Financial Skeptic Bulletin,  2011

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2011 – THE YEAR OF CATCH-22 (Featured Article) « The Burning Platform

It seems the consensus for 2011 is that the economy will grow 3% to 4%, two million new jobs will be created, corporate profits will rise, and the stock market will rise another 10% to 15%. Sounds pretty good. The problem with this storyline is that it is based on a 2010 that gave the appearance of recovery, but was a hoax propped up by trillions in borrowed funds. On January 1, 2010 the National Debt of the United States rested at $12.3 trillion. On December 31, 2010 the National Debt checked in at $13.9 trillion, an increase of $1.6 trillion.

[Finnacial Armagetton]:

It was nearly a year ago when I made reference to the big assumption underlying most efforts to reverse the tide of rising red ink and economic destruction unleashed by the Great Unraveling:

Throughout the financial crisis, policymakers have focused on keeping things afloat until the storm passes. They've spent vast sums of taxpayer funds trying to jumpstart growth until the economy is back on track. They've encouraged people to keep the faith until businesses start hiring again.

But what happens if all those "untils" turn out to be wide of the mark?

2011 prediction March

• Stock rally might reverse in May-June timeframe.

• Effects of Japanese disaster will linger

• Oil will continue to be above $100...

2011 predictions

• Republican fiscal conservatism is fake -- deficit will continue to grow.  Defense budget will not be cut in any significant numbers.

• Bonds will have a difficult year but most end in positive territory again:

  • Junk may faire OK as it is correlated with S&P500 which is propped by government.

  • Treasuries will rise across the spectrum but the rise will be modest and one year returns will be minimal but positive.

  • Municipal bonds will partially recover toward the end of 2011 and have a positive year. That means the end of Jan might be a good time to buy.

• Government will continue to prop S&P500 but returns on layoffs and cost cutting this year will start wearing out. Midyear correction in cards.

• Inflation will stay in check. Commodities will continue to rise but not  dramatically. Oil will oscillate in 22-26 range. Inflation fears returned and TIPS will have a decent one year return again.

• Bank stocks may correct somewhere during the year and then "recover"r: megabanks banks are insolvent. mired in lawsuits and are propped by government. They may have a good year but crash is in the cards. Sill “Government support” is, going forward, will always be available to megabanks.

• There will be at least "over 10%" one stock slump during the year. At the same time S&P500 might end higher 

How 2010 predictions fared

Q3 2010 Predictions (July, 2010)

General consideration

• Growth is downshifting from the rebound phase, but unclear how much. Probably growth will not fall of the cliff before elections. But there is a general anxiety about this slowdown in the air. That means bonds prices probably will remain elevated and yield depressed (or "normal" as in "new normal"). But that does not mean that, say, Pimco Total Return prices remain on the current levels. See Potholes in the Recovery Road - Reduce Speed Ahead Paul Kasriel Safehaven.com Jul 9, 2010
• Per Paul Kasriel: "Although we had projected declines in state and local government spending for 2010, the budgetary problems are even more serious than we had assumed. "
• Probability of deflation is higher, growth will slower as US needs to stop living belong its means.
• Emerging markets are growing and is some future may boom and form a bubble.

Q2 2010 Predictions (April 2010)

1. General considerations.

   • They will be kicking can down the road. While this is an election year opposition to the current elite is weak and the elite is sleeping at the switch and is not inclined to pursue any real reforms of financial sector which remains a huge drag ("finance tax") on a real economy. Speculation continues (credit-default swaps, derivatives, securitization.). They just want to kick the can down the road.

   • America's economy shows worrying signs of weakness (common to other developed countries): it lacks a credible strategy for longer-term growth. Incomes in the middle-income range for most Americans have stagnated for more than 20 years. The challenge of the future is economic growth that does not depend upon resource depletion or pollution. The question is how we get to a service economy without becoming a servant economy: were workers are employed providing personal services to significantly richer folks then the providers themselves (table servers at white linen restaurants, etc)

   • [Right about price of oil] Oil price remains high and that makes sustainable recovery impossible. So it's just a question of time when relapse happens. That complicated establishing a viable industrial policy.

   • Outsourcing remains an important factor. The availability of low-cost, highly disciplined labor force (no strikes) in developing countries reduces the incentive for companies to invest in technologies that enhance labor productivity in the manufacturing sectors of the advanced economies. That results in changing composition of advanced economies with higher and higher weight of service sector.

   • [Right] Municipalities are broke but will be kept alive as zombies. Municipalities are broke and with pension obligations cannot finance many projects worth financing: austericity on municipal level translates into pull back for the whole economy.

   • Export based growth can't materialize as manufacturing was severely weakened. So there is no real driver for recovery. Due to outsourcing manufacturing is vanishing in the US, a trend that must be reversed. The question is how. Crosspollination between R&D, product development and manufacturing is lost... Employment stagnate. Income distribution move toward higher inequality the social contract eroded.

   • Three separate but related forces are now threatening economic activity: a credit market crisis, a decline in house prices and home building, and a reduction in consumer spending. {plus huge unemployment -NNB} These developments compound the general weakening of the economy earlier in the year, marked by slowing employment growth and declining real spendable incomes. Liquidity Now! - WSJ.com

2. Double dip postponed till late 2011 or even the second half of 2012 or as they call it "hunt for the Red October".

   • Bonds

     • All bonds will do well in 2010.

   • Stocks

     • S&P 500 might experience a double dip.
       

3. Housing will continue to deteriorate, unemployment will drive foreclosures higher as no sustainable recovery is possible after wages decline so much and oil price reached $100 per barrel....

   Supporting evidence: A Few House Price Forecasts

   11/20/2011 | CalculatedRisk

   From housing consultant Ivy Zelman commenting on the MBA Delinquency report in the NY Times U.S. Mortgage Delinquencies Reach a Record High

   "I've been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down."

   From Bloomberg: Housing Recovery in U.S. Set Back to 2010 as Market Wanes

   "I don't think the housing crisis is over," Mark Zandi, chief economist with Moody's Economy.com, said in a telephone interview. "I think we're going to see another leg down."

   From Goldman Sachs chief economist Jan Hatzius in a note to clients: A Renewed Sag in the Housing Market (no link)

   "Our current working assumption is a 5%-10% drop in home prices through the middle of 2010. ... house prices and credit quality ... to weigh on the US financial system, the availability of bank credit, and ultimately the pace of the economic recovery."

   My view is that house prices might have bottomed in some non-bubble areas, and also in some low end bubble areas with high foreclosure rates, however I expect further price decline in many mid-to-high end bubble areas.

Disclaimer: This page is mainly an exercise in self-education that was made available to others in a hope that it might be useful. The stories on this page are financial blogs stories picked by me from the Internet; in addition to being late some or most represent a typical market noise that is mostly irrelevant. You are warned !

Please read them critically and apply sound judgment. Very plausible stories and explanations can in retrospect be dead wrong. All 401K investors should be warned about the 95% rule, which states that about 95% of what you read about finance and economy is either wrong or irrelevant. In investment, 95% is probably a very conservative number. This site is no exception...

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