Just so eveyone fully connects the dots, let me explain: basically, a significant part of the globe's economy since about 2000 was bought and paid for by debt, and specifically the housing bubble allowed it to happen. Here's what I mean: As the housing values rose people came to believe their net worth was growing and would continue to go. The result was, they get buying more cars and high end goods, and when the bills came due they transferred the debt from their credit cards and car loans to their home equity lines. As a result, the normal circuit breakers -increased credit card debt, etc, didn't go off. Once the bubble popped , people are stuck with houses with declining value, credit card balances that can't get rolled onto home equity, 401k's that have been decimated. So now everyone is feeling very poor. Then you combine that with baby boomers beginning to hit retirement, and what you will see for the next 20 years from that demographic is significantly less spending and a lot more saving, so they can repair their retirement outlook. It is not going to be pretty for many years.
Ok anyway, that's in the past and future. What are my new predictions for the future. I will try to bullet point as much of this as possible so it doesn't get too long winded. I will also tell you in advance, like the mortgage mess before, my predictions are more about what I see as a macro change rather than, hey buy this stock because it's in plastics and they are the future. SO here goes:
Financial Services will be a much smaller player 10 years from now. This seems obvious but let me explain. No single industry has benefited more from the last nearly 30 years of deregulation than the financial services business; mortgage debt, asset management, student loan debt, other consumer debt; etc. A big chunk of that will shrink from the private sector and the rest will look more traditional. Before June 30 of this year, I predict FRE and FNM will announce that they will merge and become full fledged government entitites. When you combine that with FHA, that means about 95% of the mortgages in the country will be owned by the gov't. The admin and funding of Student loans (which I will explain in a minute) will be taken over by the gov't. The banks and financial intermediaries in that business are truly just friction in the process. In addition the SL originators have been in a very cancerous but symbiotic relationship for years, which will now end.
(Here is an aside. If you read my last post from 2 years ago, it was an observation on the excessive cost of college over the last 20 years and how I couldn't explain the above average increase, and I thought it would be solved in the future by children going to colleges overseas and by colleges using on line education tools to make themselves more efficient. Well little did I know, that colleges and student loan purveyors, had their own little symbiotic thing going just as home builders and realtors did with the mortgage industry. In hindsight it all seems logical now. The colleges had no interest in reducing the costs. They wanted to increase revenues by hiking tuitions. Well how do you sell a home that used to cost $300k and now costs $400k but your target market's income hasn't increased? You just find more creative financing options. Everybody thinks they have won - the buyer, the seller and the financier - but in truth, only the seller and the financier did. The buyer thought he won because he could tell his friends that he know lived in a $400k house, but in fact it was still just a 3 br 2ba split level. Well the same thing was going on with the colleges , the students, and the parents, and the financiers. The college received more tuition, the student and parents didn't quite feel the pinch since they were either taking out student loans with deferred payments and/or increasing that same home equity line, and of course the financier won because now he has slapped a $50-100k lien on a college grad, and that lien can't be discharged in BK (only the IRS has similar rights).
The next one the list is employment based retirement savings in the form of pension plans and 401k plans. These plans are totally controlled and administered by the private sector, whether it be the company or the employee, but the Federal gov't is the guarantor. And frankly all these adminstrators are just friction. It only makes sense that if the gov't is the backstop, then they will conclude that they should be the adminstrator, and the investment manager. So sure, go ahead and offer an attractive retirement plan as a benefit Mr. Corporation, but don't expect that you will be able to use accounting gimmickry to get around funding and managaing it adequately. Expect the Federal government to admin the assets, dictate current funding, and detemine asset allocation strategy. This is also a backstop to ensure that we can adequately means test Soc Security, which obviously is coming.
So net net, financial services will be much smaller (plus consider that as baby boomers retire they will begin to withdraw assets for living expenses, especially since now their house is worth less). And you have half a generation of workers that have seen no benefit in investing in stocks and bonds, since the market is now below 1997 levels. Frankly anyone who started work in the 90's or later will conclude that the best strategy is to put their money in the bank account.
Ok next prediction: Microsoft is doomed (unless they blow up their current business model). The simple truth is open source software has gotten better and more reliable, and is really just as good for most apps. If you combine that with corporate retrenching that is forcing every department to take a hard look at every expense item, you come to the conclusion that many CIO's will finally decide to ditch Exchange for Google apps, or Office for Open Office or zoho or google apps, or .net, SQL for LAMP. The only way Microsoft will survive will be if they embrace web and open source world, by skinning down Windows and making it cheaper, cutting the price of Office by 75% or more, and overhauling Exchange by dramatically expanding storage and getting a much better search feature.
Any brand with luxury cache now and brand equity, will have a very tough time maintaining that equity over the balance of this depression. And when we finally do come out, a new, younger generation will be ready to spend, and they will have their own ideas of what brands are valuable to them. So how do you make money on this? Identify brands that still have brand equity tied into their market value (that means the stock is trading at a premium to tangible book) and short it.
What else? Oh I know. Health care. Of course we are moving to a single-payer model. We have to. I crack up when I hear these idiot Repubs talking about tax cuts as the solution to every problem. "Oh small business needs these tax cuts to provide employment" Please, if single payer results in a 25% cost cost reduction in health care premiums paid by small business, I think that will have a more positive effect.
And I guess lastly, the Repubs are toast as party for a long time, unless they abandon the whack job Christian wing. They are rapidly becoming the party of angry, redneck males.
TTFN