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10 December 2008

Thoughts on the Future of the Markets

Fortune spoke to eight of the sharpest thinkers on the markets. Here is a summary of what they had to say. Click on the title to read the article posted on CNN.

Nouriel Roubini - Known as Dr. Doom, the NYU economics professor saw the mortgage-related meltdown coming.

Roubini says we are in the worst recession of the last 50 years. It is an unwinding of a huge leveraged - up credit bubble. All of the advanced economies will experience a hard landing and the emerging economies will experience a severe slowdown. And it will get worse.

GDP will be negative throughout 2009 and during the recovery in 2010 and 2011 will be very weak. So weak it will feel like a recession. Unemployment will peak in 2010 at 9% and housing prices will fall another 15%.

Roubini says that for the next 12 months, stay away from risky investments like the stock market and commodities and invest to preserve capital. Buy treasuries and bonds. It is better to make low returns than to lose 50% of your capital.

Bill Gross - The founder of bond giant Pimco warned of a subprime contagion back in July 2007.

In 2008, over $30 trillion worth of paper wealth was destroyed. This was not caused solely by the sub-prime mortgages alone. There was a great leveraging that embodied derivative structures of all types. As 2008 ends, investors are fearful that the recession may bring us to the brink of a depression.

Federal guarantees and trillions of dollars will be required to fill the gaps created by the deleveraging of private balance sheets. The process will take longer than 12 months and after the bottom is reached profit margins and earnings growth will be low.

Investors will have to be content with single digit returns for quite awhile and should stick with high quality bonds and preferred stocks, especially those that are part of the TARP bailouts. While the returns will be small they should be safer than most other investments.

Robert Shiller - The Yale professor and co-founder of MacroMarkets called both the dot-com and housing bubbles.

Shiller sees similarities between now and the 1930's. The percentage rise and fall of the stock market, interest rates and housing prices. Unemployment is not anywhere near the '30's, however.

Other similarities include consumer confidence (even though our numbers don't go back that far, it is likely at its lowest level since then), volatility, biggest one month drop in consumer prices and it's a world wide event.

He thinks we'll manage it better this time around, but we are still vulnerable. One of the lessons from the Depression is that things can smolder for a long time. Consumer confidence needs to return to get things rolling again.

The PE ratio reached a record high at 44 and has since fallen below the average of 15. It is now 13, but in the '30's it fell to 6, so that is a concern. Investors may feel comfortable that valuations are good right now, but there still is the risk they could fall by half.

Sheila Bair - The FDIC chairman has been pushing to get mortgage relief for borrowers.

Chairwoman Bair is a believer in the basics of investing. That is find a stock you like and hold on for the long haul. That seemed to work for her mother and she would like to see America return to that philosophy.

The crisis we are currently experiencing was caused by investors not doing adequate homework in their investments and as housing prices deteriorated the problem began feeding on itself and getting worse.

Jim Rogers - The commodities guru predicted two years ago that the credit bubble would devastate Wall Street.

This forced liquidation we're in has only happened 8 or 9 times in the last 150 years. It's no fun, but the way to make money is to buy investments that are unimpaired by their fundamentals. GM and Citigroup are impaired.

The only group that Rogers can find that is unimpaired is commodities. He especially likes agriculture. The cost of raising crops is increasing and the supply of commodities is decreasing. At the same time the demand for food is increasing. Getting loans to acquire the goods needed to continue produce commodities is also getting harder. This is a recipe for higher prices.

Rogers has been buying Chinese stocks and stocks in Taiwan for the first time. He has covered his shorts on U.S. stocks and is shorting Bonds. There is a huge amount of bonds coming onto the market and soon inflation will return.

Rogers feels stocks are still overpriced. Historically, you buy stocks when yields are 6% and selling at 8 times earnings. You sell when they are 22 times earnings and 2% yield. Stocks are cheap, but yielding only 3%. To get to that 6% yield the market will have to drop to 4,000. If an investor is still solvent at that point you should be buying everything in sight.

To read what Wilbur Ross, John Train and Meredith Whitney have to say about the markets click here.

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