Thornberg, one of the earliest predictors of the housing market crash, explained that there are definitely some good signs out there. "If you look at an economy a certain way, there are some good things happening." But, he also noted that if you look at the economy a slightly different way, things are bad. It's similar to those black-and-white psychological photos, he said, "where you look at it one way and it is a light at the end of the tunnel, but if you look at it another way, it could be a train headed straight for you."

It is clear that the financial markets hurt the industry, he noted, "but those aren't the source of the problems." The actual cause of the problem he said, are the three big imbalances: housing, the national asset bubble and the consumer. "When you look at the numbers, the recession is over, which is good news," Thornberg said, "but the bad news is that it's not over because the fundamental problems haven't been fixed overall." He added that "the positive signs you are seeing are due to government intervention," which is now "creating its own separate set of imbalances, such as budget deficits for example that are exploding across the board." At some point in time, he said, "the government will back off their support, and then we have to worry about those other problems emerging."

Thornberg added that "this doesn't mean you should go back into your shell." Instead, he said to "keep your eyes open and stay cautious…there are opportunities, just proceed cautiously." He pointed to an "S" shape recovery, "and by 's,' I mean 'slow'."

Why Aren't Banks Lending?

Thornberg says the wrong reason for banks not lending would be for them to sit on the cash to cover their losses. "It is just another type of asset they are sitting on." The answer, he said, is that the banks aren't lending because there is no one to lend it to. "I know that sounds odd because there are a lot of people saying, 'I can't get a loan,' but they are risky," he said. "The people the banks want to give loans to are not looking for cash right now. They aren't stepping up to the plate and buying."

The banks aren't out of the woods either, Thornberg said. "Despite the fact that they get to move a lot of their assets aside, the profit situation for the banks is quite grim." He explained that the bank's traditional client base isn't showing up at the door to borrow money.

Where are We Today?

What worries Thornberg is what is going on with the consumer. Consumer spending has increased some, but consumer weakness will likely continue, he said. "Businesses are a wild card, the housing bounce won't last, commercial trouble will continue, there remains a chance of a double dip, higher rates are coming down the pike and there is a chance of inflation," he said. "But…it isn't permanent."

With all that, Thornberg still remains bullish on California in the long run. "We are a state that when it is good, it is really good in California, but when it is bad, it is really bad." However, "The state has grown faster than the US since 1994 in terms of GSP, income, employment and population," he said.

Following Thornberg's forecast presentation, experts--including Richard Weiss, EVP and CIO of City National Bank, Carmela Ma, president of CJM Associates Inc., and Brad Cox, managing director for Trammell Crow Co.--joined Thornberg on stage for a panel discussion.The panelists focused on investment opportunities, the international global market, prospects for a California recovery and the dynamics driving local markets.

Weiss said that stocks are a good place to be because corporate profits are poised for huge rebound, although not the only place to invest, and he emphasized that overseas investments may be more attractive because, "The US is slowing down." Ma pointed out that the US is now in "a different environment" where "everything that happens outside this country affects us." As an example, she cited the high foreign demand for US dollars that are viewed as a safe haven in times of global turmoil.

Ma sees California in 'a very good position to profit especially from recovery led by Asia due to the close proximity," adding that traffic at the ports of L.A. and Long Beach will create more jobs and growing industry sectors such as green technology education and healthcare should help the recovery of LA's office market.

Cox predicted that property values are going to bottom in 2010 in most markets in Southern California, pointing out that pricing is difficult today because so few properties are trading. He estimated that the true benchmark for prices in Southern California is probably 30% to 40% off what it once was. He noted that the flood of distressed assets that has long been anticipated has yet to materialize, and he's not sure it will. This means that transactions will pick up in the middle of 2010 as some things come to market, but it will not be a flood, Cox said.

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Keep Your Head Low, But Keep Looking Ahead

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