Issue #31

Since 2007, we at Barnes Capital have been making predictions in this newsletter about what will happen in the New Year. Thinking about the future and what could possibly happen is crucial for us in our role as a steward of people’s finances. History has shown the importance of a diverse portfolio, particularly in times of great change.

Although we at Barnes Capital are not negative about the future, worst-case scenarios are something we think about. It can sound pessimistic, but the reality is that there are scenarios, albeit very unlikely scenarios, that can dramatically affect personal finances. There were business owners in Germany before World War II who lost everything when their businesses were seized by the government. If the owners could have gotten out while keeping some of their capital, it would have made huge differences in their futures. So, although we don’t expect cataclysmic events to happen in the political or economic life of this country, they are possible. Barnes Capital attempts to structure portfolios that can survive unimaginable events and that also work well during normal times, if there actually is any time that could be considered normal.

In 2009, our predictions had some degree of accuracy. In the sports world, the Yankees did make the World Series, although we predicted they would lose. Here are some things we missed on: Nuclear power did not have resurgence in the U.S., although the Europeans have continued to embrace it. There was no Republican Tax Cut, and President Obama did not restart the Depression-era Works Progress Administration (WPA).

At the same time, we did predict that President Obama would enjoy some of President Reagan’s Teflon, and he has. Although he did not resurrect the WPA, he did succeed in getting his measures for changes to the health-care system passed. Gold continued to rise, although it rose even more than we predicted to end the year right around the $1100 mark.

The big story of 2009 was our nation’s collective return to a thriftier lifestyle. The decline in consumer household debt that began in 2008 continued in 2009. Household debt had not declined since the statistic had begun to be measured – in 1952. It’s hard to say how long that trend will last as well as what it will mean in the long-term. Of course, the fact that it’s hard to predict the future with any degree of accuracy has never stopped us from making an attempt.

Here are our predictions for 2009:

Likely to Happen

Prediction 1:
Changes in the health care system become law. But with the deepening recession, this milestone event pales next to the growing unemployment problems. The actual implementation of health care reform is less clear and remains unrealized in 2010.

Prediction 2:
In real estate, the selling season begins strong in late February as hope springs anew. Then the Alt-A mortgage resets kick-off and massive amounts of suppressed inventory flood the markets. By June, oversupply and higher long-term mortgage rates sends multiple regional markets into tailspins. Deals fall out of escrow and sellers begin to face the music. But it’s too late for big changes to happen in 2010, and inventory quietly gets taken off the market as buyers in waiting and sellers in denial put off getting real and moving real estate for another year.

Prediction 3:
Gold finishes 2010 on an upswing notching — the 10th straight year of a rising gold price. During the year, the ancient relic pulls back its price more than 15% twice without breaking a sweat and it closes the year strong with a close above $1450.

The following is a list of the spot price of Gold on the last day of the year for 10 years.
2000 — $273
2001 — $279 2%
2002 — $348 25%
2003 — $416 20%
2004 — $438 5%
2005 — $518 18%
2006 — $638 23%
2007 — $838 31%
2008 — $889 6%
2009 — $1109 24%

As we continue to say: Gold is real money. The world is gradually rediscovering this. There is little reason to think that will change. Here’s one final thought – a rhetorical question on the subject: If you were going to leave an asset to a great~grandchild in the year 3000, what would your bequest be?

Municipal bonds repeat their tumultuous ride of 2009 rallying strong in the face of higher demand, while falling hard during increased issuance months. Returns remain positive for the year in single digits.

Prediction 5:
Ever-expanding world population growth in the developed world creates a floor in oil prices above $65. Continued global recovery despite the global bear market in real estate pushes oil into stabile $65 – $95 trading range.

Unlikely to Happen: but it wouldn’t surprise us if . . .

Prediction 6:
The Longer term interest rates keep rising, right through levels believed to be insurmountable in the near term (6%), leaving the yield curve at its steepest ever.
The bond market investors are viewing the monstrous mountains of debt and the revolving Ponzi scheme of government financing as unsustainable, and they don’t quit their buyers’ strike until late fall when the 30-year bond flirts with 6%.

Prediction 7:
Rising longer-term interest rates and global uncertainties cause other sovereign wealth funds to acquire more dollar-denominated assets. Fears about dollar collapse subside.

Prediction 8:
Amid the chaos of a continuing credit crunch, thrift catches on. The ongoing turmoil in real estate (with the resets of alt-mortgages) causes middle- and upper-class people to spend less and save more. The Job recovery is stalled, and bank deposits climb, eventually leading lenders to begin to loosen their lending fast (as in famine) in the fourth quarter. The new culture of thrift continues to cripple retailers, including Apple but not Amazon.

Prediction 9:
The Democrats lose the House in mid-term elections. Political ennui and high joblessness (euroschlerosis) result in more hate for Congress and toss-the-bums out attitude. Obama’s Teflon holds, despite an increasing number of bare spots.

Prediction 10:
Risk Assets climb in the first half of 2010 as the global liquidity tide continues to lift boats. But, as summer approaches, rising long-term interest rates increase dollar demand, and risk assets suffer a twenty percent decline. Municipal bonds rally with short treasury notes and the dollar. Gold also rallies. Uncertainty rises and the chant of the unknown becomes louder to the drumbeat of a nervous economy. Risk assets give up many of the 2009 gains, but stabilize in the late fall. Higher inflation and lower returns reinforce the feeling of a permanent “Euro-type” recession. The culture of thrift strengthens modestly. High uncertainty reigns heading into 2011.

In Conclusion
This will be a year where the dominant feeling is uncertainty and certain skittishness about the future. Sometimes, there’s an unjustifiable euphoria over expected economic or political conditions. Right now, there’s no trace of overconfidence.

There’s a legendary curse, oftentimes erroneously attributed to the Chinese: “May you live in interesting times.” Right now, for better or worse, our world is pretty interesting.

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Monday, December 28th, 2009 at 3:49 am and is filed under Insight Newsletter. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.