ll have a “honeymoon” period that in his case will end sometime around 10:00 a.m. on the 21st depending on if the Republicans sleep in late after their inauguration wake. Their criticisms will build over the week  (look he’s slept in the White House and the economy hasn’t gotten better) until Sunday when it will hit the MSM (main stream media) on the talk shows and ignite a push back (don’t expect miracles, give him another week). This will be against a backdrop of rapid action by the Administration (Republican complaints about inaction will have nothing to do with reality but that’s never stopped them before) such as releasing the balance of the TARP funds with provisions for some of it actually getting beyond the banks (being cynical, the whole thing was just a transfer of funds from the public to the banks in the first place and had nothing to do with the real world economy.) But this will be mostly politics and confidence building, the real work will be in the Congress and the offices of bureaucrats.

Since the U.S. has moved from majority rule with respect for minority rights to minority rule with no respect for the majority’s wishes (before calling me a cynic, try to get a bill through Congress with 41 Senators opposed) – we can assume that Congress will distort any proposal by Obama and diluting the positive impact. As to the new senior bureaucrats, making me nervous is that too many of his appointments don’t bode well for major systemic changes. He has promoted Tim Giether who presided over the NY Fed, the Fed’s front line on supervising the investment banking and global banking worlds, who was silent while investment finance became a con game. The mere fact that Wall Street approves of his appointment since “he understands the Street” should make you nervous. Obama has also promoted Mary Schapiro, the head of FINRA – Wall Street’s self-regulatory body (has anyone ever suggested a mafia self-regulatory body?), who failed to notice what was happening and whined at her confirmation hearing that FINRA wasn’t responsible because no one had complained to them – a truly Greenspanian concept of ex post facto regulation, i.e. spend the government’s money cleaning up after the exploded bubble instead of preventing it. They will be “supervised” by Larry Summers who everyone refers to as an economic genius – a title he earned when working with Rubin to convince the Democrats that deregulation and securitization was the economic panacea. He was recently forced out as President of Harvard for among other things saying the women’s brains may not be as good as men’s for science and math – perhaps given recent history we should ask if men’s brains are any good for finance and economics but I diverge. Of course as with so many Obama appointees, people say that Obama will make the actual decisions which makes you wonder why these people are being paid if Obama is going to do all the work.

Be that as it may, my predictions for real estate are:

Housing will continue down with some sharp drops but basically hit bottom sometime in the second/third quarter – but the bottom will be mud. Bottom fishing will start in the second quarter until the bottom fishers realize that they are chasing prices down. The industry will start feeling better in the third/fourth quarter 2009 (or least not feel worse) and the real recovery will be in second/third quarter 2010.

But don’t worry. The world will still be exciting because the decline in the commercial market will pick up steam and go full blown this year. By second quarter, the industry will move from calling for help to shouting and the government will respond with some program in the second/third quarter which will feel good but not help much. The industry will suffer from a triple whammy: over-leveraged debt coming due, declining economics, and rising interest rates/spreads. The panic moment will come when the world wakes up one day and says that the U.S. is pumping out too many Treasury bills to pay for the bandaids that have grown into bandages. Markets will panic, interest rates will spike, traders will make a lot of money, and then the world will say Treasury rates are historically low to start with so it’s not so bad and life will go on.

Commercial real estate will start to recover along with the economy in fourth quarter 2009 and show some signs of life in the second/third quarter 2010 and start the upswing part of the cycle in 2011.

Conclusion, now’s the time to look for investments so your friends can tell you this year that you’re crazy, next year that maybe you were right, and 2011 that you were a genius (which you will prove by selling in 2012/13 before the 2014 “market adjustment”. Remember to defy history and instead buy low, sell high.