At the beginning of 2010, I forecast the following ten items would occur that year:
1) MASSIVE increases in volatility
2) The 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.)
3) The 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.)
4) Once 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
5) Several sovereign defaults and credit rating downgrades
6) Multiple states to beg for bailouts or default on their debt
7) A municipal bond Crisis
8) Interest rates to rise or inflation to break loose
9) China’s credit bubble to pop (Chinese real estate is trading at completely unaffordable levels based on Chinese incomes) resulting in Chinese stocks and Chinese real estate plummeting
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.
This was 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.
In plain 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.
1) The politicians NEED things to continue as they were if they want to remain in office/power
2) The bankers NEED things to continue as they were if they are to stay in power/ collect their ridiculous salaries
3) The central banks NEED things to continue as they were if they are the maintain their power/ control/ prestige
4) Money 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.
However, all 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.
In plain 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.
Happy New Year!
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