Five more themes for the New Year, courtesy of Kevin Depew, at Minyanville.
Five Themes You Need to Know for 2009
Kevin Depew’s Five Things You Need to Know to stay ahead of the pack on Wall Street:
Before we get to 2009, first, think back to a year ago. Deflation was barely on the radar of mainstream economists and financial media. Most viewed it as an impossibility, focusing instead on what was supposed to be the resurrection of the commodities bull market.
Even today, while paying deflation minor lip service here and there, the vast majority of economists and financial media are ill-prepared for just how severe this ongoing deflationary credit contraction and debt unwind is going to be. Consequently, if there is one theme that stands above all else in 2009, it will be this: The despair that unfolds as the point of recognition emphasizes the "de-" in deflation. The fat is in the fire.
"In my hour of darkness, in my time of need, O Lord grant me vision, O Lord grant me speed."
– Gram Parsons & Emmylou Harris, "In My Hour of Darkness"
1. The Point of Recognition
What is "the point of recognition" and why is it the most important theme for this new year?
Think of it this way:
It’s a warm summer night and you’re driving a 1976 Cadillac Sedan De Ville, alone, on a dark interstate highway, halfway between towns and just past the decent side of midnight.
The windows are down and the car stereo is on, but not too loud, the warm breeze whipping around through the wide open, sprawling car interior and mixing with an old Brewer & Shipley tune: "One toke over the line, Sweet Jesus, one toke over the line. Sitting downtown in a railway station, one toke over the…" twelve-point mule deer slumped sideways across your shattered windshield, the entire weight of your body pressing the brake pedal to the floor, the interior of the car filling with the smell of burning rubber tossed with the hideous, sickly sweet smell of radiator fluid.
There’s really no accurate way to describe the sound a vintage, American luxury automobile makes when it hits a 250 pound mammal at 75 miles an hour, but so what? The point, the point of recognition, is that split second prior to impact when the dumb beast’s eyes meet your own, and the electricity of the moment jangles up the spine and registers in your brain as absolute, in-the-moment truth and clarity.
For some of us, that feeling – the moment where speed and vision meet just before the point of recognition – is pure, king-high living. And once we get a taste of it we’ll waste a lifetime trying to recreate it.
Maybe that’s what Gram Parsons meant when he wrote, "O Lord grant me vision, O Lord grant me speed." He was dead of a drug overdose by the time that song was released in 1974, making it somehow both prescient and historical, a hell of a juxtaposition that can’t be pulled off more than once in a lifetime… for obvious reason… but that’s beside the point.
The point is you will come to know that feeling soon enough. And every day the Dow Jones Industrial Average (DIA) or S&P 500 (SPY) floats higher takes us one more minute closer to our hour of darkness. Our time of need.
2. Putting the "De-" In Deflation
As declining risk appetites manifest in nearly everything in 2009, from our collective views on financial risk to our tastes in culture, music, film and fashion, we will see a focus on declines, destruction and devaluation. Perhaps nowhere will this be more obvious than in the disintegration of large-scale social networks into smaller, more focused and intimate groups.
While peak social mood helped propel the movement toward increasingly open social networking platforms and large scale interactions, the rush to disassociate from the crowd will inevitably manifest as a reduction in broad network exposure and a preference for close-knit, tighter communities. Beneficiaries of this movement will be families, small groups and, to an extent, neighborhoods.
3. The Rise of the Specialist & the Entrepreneur
From a business standpoint, the operative word for 2009 will be "specialization." As the deflationary debt unwind continues, the businesses most at risk (other than the obvious ones with the largest debt load) are those whose business model attempts cater to broad audiences; the so-called "Jacks-of-all trades," which are in the process of becoming exposed as "masters of none."
Those companies that spent the bull market expanding product lines, conglomerates such as General Electric (GE), mass retailers such as Wal-Mart (WMT) and Target (TGT), automakers that make every type of car and truck like General Motors (GM) and Ford (F), banks such as Citigroup (C) that once had a hand in almost every financial-based revenue activity unimaginable, will spend the next year dismantling and dissolving many of their business lines.
Another, related, aspect of this will be the return of the entrepreneur. If it is true that necessity is the mother of invention, then wide-ranging necessity will lay the groundwork in 2009 for sparking a re-invention of self-employment and entrepreneurial activity. Because access to credit will remain tight, this activity will take time to develop. But if there is a silver lining to the coming despair it will be the return of entrepreneurial problem solving.
4. Don’t Touch Me!
"Whoa! Hey! Don’t touch me!"
– Brak, "Don’t Touch Me"
It is important to keep in mind that structural shifts in social mood take place as long-term, non-linear processes. They do not occur as singular events. One of the peculiar myths in the narrative of the era of the Great Depression is that the stock market crashed, businesses closed, people went hungry, stood in soup lines, picketed, rioted and then things got better.
If one spends time looking through historical records of that era – newspapers and magazines such as Time and The New Yorker – it becomes clearer that while economic times were difficult, life continued. People went to school. They followed sporting events. In short, they went about their lives.
Nevertheless, for 2009 we should expect increasing bursts of social strife and ugly human behavior culminating in increasing waves of violence and crime.
Strangely, pundits and commentators will attribute this to worsening economic conditions. For example, news articles may report that banks are being robbed with greater frequency and attribute causality to declining economic conditions.
The reality, however, is that declining social mood is what causes declining economic conditions as people collectively feel more risk averse, fearful and negative. That mood also translates into actions that are themselves more negative; criminal acts, anti-social behavior and increasing personal conflict… nevertheless…
"Three words you have spoken,
don’t make me a fool.
As a gesture, a token
please play by the rules."
Brian Jonestown Massacre, "Nevertheless"
5. Markets: Gold Declines, Dollar Rises, Interest Rates Hover at Unimaginable Lows
I recently covered in the article, "Bear Markets Ain’t Over ‘Til They’re Over," the reasons why I believe probabilities favor dramatic new stock market lows in 2009, but what about the other asset classes, gold, currencies and bonds?
It is no secret that in a deflationary debt unwind all asset classes suffer absolute declines. In a relative sense some asset classes may fare better than others, but the problem remains that you can’t spend negative relative outperformance.
As for commodities and precious metals, look for 2009 to begin optimistically with commodities retracing some of their disastrous declines this year. Gold is also in the late stages of another attempt at cracking the $1,000 level. Unfortunately, the purpose of deflationary debt unwinds is to crush the spirits (and speculative juices) of all who attempt to participate in financial markets. The point of recognition for this deflationary debt unwind will culminate in another wave of intense selling pressure as the last speculators standing give up.
There has been no shortage of top callers in the bond market of late. From a technical standpoint bonds certainly begin the year with the rubber band stretched painfully to the upside. But do not underestimate the power of deflationary forces to keep a floor under bond prices as interest rates hover at lows that, as recently as a year ago, seemed unimaginable.
So there you have it. Only 366 days until 2010. That’s the good news. When all is said and done, perhaps the best thing that will be said of 2009 is that it only lasted a year.
