Predictions 2010

That time of year again: predictions! Last year I laid out 9, and would grade this as 6 correct, 2 half correct, and one missed. I suppose 7/9 is pretty good. Some highlights:

• The Dow would rally to 10500, which it has; but I thought it would get there sooner, by the end of summer. Only half a point
• The lows of Nov08 would be retested by Feb, which they were. Point
• Oil would break $28, but it bounced of $31. Close, but no cigar
• 2009 would not be as bad as expected (that turned out correct) but the recovery in Q3 would be delayed. Nope, it came, albeit has been reduced down twice in size. Half a point
• That the Meltdown would be delayed into 2010, with next summer Obama's Summer of Disillusionment. Still right, and I will roll this over to 2010

My predictions last year were informed by historical patterns: after a steep fall, a 50% rebound is typical. My predictions this year are informed by a belief in a W shaped recovery, which will start like a V, so most of 2010 should be up; see the recent post The Stimulus Has Stalled. 

Now, 10 for '10:

1. 2009 was the Year of Hope. 2010 will be the Year of Change: the assumptions that drove markets up in 2009 will roll over in 2010. 2011 will be the Year of Chickens (coming home to roost)
2. Stocks peak in Q1, probably by early Feb, and retest the Nov08 (not Mar09) lows, and bounce
3. Bonds fall in 1H10 as rates keep rising, to above 6% in the long-bond. It could get to 6.9%. This could reverse in 2H10, with rates falling again, but that depends on how the powers-that-be fund the $2T in new Treasury issues and $3T in roll-over of short-term Treasuries. A panic stock crash would drive rates back down. Watch the Treasury auctions in the first few weeks of Jan for a tell of how the year will go
4. The USD goes above DX90. Its rise is being driven by weak Treasury auctions, which drive the long end of the yield curve up
5. Commodities should drop as the Dollar rises, including oil going below $50/bbl, but so many nations are engaged in a race to cheapen their currency that commodity inflation will continue in 1H10 and drop in the second half
6. The Summer of Disillusionment is next summer, when the economy begins to fade, but we might not see a negative GDP quarter until 2011
7. Real estate will fall another 20%, despite its blip up recently, which was driven by Cash4GDP gimmickry. Look for that blip to reverse down by the Summer of Disillusionment, if not earlier. The second wave of defaults is coming as optionARMs reset
8. Euroland will be the canary in the coal mine of the next financial crisis, with increasing problems in 2010 beyond the PIIGS, including problems with investments in Eastern Europe. Nations over-extended on sovereign debt will have to start getting their house in order, which will cause a reduction in global fiscal and monetary stimulus, leading to deflation
9. China's bubble begins to unravel by the Summer of Disillusionment. It will start as a real estate bubble bursting, probably right after the Chinese raise rates to stem a raging inflation
10. Unemployment will keep rising to go over 11%. The apparent peak in Oct and drop in Nov was driven by seasonal adjustments

Key advice to investors: there is no "long-term" in 2010. The bottom last March was artificial, based on extraordinary monetary policy, massive fiscal stimulus and ad hoc gimmicks (cash4clunkers, first-time homebuyers credit, etc.), and therefore is not lasting. The underlying economic fundamentals are highly uncertain, but it is clear the high-bailout, low-rate policy cannot last much longer. Question is how long? My bet is the crisis builds slowly, as the problems accumulate through the year, and then hit hard in 2011.  

Comments

[steve]

I am a little confused by your post. You say “so most of 2010 should be up” and yet you predict “Stocks peak in Q1, probably by early Feb, and retest the Nov08 (not Mar09) lows, and bounce”.

For most of 2010 to be up there has to be a quick drop to the Nov08 lows for a rapid bounce to take place so as most of 2010 is up. Am I interpreting your post correctly?

[jbr]

Yelnick - agree with much of your thinking but I would add probable Japan debt/currency crisis to the list for late 2010 or some time in 2011.

[Craig]

Please clarify for me the Summer of Disillusionment timeframe. Are you forecasting it for 2010 or 2011?

[yelnick]

Craig, the Summer of Disillusionment is 2010. More on why here:
http://yelnick.typepad.com/politick/hope-and-disillusionment-in-obama.html

[yelnick]

Steve, my comment "most of 2010 should be up" was referring to GDP not stocks

[TC]

Looks like Neely continues to miss out on yet another big run to the upside.

[Rich]

Thoughts on gold?

[yelnick]

Rich, the standard view is gold drops with deflation & the USD rising. Yet I see gold as a hedge against bad government, not just inflation. I have written how gold appears to be hoarded by central banks right now, and we have seen dramatic (for gold) sovereign moves to increase gold stocks (eg. India, China). Those two factors (hedge and hoarding) should keep gold buoyant against a rising Dollar.

This does not mean gold goes on a run again, at least not yet. Early in the year the USD needs to correct down to DX76 range, and then have a third wave up. Gold may rise in the short term and then fall with that third wave. Around the Summer of Disillusionment, when the US economic policies begin to falter (ie. Treasury has to raise rates to raise funds, Fed is trapped in its exit to begin to signal a short-term rate rise, US GDP begins to flatten after several good quarters, and unemployment remains stubbornly above 10%), gold will return as a buy even as the USD will continue rising.

[Hockthefarm]

Great post Yelnick, much appreciated.

Government activities appear to be working in the short term. I like your call on housing. 20 percent seems about right. Oil at 50$ seems low.

Here is a fairly downbeat forcast for 2010:

http://tinyurl.com/ydybrdo

Thanks again for the insight,
Hock

[stefano]

Yelnick............you posted that the PIGS should be in the eye of the storm in 2010. I' m from Northern italy and to tell the truth I think that Great Britain is in a much worse situation. Northern italy is a train................without southern italy.............we would be like Switzerland, an economic heaven: If we can maintain southern italy which is a black hole of public money............we can get out of anything. GB instead is not used to the critical conditions which they are going to. And the USA too are not well positioned, imo, if some states are close to BK as someone says.

[yelnick]

Stefano, agreed - if Milano and its surrounds could de-federate from the rest of Italy, it would a great economic engine .. it is the whole of Italy that earned it one of the I's in PIIGS. (Ireland is the other.) And with the excessive QE of Great Britain, maybe the PIIGS become PIIGGS. Or, if the US continues to go off the deep end of excessive debt, we can create a new category for US UK called USUK, pronounced "you suck". (The origin of the phrase 'to suck' comes from a '50s expression "to suck wind", meaning out of breath .. this actually seems to fit the QE countries, who will soon run out out wind in their sails of borrow & spend, and will watch their ship of state stall.)