Byron Wien’s five sure investment calls

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I featured Byron Wien’s Ten Surprises for 2008 at the beginning of the year. Wien is chief investment strategist of Pequot Capital (previously in a similar capacity with Morgan Stanley). Although not unfailingly right with his market views, it is always insightful to hear how he sees the lie of the land. I therefore thought it appropriate, especially in the light of the tumultuous markets, to repeat his recent contribution to Wally Forbes’s Financial Round Table. Wien’s verbatim take on markets follows below.byron-wien.bmp

I’m as cautious right now as I’ve been in for some time. Certainly since 1999. I think … what’s going on here is more serious than people realize.

What’s going on in the housing industry is going to have long-term implications. You have probably two million unsold homes out there and I think that industry is going to be in the doldrums for at least two years. That means that all the people working in industries ancillary to the housing market, like the homebuilders, the mortgage brokers and so forth, are going to have tough times. Many of them are going to be laid off.

I think the credit situation is extremely serious. Not only are the money center banks suffering huge write-offs and significant executive turnover as a result of it, but they are also going to have to shore up their balance sheets and they’re probably going to require foreign capital in order to do so.

In addition to that, when they get financially solidified I think they’re going to be very careful in making loans. So I think it’s going to be hard to borrow money when people or institutions or corporations get the enthusiasm to do that.

I also think that America is not quite the place it once was. This is a global environment and America is losing ground. I think people underestimate the unusual position America was in after the end of World War II where we had enormous scientific talent, we had enormous manufacturing capability and the rest of the world was in economic shambles.

Today, the rest of the world is in terrific shape. Some countries, particularly China, have infrastructures superior to ours and a scientific capability that rivals ours. We still have the greatest universities in the world, but many of the students coming to train here are going back to their home countries after graduation.

My view is that people underestimate the seriousness of the energy situation. We are only finding oil at a rate equivalent to replacing the oil production that erodes every year as a result of the existing wells getting tired. In addition to that, China and India are consuming less than two barrels of oil per person per year while we consume 26 barrels, Western Europe consumes 13 to 15 barrels, and Japan, Korea the same amount.

As China and India increase their consumption, even if the two and a half billion people there only increase their consumption by a quarter of a barrel of oil per year, there’s no way the world can meet that demand. So I think the price of oil is going a lot higher.

I also think that we have to recognize that we’ve been running a trade deficit now for a decade – a serious trade deficit for a decade – and that foreign holders of dollars have become increasingly impatient. I traveled around the world twice last year. I was in the Middle East twice and in China and India and I can tell you that while they are not going to sell any US bonds, they may slow down their buying of them. Our demand for the kindness of strangers to finance our deficits is going to continue inexorably. So I think that’s leading to a serious situation.

I’m getting older now, so I only invest in sure things. I don’t invest in things that only “might” work out. So let me give you five sure things.

1. Gold is going to $1 000 an ounce probably this year. I forecast that it would go to $800 an ounce last year.

2. Oil is going to probably $125 a barrel. I forecast that it would go to $80 last year.

3. The dollar is going down for the reasons I mentioned because large holders of dollars are going to diversify into other assets and other currencies.

4. Cotton is going to be the commodity of choice because the world’s standard of living is increasing and the places where it’s increasing fastest are warm and the people don’t wear wool, they wear cotton. Cotton is something nobody wants to grow. They want to grow corn instead. So, while the demand for cotton is increasing, the acreage devoted to it is decreasing and that’s all you have to know.

5. Finally, I think the Chinese are going to revalue the renminbi (yuan) by even more than the 7% they did last year.

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13 comments to Byron Wien’s five sure investment calls

  • Byron Wien’s five sure investment calls…

    Byron Wien’s five “sure things” make for interesting reading, especially in the light of the tumultuous investment markets….

  • The long awaited recession willl fail to materialize. While I agree with BW’s assesment of the housing market in the long term, in the intermediate term housing and financial stocks will be the top performers until we peak in the final blow-off likely late in the 3rd Q. Betweeen now and then we must complete a Spike with possibly the fastest rate of ascent in prices for US stocks ever. The Dollar has bottomed and gold peaked for the time being. We need only complete the pull-back in progress to unleash an exposive uptrend in the Dollar and the Market stimulated by foreign demand to buy US stocks…. for at least 7-9 months.

    Eduardo Mirahyes

    http://exceptional-bear.com

  • Ian Nunn

    Thanks for the pass-along. I value your postcards very much. You access sources I haven’t the funds to subscribe to, and your summary seems to align with what I want to see.

    Byron Wien didn’t say anything I didn’t already know (except for the insight into cotton). He just packaged it succinctly.

    Literally, it keeps me awake at nights.

    I was working on a PhD in computer science with a major interest in what are called complex adaptive systems. An ant colony is an example. The weather would be another, and most importantly, the world economy.

    One aspect of these systems is they are complex, and our linear, deterministic modes of thinking simply do not apply. I believe their interconnectedness is one of the fundamental sources of their complex behavior.

    I haven’t seen anyone begin to grasp where we might be heading in terms of the issues Byron touches on.

    As an example, who would have made this connection with peak oil? Asphalt for roads comes from the bottom of the barrel of oil. It was the fraction that could not be processed economically into some higher value form – sludge if you like. Now, with the higher price for oil, more of the bitumen is being refined into higher grade product. To maintain supply, price has to rise.

    Looking at the State of California’s Asphalt Price Index http://www.dot.ca.gov/hq/esc/oe/asphalt_index/astable.html,
    it stood at 40.2 in Jan. 1999, 287.1 in Jan. 2007 and 439.3 in Dec. 2007. This is a 993% increase in 8 years and 53% in 2007 alone. At what point will we not be able to afford to repave our deteriorating roads? Imagine the impact on truck transportation and cities since they are net importers of all goods and commodities.

    I’m 64 and expect to have to deal with these issues. I can’t imagine how my grandson will manage.

  • Prieur,

    I agree with the gravity of Byron’s concerns about both housing and credit markets. The impact on the economy is apt to be both prolonged and deep.

    Readers interested in a more in depth view of the situation may wish to read some of my recent posts this past week at SuccessfulTradingTips.com

    Best,
    John Bougearel

  • Ian,

    Your thoughts about complex adaptive systems are insightful.
    There is an interdepencence, mutuality and interconnectedness to our global existence in ways never perceived by Darwin when fist concceived the ‘survival of the fittest’ theory.

  • Jim Hancock

    I find it odd that all 5 calls are in commodities or currencies, since these are often the hardest to predict. Both can be influenced by geopolitical events. Plus if we end up in a global recession both non-US currencies and commodities could start dropping quite quickly …the first thru lowered foreign Fed rates and the second thru reduced consumption and deflationary presure.

    The only “sure” think in my mind right now is that equities are significantly over valued going into a recession. I currently hold QID, SRS, SKF, TWM, EEV and EFU. All double-short ETFs taking various equity slices. They are all in the money and I think they have a long profitable future as the equity markets meander their way down.

    Anyway, I am not disagreeing with the author …his predictions may turn out to be spot on. I’m just saying that the 5 choices seem riskier to me than just shorting equities.

  • Jim

    I didn’t say anything, given Bryon is an old man and all, but you are absolutely right, – a severe recession will reprice oil to 70-78 in a new york minute. ~ Note too, the huge bearish overtones in today’s crude oil report:

    ***Crude inventories surged the most in almost four years last week

    ** Opec production raised production another 120,000 bbl a day in Jan,

    Crude oil imports jumped 4.6% to 10.5 million barrels a day – highest since August…

    “We are being overwhelmed with supply as imports rise and demand slackens,” said John Kilduff.

    Do not think for one minute that Opec is not lending a helping hand here, and that the US govt is not appreciative.

    They know the us consumer is stretched and the best thing to do is ensure plenty of supply to drive crude oil back to 70-78

    And in the event of a slowdown in the US economy, gold returns to 800-820 and waits out the maelstrom

    SuccessfulTradingTips.com

  • Sumeet Valrani

    I am curious to now what he predicted last year.

    As far as the foreign aversion to dollars there is no other economies/economy that can absorb it!

    Oil … while demand is up there is a huge shortage of refining capacity. So the demand is for the end product but no new refineries = no new demand for oil.

  • Sumeet: I reviewed Byron’s 2007 list at the time of publishing “Byron Wien’s Ten Surprises for 2008″. Here is the link: http://www.investmentpostcards.com/2008/01/04/byron-wien%e2%80%99s-ten-surprises-for-2008/

  • Dan Modricker

    As I see it, there will be continued high demand for oil .. no matter its price. Civilization depends on carbon energy; even if it must turn to coal to survive.

    The West knows nothing about heating food and boiling water by burning camel and cow dung. Pent-up demand for modern conveniences and for more healthy ways of living is not going to stop just because developed countries suffer a mutually-reinforcing economic recession.

  • Dan Modricker

    Ian Nunn said: “Looking at the State of California’s Asphalt Price Index http://www.dot.ca.gov/hq/esc/oe/asphalt_index/astable.html,
    it stood at 40.2 in Jan. 1999, 287.1 in Jan. 2007 and 439.3 in Dec. 2007. This is a 993% increase in 8 years and 53% in 2007 alone. At what point will we not be able to afford to repave our deteriorating roads? Imagine the impact on truck transportation and cities since they are net importers of all goods and commodities.”
    ———

    Perhaps an incorrect inference is made that it is too costly to repave deteriorating roads. One should realize that tearing-up and reuse of asphalt surfaces helps to keep the cost of resurfacing roads down to 10-15% increase over previous year. That’s still significant, but I contend that it is manageable.

  • [...] Byron Wien’s five sure investment calls » Investment Postcards from Cape Town Anytime something is a ’sure thing’ it makes me think harder about the opposite case. Interesting post. [...]

  • While its always interesting to read Byron Wein,I have to question his conclusion that China has an infrastructure superior to the US.Maybe a few cities, but countrywide?

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