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Emailed 05/04/09

Gazing into my crystal ball

  Hello all:

Making predictions is always hard, especially about the future. For those of you who have been reading these missives a while know, I rarely make predictions about the stock market and I'm not going to do so now.  Economic forecasting involves less mind reading and  is important when attempting to divine the short term direction of stocks so I'll dive in and make a few negative predictions here.  When I mean negative I do not mean as in bad news, but more of what will most likely not happen.

I have found that knowing what to avoid is almost more important than knowing what to invest in. As recent history painfully reveals, avoiding the serious land mines can save a portfolio from utter ruin.

Here goes:

When the economy recovers, real housing prices will not rebound strongly, if at all..  Artificial demand created by easy lending standards pumped up housing prices to above normal long term pricing trends.  Easy credit also allowed consumers to withdraw a very high percentage of their equity. These factors will inhibit a strong price rise once we recover as underwriting standards have increased dramatically and there's now an excess supply of homes available for sale.  Also note I stated real housing prices will not rebound.  If the Federal Reserve prints enough currency to pave the highway from New York to California, the resulting inflation will fix declining home prices but that doesn't count... 

The US consumer is out of money, avoid the US consumer.  As a whole, consumers have over spent and over borrowed themselves into a very deep hole and will spend the next several years rebuilding their balance sheet. 

The chart provided by helps to explain the previous predictions.  The US consumer has borrowed and spent money against an asset that is now worth much less.  This will reduce future home sales and put a lid on homes prices as people are unwilling to sell at a loss and as such wait for prices to rise.  Less equity in ones home also makes people feel poorer and  less likely to spend.  

This recession is unlike any other ever seen.  A massive credit deflation paired with extreme stimulus by the Federal Reserve is something extraordinary.  None of the standard rules of thumb will work  so when you read in the paper 'it happened like this last time so it will do so again', discount the conclusions.  This may sound like a rather odd prediction that it is 'different this time'  but this time, it is. 

Energy prices will not stay low. The worldwide oil supply needs constant long term  investment to replenish the older oil reserves that are on the 'downslope' of their production curve.  With oil prices low and capital expensive, the drilling and exploring happening right now is not enough to replenish the expiring reserves.  Once the economy picks up again world demand will run straight into that declining supply with a vengeance.

While these predictions are not pleasant I thought it important for you to hear them.  Advising people doesn't mean only giving them good news and rosy predictions.  There's an opportunity for gains even in a recession and the above conclusions create the framework for those profits.  As always if you have questions about the above predictions or about my strategies going forward please contact me.





(253) 927-0998

Strategic Asset Management
1113 A Street #208
Tacoma WA 98402


Strategic Asset Management is a fee only financial advisor intent upon providing its clients with independent and unbiased advice. 


Note:  This communication is not an offering for any investment.  Greg Merrill is President of Strategic Asset Management which is an investment advisory firm registered in Washington State.






Strategic Asset Management
voice: 253-927-0998

Strategic Asset Management is an investment advisory firm registered in Washington State.

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