- Long term interest rates will go up significantly while short term rates will stay low (i.e. a very steep yield curve). One of the reasons is because of all the debt the U.S. government will have to issue over the next few years. Currently, the 30 year bond is yielding 3.66%. Warren Buffett got 10% yield on his preferred interest on his investment in Goldman Sachs. The Chinese, with their massive dollar reserves, will be financing this, like it or not. They will not accept a 3.66% return on their money if Buffet is getting close to 10%. The yield on a 30 year bond will be hitting 8% over the next year or so in order to pay for the TARP program and whatever else Congress dumps on us.
- If we are looking at a 8% 30 year bond rate, the stock market will drop to a level relative to this. If we assume a 3% dividend yield (a bit on the hight side) to make the math earlier and a 30% risk premium, the S&P combined earnings and dividend yield (i.e. dividend yield plus the inverse of P/E) should be roughly 13%. That implies an earnings yield of 10% or a P/E of roughly 10. S&P 500 earnings will likely drop by about 30%, so that gives an implied index level of 450 as the bottom - so a worse case scenario of a 40% + drop. Mind you, that is a worse case scenario, but I can see it dropping down below 600.
- Commodity prices will continue on a short term downtrend, and will start back on an upward swing once the markets start to recover from their bottom.
- There will be another major bank failure in the next year.
Saturday, November 22, 2008
Into the Crystal Ball
After being to a few investment symposiums (one of the benefits of having the CFA charter) and doing my own overview of the markets, here are a few things I think are probable: