I don't think they were considering that "it might be a 2-month crisis sometime a few years from now"... My guess is that they considered it "inevitable" and were willing to hold bonds all this time just to be sure they were not caught in the downdraft. Much worse? I believe so. Once the "credit crisis" eases, we'll have to deal with a much slower economy... and no sharp snap-back. The current S&P P/E is 16x, even after last week.... with earnings at $56-$57. Historically "cheap" P/E would be 10x or less... and if the "E" dropped to, say, $30... and 10x... that would be SP = 300... and Dow about 2700. That's all in the back of my mind as more than just possible.
I found this through a search. It is the recorded history of the SP500 earnings since 1960 published by NYU. Looking at the numbers there were only 11 ocassions when earnings dropped from prior year in the last 47 years. Seven in single digits. The worst recorded decline peaked at 17% in 1975 from prior year. If past is of any indication, 2009 earnings will take the hit. 1969-1970 > 10% decline 1974-1975 > 17% decline (74 earnings were actually higher than 73) 1981-1982 > 9% decline 1982-1983 > 4% decline 1984-1985 > 7% decline (after 1984 being higher 27% compared to 1983) 1985-1986 > 8% decline (but still 8% higher than the low of 1983) 1989-1990 > 9% decline 1990-1991 > 12% decline 1991-1992 > 5% decline (but still 13% higher than 1987 earnings) 1997-1998 > 3% decline 2000-2001 > 15% decline Earnings for 2007 were at 87.51. A 25% decline in earnings -much bigger decline than the one that ocurred during the recession of 73/74 and 2000/2001- would put 2008 earnings at roughly 65. An historically low pe of 12/13 would value the sp500 at approx. 810 (+/- 30). The 25% decline is arbitrary as well as the pe ratio of 12/13 and this hypothesis doesn't count continued decline in earnings through 09. A few notes: The 1987 crash didn't produce a decline in earnings. Earnings were up 11% from prior year and were even higher in 1988. Twelve and 24 months after a recession, earnings jumped in average 35%-45% specially considering the second year. Link to earnings history: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm
Jim Rogers says he is selling T Bonds - that they are the remaining asset bubble that is still to collapse. I do not really understand his logic though....
Doesn't inflation seem unlikely for now though? I was suspecting that he anticipates increased risk of default even by the U.S. government , say if the Chinese start selling their U.S. Bond holdings.......
Part of his thesis is probably that people will sell bonds for liquidity's sake. The hard asset and equity markets have been liquidated, at serious losses. People will need money to live and pay for things, and will sell their performing monies in bonds in order to raise liquidity. I think that this might be part of it, but I'm sure J.R. has some accompanying reasons, like inflation.
So what will do well in the next 12 months? You pose an interesting an idea since I see both logical arguments for inflation and deflation.
Commodities have given us some short term relief now that they have fallen sharply. But the central banks all over the world are now printing money. They have literally decided to avoid a "recession" by all means by printing money. This increase in money supply will sooner or later turn into some serious inflation. Yields in government bonds have to increase and subsequently fall in value. Looking at long term trends it is obvious that an increase in money supply leads to inflation. The US now have 5% inflation and FED have 1,5%. Really scary to me. The real problem all over the Western world is the low saving rate. I live in Norway and we have a Y/Y inflation now running at 5,5%, the highest in 20 years. By lowering the interest now it really gets scary some years ahead. I have saved money over the years and I'm really scared now. I will by some real esate in the next year to protect me from rising prices.
Jim Rogers said he is buying the Yen, Swiss Franc, Agriculture, and a little China and Taiwan, Water Treatment stocks. He says that Asia will come back better than the U.S. and Europe. He is still mostly cash though.