beginning of 2010, I forecast the following ten items would occur that year:
increases in volatility
Fed to continue its bailout efforts but in a more subtle “behind the scenes”
manner (less public bailouts, more non-public lending windows/ purchases of
Mortgage Backed Securities/ etc.)
market potentially struggle to a new high (potentially 1,200 on the S&P
500) sometime before March 2010 (this is negated by any major negative catalyst
e.g. a sovereign debt default, major bank going under, etc.)
the market peaks, a serious, VIOLENT reversal followed by a volatile roller
coaster ride downward for the first half of 2010 culminating in a Crash
sovereign defaults and credit rating downgrades
states to beg for bailouts or default on their debt
municipal bond Crisis
rates to rise or inflation to break loose
credit bubble to pop (Chinese real estate is trading at completely unaffordable
levels based on Chinese incomes) resulting in Chinese stocks and Chinese real
10) Civil unrest in the US
#’s 1, 2, 3,
7, and 8, were dead on. #’s 5, 6, and 10 were half on the mark (technically we
had rating downgrades but no defaults, US states have started issuing IOUs but
have yet to beg for bailouts, and civil unrest is occurring in pockets of the
US but has yet to go mainstream). #’s 4 and 9 were completely off.
All in all,
I give this forecast a B+. It was generally correct with few outright failures.
However, I don’t consider it “A” material since the market predictions (Crashes
in the US and China) were flat out off by a mile.
largely because I underestimated the Fed and Central Banks’ abilities to restore
confidence and kick the can down the road. In some ways, this was impossible to
predict (no one but the chosen few on Wall Street have direct knowledge of what
the Fed will do ahead of time). Still, I should have erred on the side of
increased moral hazard, manipulation, and intervention. After all, these
elements have been the dominant theme of the financial markets ever since the
Financial Crisis began in 2007.
terms, I believe that the reason the markets have held up despite overwhelming
evidence that the US economy is in a Depression and the fundamentals are
collapsing is because all the “powers that be” have a vested interest in
maintaining the myths of control and security in the financial markets.
politicians NEED things to continue as they were if they want to remain in
bankers NEED things to continue as they were if they are to stay in power/
collect their ridiculous salaries
central banks NEED things to continue as they were if they are the maintain
their power/ control/ prestige
managers/ Wall Street NEED things to continue as they were if they are to keep
their jobs/ collect their ridiculous salaries (consider the tens of thousands
on the Street who lost jobs during Round One of the Crisis from 2007-2009).
This is why
the next Crisis, while obvious and staring all of us in the face throughout
2010, failed to fully grip the market. It’s why stocks and the like swallowed the
European collapse, US Depression, Flash Crash, and more without REALLY falling
off a cliff.
of this cannot last forever. The Fed’s actions, while dramatic, have failed to
address the structural issues of the US economy and financial system. Those
structural issues are, excessive debt, accounting fraud and corruption.
At some point
in the future, these structural issues will surface again and grip the
financial markets. When they do, there will literally be nothing the Fed can do
to stop a full-scale collapse. The reason for this is that the Fed has already
exhausted its arsenal of tools fighting the Financial Crisis from 2007-2010.
Indeed, the only tool left is additional QE, which will eventually result in
the US Dollar following in the footsteps of the Euro.
terms, the system is broken. Everyone, including the Fed, knows it. The
financial world has collectively chosen to ignore this due to political
pressure and career pressure. However, this will not last forever. At some
point something will give and we shall once again enter Crisis mode. I know
this. You know this. Even the most aggressive bull knows this deep down but
believes he or she will be able to get out before it happens.
With that in
mind, I’m preparing 2011’s forecast to be published next week. For now, I will
simply state that I believe this year will be the year that the can cannot be
kicked down the road any more. In the last six months, the Fed has gone from
pumping $10 billion of liquidity to $25 billion in liquidity into the system
per week. I believe that before we get to $50 billion per week the system will have
broken down again. Given the current pace of things, this should hit before the
end of 2011.
So for now,
enjoy your New Years’ celebrations. In 12 months’ time, we’ll all likely be
looking back on this time with nostalgia, not because it’s a great time, but
because it will prove to be a better time than what’s coming.
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