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John Mauldin's 2009 Outlook: Deflation, Recession, New Market Lows

Posted Jan 16, 2009 10:50am EST by Aaron Task in Investing, Recession
Related: ^dji, ^gspc, ^ixic, DIA, SPY, QQQ, TLT
John Mauldin, president of Millennium Wave Advisors, was one of the few analysts whose forecasts for 2008 proved accurate (and worth repeating). Mauldin made bullish bets on gold and Treasuries, and remained wary of stocks.  Although he did believe the U.S. was in recession heading into 2008, which wasn't consensus at the time, Mauldin readily admits he wasn't negative enough on the economy (again distinguishing himself from most forecasters who never seem to admit their failures.) 

Looking out into 2009, Mauldin's forecast can be summed up in two words: Deflation and Recession -- with new lows for the stock market thrown in for good measure.

"We have a structural program in that deflation has the potential to get some very real traction going forward," he writes in his popular Thoughts from the Frontline e-letter. "Why? Because not just in the U.S., but all over the world, we built too much of almost everything. And when demand due to the recession drops as well, prices fall as producers try to stay in business."

As discussed in the accompanying video, Mauldin's baseline scenario features:

  • Deep recession throughout 2009 and a "muddle through" scenario in 2010 and 2011, the earliest he believes housing inventories can be worked off.
  • The potential for a short-term rally in stocks as money redeemed from hedge fund comes back into the market (via directly or other managers) but new lows in the summer as earnings continue to disappoint.
  • The potential for a 1974-like bottom in late 2009 as valuation compression generates selective opportunities.

This outlook, it should be noted, presumes government stimulus prevents a more dire economic outcome, as discussed in part one of our conversation.

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