Outlook for 2009 through 2012

I posted some pontifications on outlook for 2009.
But it is important to look beyond 2009, to have a plan on how to maneuver in a changing environment.

Buy broad basket of stocks now
I have read where people are trying to buy now with "prices are good.
Wrong. Prices are still too high for stocks. In good times, the analysts state look at the earnings multiplier. In bad times they state prices are cheap. You can't have it both ways, either a stock is good to buy because the earnings multiplier is strong and rising OR a stock is cheap because.....well...it isn't worth more.

So ask yourself this, do you believe the market downturn has ended, and now we are setup for another 5 year run? If the answer is no, then investing in a broad basked of stocks for the long term is just wrong right now, and your money should be invested elsewhere.

If the answer is yes, my question is why? The US after artificially inflating housing (through cheap interest and easy credit) to drive the economy since 9/11, that all the debt (bad or good) since then has now been overcome in less than 6 months?

If history is something to use as a guide, a banking collapse such as the US (and the world) is experiencing will take years to unfold before hitting a solid bottom. There are several decent articles you can read on the topic. Harvard paper, Japan's own issues resulting in 20 year recession, Causes of last American Great Depression. There is NO historical basis to assume the market and the economy will U turn in the near future.

Obviously with a new US administration, new steps will be taken, which could completely change the time line I post below. The efforts to "increase debt spending" to stimulate the US will make the predictions below more accurate, not less. If the US accounting irregularities are fixed (eliminate level 3 debt class) and proper valuation for debt is realized, the US should plunge much harder into a recession/depression, but spring back relatively quickly (year or two, rather than decade)


2009
As previously started, 2009 will be a down year on the stock market as the deflation whirlwind continues to crush the weak. This downturn could be much shorter IF the bad debt in the system is exposed and cleansed. However, the politicians are likely to NOT do this (until it must), and therefore by hiding the bad debt, will extend the downturn. DOW 6,000 is my target.

2010
2010 may see the final (3rd big wave) down of the market decline, with some headroom for a 20% further downturn into 2011. By this time, everyone will be dismayed by the market and finally start giving up, and selling their assets at a huge loss. Housing may actually start being sold by banks for actual market value, rather than held by banks to avoid losses. DOW 3,000 is my target.

2011
As previously posted, the adjustable mortgage resets will be reaching their peak by 2011, allowing the final bloodshed to be exhausted. The housing may continue to fail, but the avalanche will be ending. 2011 will mark the bottoming and most likely hopelessness of everyone. Basic items such as food, energy, housing costs will be primary focus of many people.
Pop around DOW 3,000, make a all time low, trade in a range. Making money in the market (short or long) becomes difficult. The trading party is over.

2012
This will be a telling year, can the US come out of the funk, or will it end up like Japan, into it's 3rd year of a 10+ year recession. This is too far to see.


Summary
OK, so what the heck is my point?
The point is do NOT get caught holding stocks for the next 10 years waiting to regain your losses. Assuming the DOW hits 10K this quarter, get the heck out of dodge. Remember how bad you felt looking at your life savings when DOW was at 7,550? Take that fear and put it to good use. GET OUT of the market and put your money in US Federal bonds, consider buying OIL fund USO (assuming oil is below 50 a barrel), GDX gold miners (if still cheap, 35 or under), and attempt to store your wealth in "real" terms, rather than paper terms. (Click here for indicator when to invest in stocks)

And that is the key point, in the next few years (as it was 6 months ago) the name of the game is keeping the wealth you have built up. And investing in the stock market broadly is a high risk play for the next few years.

If the US actually achieves hyper-inflation, as it is trying to do, then resources are even a better play to preserve wealth.

Extreme preparedness
Finally, consider buying physical gold, I am trying to wait for gold to fall to 600 an ounce myself. Please remember, the US government in the last great depression entered the banks across the country and TOOK everyone's gold. Therefore I would recommend storing gold outside the US (and some inside) as well as holding 20K of it physically.
GoldMoney.com has some very compelling ways of holding gold to store wealth if in the event the US dollar starts to collapse.
I am not in extreme mode, but if Gold gets cheap enough, I can't see the harm in "storing" some money at GoldMoney.

Final Thoughts
Between now and 2011 there will be quite a bit of money to be made. Trading is about being on the "right" side of a trade, and "Taking" profits, rolling into the next trade. Once the market hits bottom and flatlines, trading will yield nominal profit (if any). World players can change the pace and depth of the timeline I laid out. But one thing they cannot do, is wish away this issue.

It must be addressed, either up front, or at the bottom, the companies must realize their losses and move on. Nothing short of that will fix the problem. Additional debt is not the answer.