2011 - What's Coming
Oh boy is 2011 going to be an exciting year! Some things that I think might happen:
-Volatility is going up across the board. If you have the stomach for
the swings that are coming across all markets there is a ton of money to
be made; balls and timing are all that are necessary. The markets will
create dozens of opportunities to make and lose.
-There will be 50 days with a swing in the S&P greater than 1%.
There will be 10 days where gold swings $50. There will be two days with
a drop greater than 100 bucks. Most of the big moves will be down
moves. Bonds will not be spared the volatility.
-Gold will be higher a year from now but off its peak. At some time in
the fall, gold will be near 1,800 and the New York Times will do a
front-page story that gold is on its way to 2,000. That will be the high
point of the year.
-Copper will continue to rise. This metal will benefit as the poor man’s
gold. Why buy an ounce of something for $1,600 when you can have a
whole pound of something else for only $5? The logic is compelling only
because there is no logic. Increasingly, it will become understood that
money does not hold value. Copper will do a better job of storing value
then a Treasury Bond.
-The US bond market is in for a heck of a year. The 30-year will trade
at BOTH 3% and 5%. Higher rates will come early in the year, then the
deflation trade will come back into vogue.
-Spain will be the next sovereign debtor that falls prey to the market.
This will happen before the end of the 1st Q. The package to bail them
out will exceed $500b. This will exhaust the EU resources. There will be
very high expectations that contagion will then move to Italy. That
will not happen in 2011 (2012?) The European Central Bank will step up
to the table (finally) and support the market for Italy. Sometime
between March and June Italian bonds will be a great buy.
-The IMF will contribute $125b to the Spanish bailout. The US portion of
this will be $25b. Republican Senators and Congressman go nuts. The
American people will side with them. The argument, "How can we help Spain but not California?" will
be the mantra. In the end the IMF commitment will stand. But that will
be the last time the US contributes to a sovereign bailout. This will
prove to be very destabilizing at some point after 2011.
-The ECB will be forced to issue bonds that are joint and several debt
of the EU members. This development will stabilize the EU temporarily,
but it will be hated in Germany. The amount of the new issuance of these
bonds will be small. The program will be terminated in 2012.
-The dollar versus the Euro will be all over the lot. The low for EURUSD
will be ~1.17. The really big surprise is that toward the end of the
year the Euro will be pushing 1.50.
-The CHF will be like copper. It will attract investors as there is no
good alternative. Before June EURCHF will trade below 90.
-The market will finally wake up to the fact that the YEN is not a good store of wealth. The continuing argument will be, “Yeah the Yen stinks, but everything is worse so it should be okay”.
Wrong. The Yen is a short. The best currency trade of the year will be
long Sterling short Yen. There will be better levels to put this trade
on then exist today; be patient.
-The US will have a full year deficit of 1.4 trillion dollars. This
depressing reality will hang on the US economy/markets. Congress will
talk about the problem endlessly, but little will be accomplished. By
the end of the year the problem will be so acute that belt tightening is
put in place for 2013-15. But it will be too late by then.
-QE2 will be the last QE we see. The program will end (on schedule) on
6/30. Perversely, long-term interest rates will rise as long as QE
continues. When the program is finished rates will begin a rapid
decline. This will not go unnoticed by academia. The result will be that
QE will be a disgraced policy that will not be used again for at least
-The high for the S&P will occur before June. The S&P will fall short of 1,500. The low will be 1,100.
-Oil will rise to $130 in the next six months. It will be above $100 at the end of the year.
-China’s inflation rate will continue to rise. Food will be the primary
driver. The central government will respond with monetary tightening and
an acceleration of the Yuan appreciation. It will not work. Inflation
will push 7%. The domestic economy will continue to grow but at a much
smaller pace. 5% GPD will be all that China sees for the year. The trade
surplus will fall by a third.
-Brazil will continue to shine as a resource rich country that runs a
trade surplus and has low budget deficits. The surprise of the year will
be Argentina. Food will be the reason. Argentina’s fortunes will
improve with rising wheat and soy prices.
-The US will wind down its presence in Iraq. With every step we take out
the door domestic violence will rise. Iran will assume a larger roll in
the south (Basra). This will not go over well with the US. Much of the
year will be spent debating what should be done. US warships will be off
the Iranian coast waiting for a phone call, but no shots will be fired.
Russia and Germany will not go along with strong sanctions against
Iran. The problem will fester toward a resolution in 2012.
-Kim Jong-Il will die. His son will take over. The heir is a
nut, there will be more military exercises that results in shells
landing on S. Korea soil. China will make public statements that it is
trying to bring order; behind the scenes they will be applauding the
-Obama’s popularity will continue to fall. The legislative “successes”
at the end of 2010 will convert to a series of failures. There will be
no new stimulus. Portions of the health care legislation will be dialed
back. The mandatory participation feature will be found
unconstitutional. Without this feature the legislation makes no economic
sense and a great debate will be initiated as to what to do about it.
Nothing will be accomplished. Reason? There are no “answers” to this
-Obama will propose a means test for Social Security in his State of the
Union Address. Retirees who are living the high-life (Warren Buffet
types) are going to have their SS checks cut to the bone. Any senior
with income of $200k will be impacted. The great socialization of Social
Security will have begun. The popularity of this program will fall of a
-The 2% reduction on worker contributions to Social Security will be
extended and expanded to 3% for 2012. Rates will not go up in future
years. Social Security will have to be gutted as a result. This will not
happen in 2011. But the seeds will be sown for this to occur in 2014.
-2011 will be a stock pickers market. Index investing will see a bad
year. Some of the darlings of 2011 like AAPL and NFLX will not fare so
well. While I don’t see big declines in these stocks there are much
better places to put money to work. M&A will be a dominant theme.
That is where the action will be.
-There will be at least three more 'Flash Crashes'. The SEC will launch
another investigation into how this could happen. The conclusion will be
that ETF's and how dealers manage them are responsible for the
liquidity problems in individual stock names. There is no solution to
this problem. The market will be on edge looking for the next mini
crash. A stock will fall prey to this and drop 20% in seconds. Unlike
prior examples there will be no recovery in the stock. Holders will
protest the losses. There will no restitution. Market confidence will
fall as a result.
-Meredith Whitney will be proven wrong in her forecast that 50-100 munis
go chapter 9 this year. The process to insolvency takes much longer
than she has anticipated. Only 11 munis will make a chapter filing. The
rest will be pushed to the brink in 2012.
-The center of attention will move away from California as the most
bankrupt state. In his State of the State address in January, New York’s
new Governor Andrew Cuomo will fess up to the fact that for the past
year of so NY has been burying its problems. Substantial cutbacks in
spending will be the result. NY State long -term GOs will trade at 6% at
some point in the year.
-Unemployment will not go down. The average for the year will be above
10%. The number of workers who leave the system will rise to 20mm. These
workers will find part-time jobs that pay cash. The new day-workers
will compete will illegals for employment. Social tensions will be the
-The Chevy volt will not sell well. Boeing will be unable to complete a
single Dreamliner. GM will trade below $30, Boeing will hit the low
-The Singapore dollar will be the strongest currency on the globe in 2011.
-Apple will not come up with a new product this coming year. The rest of
the consumer tech manufacturers will gain some market share. The
problems with dropped calls with the iphone will be an issue. Apple will
respond with alliances with a number of other providers. ATT's stock
will suffer as a result.
-Headline inflation will rise a bit. It will push through 2%. Those
numbers are meaningless. The price of a pair of jeans will be 50%
higher. Food will cost us 15% more. Gas will be at $4. Bernanke’s QE
will be blamed for the inflation.
-Much to my chagrin and surprise Tim Geithner will not be replaced as
Treasury Secretary. He will continue to do a very mediocre job for us.
He will be replaced in January of 2012.
-Comcast will complete the acquisition of NBC/CNBC. One of the first
acts will be to fire Mark Haines. Nothing will help. The ratings will
continue to fall. Becky Quick will move to FOX Business. Diana Olick
will get her own show. She is being groomed to be the next Suzie Orman.
Simon Hobbs will return to London.
-There will be violent weather episodes all over the globe. The La Nina
condition that is now dominating global weather is the strongest in 50
years. This will make a dramatic shift to El Nino conditions this
summer. This will set the stage for a very big Atlantic hurricane year.
There will 12 named storms. Two cat. 4 storms will hit the mainland.
-Fannie and Freddie will be merged. Out of the ashes will come a good
bank and a bad bank. The bad bank will hold 2.5 trillion of questionable
mortgages. The US will end the year exactly where it started on this
critical issue. The federal government will be responsible for more than
95% of all new mortgages issued.
-Washington's other mortgage lender FHA will run into troubles. Their
minimum reserve level set by congress will be breached. A bailout will
be required. The true cost is buried. The bailout will be less than
$20b. As this is a problem for the Senate, the legislation will passed
-There will not be a failure of a government bond auction. But the
coverage for each issuance will grow smaller. China, Russia and Brazil
will reduce their holdings of US reserves. The mysterious "household"
sector will show a huge increase in Treasury holdings. This will be
confusing as it will not match up with other data. UK reserve holdings
will show a decline. These are actually holdings of China that were not
included in official reserves. This will bring uncertainty.
-Mortgage Gate will die as a headline story. In fact it will go the
other way during the year. Increasingly, the problems in real estate
will be focused on the fact that there has been too few foreclosures.
That too many people had been living in a home without paying a dime
becomes a cost that all have to bear. As a result there will be a much
higher level of foreclosures throughout the year. Contrary to
expectation, residential real estate for average priced homes will not
decline much further. However, prices for high-end homes will continue
to fall. Anything with a price tag of greater than $1mm will be worth
20% less by the end of the year.
-The narco violence in Mexico will expand to many more cities. Tourism
will be hurt as a result. Some of the violence will pass over our
border. Anti immigration attitudes will expand. Because the low-end
economy will remain in the dumpster the actual number of illegal aliens
will decline by more than 1mm. This will add to the RE woes in some US
areas. It will stress the countries that they originated from as $
-Interest rates will be higher throughout the year for corporate bonds
and Munis. This will bring a reversal of the mania to buy dividend
stocks. Those who thought that this investment strategy would work for
them will be disappointed. The number of hucksters pushing the dividend
story will grow in number while the popularity of the strategy declines.
-Jon Hilsenrath will write an article for the Wall Street Journal that
is actually critical of the Fed. The unpopularity of the Fed will rise
to such a level that Jon will have no choice but to follow suit.
-The Fed will come under attack from all sides. They are truly in a
no-win situation. Unemployment will continue to rise while inflation
rises and the dollar declines. One side will shout that the Fed did too
little (Krugman), others they did too much (the rest of the world).
Everyone will hate the Fed as a result. Bernanke will not lose his job,
but his term as the boss at the Fed will be forever tainted.
-ZIRP will be with us for yet another year. Bernanke will not let go of
this loser policy. Inflationary expectations will respond at some point.
By the end of the year a Fed Funds rate increase will be seen as
imminent even though the economy will be soft.
-Social unrest will become visible in America in 2011. There will be
demonstrations in many major cities. Some will turn violent. Economics
will be at the heart of the anger. The frustration that was evident in
France in recent years will come to the US.
Have a great year!!