Tuesday, December 1, 2009

Outlook for 2010

{FACT #1} Bernanke will NOT allow deflation or a meaningful rise in Bond rates. Period, end of discussion.

{FACT #2}.. if in doubt, refer to Fact #1 for guidance.

1. "Jobs" Bill: Not sure how big, but the politicians are a tad scared
about the unemployment rate (and well they should be lest they
themselves meet that same fate in the next election). Aid to local
governments will also be a part of this to avoid a muni bond implosion. Look for new taxes (trader's tax, etc) to partially pay for this. The healthcare bill might also contain immediate taxes on the wealthy.

2. Another QE: Expect Bernanke to announce another round of MBS
purchases in the $600bln range, and perhaps another round of Bond
purchases depending on how the roll over rates on short term bonds
look. Look for Japan to curtail their rollovers of US debt.

3. The FDIC will get another injection of aid from somewhere, likely
the Fed, to deal with the bank failures.

4. The Bank of Japan will announce QE in some form, perhaps bond
purchases.

5. The US Gov't deficit will be north of $1.25 trillion.

6. Unemployment will hover around 11%.

7. This printing will have an effect somewhere in the world; the "carry
trade" will, somewhere, inflate someone's stock market and real estate prices to unrealistic levels. Look for a crash somewhere, likely in Asia. Many other nations have begun to restrict the inflow of money; Taiwan and Brazil to begin with, and the list will probably grow.

8. Look for at least one sovereign default in 2010. Ukraine, Mexico and Greece head this list of shame. They'll get bailed out in one fashion or another, but there will be serious damage done to EU banks in the process. Also refer back to point #7 for other candidates in Asia. These panics will not crash the system, but will scare investors out of equities and back into bonds.

9. There will be no recovery back to the good ole days. We are as a
nation still WAAAYY too far indebted for this to happen anytime soon,
and this will continue for the better part of a decade at the very
least.

10. US Bond rates: There is some $3 trillion in short term bondsthat needs to be rolled over in 2010...nevermind the additional $1.25 trillion that Obama will need to borrow. Then we get to the borrowing needs of other nations, other states, other cities all over the world. In short, there is a chance that despite Bernanke's efforts, rates will rise.. unless..
the stock markets take a hit, in which case investors flee stocks and (voila !) begin buying bonds again. A minor panic or two in exotic locales will help encourage yet more investors to once again purchase US bonds.

11. Stock market: Because of #10 (bond rates) I fully expect a dandy
pullback beginning early in 2010; look for the DOW to sink to at least
9000ish at some point. Lets just hope that it does'nt turn into a stampede for the exits, and there exists that possibility, though I think it won't turn out that way.

12. Commodities: Since I expect a stronger dollar and a sluggish economy (and thus demand for commodities) I see commodities having a down year. Gold will cool off, but I would'nt look for it to get much below $900/oz again.

13. Currencies: When the stock market begins to tank, the USD will strengthen some versus both commodities and other currencies. Bernanke will not allow it to strengthen so much as to bring about deflation, but he will allow it to go up some.

Overall, the Fed and the US Gov't cannot forever continue printing and borrowing like this.. in 2010, between Fed purchases of MBS and the "Jobs Bill", another $1.2 trillion or so is being printed/borrowed to support our economy (then we come to the deficit), and this after last year's total of $2.1 trillion (before the deficit). If this continues, slowly but surely, commodities will go up in price to the point where it does serious damage to the US consumer, and shortly thereafter banks as people are forced to choose between their credit card debts or food. If there were to ever be a rise in interest rates of say 3-4%, it would force the US Govt to make some very ugly choices of tax hikes and/or spending decreases. If they were to ever stop their MBS purchases, rates on homes would shoot up. A rise of that same magnitude (3-4%) would force the Japanese Govt into even worse choices, almost certainly including the selling (or at least not rolling over) US treasuries and possibly reducing Social Security and Medicare. In 2011 (my guess) Bernanke will be forced to pull the plug on the QE.. and it's then that the real danger starts.

http://www.zerohedge.com/article/four-scenarios-2010

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6927923/Global-bear-rally-of-2009-will-end-as-Japans-hyperinflation-rips-economy-to-pieces.html

http://market-ticker.denninger.net/archives/1793-Where-We-Are,-Where-Were-Heading-2010.html

http://brucekrasting.blogspot.com/2009/12/whats-in-store-for-2010.html

9 comments:

  1. 5. $1.5 Billion????

    no way will it be this 'small'.

    ReplyDelete
  2. as above, the deficit is not gonna be 1.5 billion

    ReplyDelete
  3. London default.

    KaPOWeee.

    TOasticakes.

    ReplyDelete
  4. Re:
    1. well duh...
    2. Japan has been "curtailing" bond purchases since Aug, 2008- China is the biggest foreign buyer: US actually holds the largest amount of bond debt- easy to find out -do the research
    what is "QE"?
    4. again, what is "QE"; and is Japan buying US debt or not? make up your mind-see point 2.
    5. national debt is already above $11 trillion!!!!
    6. Unemployment already backing away from 10%- where did you get 11%??? these numbers are published every single week-
    7. What is the "carry trade"? ps-japan crashed in the late 90's- taiwan is now chinese- so which asian country are you referring to? that asian nation of Brazil?
    8. Are Ukrain, Mexico and Greece part of the EU? What do you mean "there will be serious damage done to EU banks"? Name the banks that make up the EU..
    Moving back and forth between bonds and equities is how it works...
    9. Duh..
    10 what "needs" to be rolled over?
    11. Stock market pullback? again, Well Duh....
    12, 13...duh, duh and duh...
    What is your fascination with Japan?
    Are you a financial advisor? trader? broker? analyst?
    Do you handle client money?
    What makes you an "expert"?

    ReplyDelete
  5. "We must not let our rulers load us with perpetual debt. We must make our election between economy and liberty or profusion and servitude. A departure from principle in one instance becomes a precedent until the bulk of society is reduced to be mere automatons of misery... And the fore-horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression" Thomas Jefferson 1780

    This is the aggregate GDP (that is, all GDP produced) during each decade from 1960 onward, the "DTi" (or debt increment) during that decade - that is, the additional debt outstanding in all sectors during that decade, and the percentage of "GDP" that in fact was NOT from production, but rather was "created" due to raw borrowing.

    Aggregate GDP/Debt 1960-2000

    Aggregate DTi60 % Debt
    7336.5 741.285 10.10%
    DTi70
    17259.9 2759.167 15.995%
    DTi80
    41722.4 8439.122 20.23%
    DTi90
    75200.5 122866.7 16.34%
    DTi00
    124309.8 26817.06 21.57%

    What we are facing down today is a fifty year Ponzi scheme. ...for fifty years we have created false output gains, with the last 40 of those years having between 15-20% of each year's supposed "GDP" not created by the work of people, but by BORROWING MORE MONEY which will have to be repaid with interest.

    To run an increase in GDP of about 5%, as so many "pundits" are claiming we will going forward, we would have to increase the total debt in the system to roughly $90 trillion dollars from the present $53 trillion over the next ten years.

    http://market-ticker.denninger.net/archives/1793-Where-We-Are,-Where-Were-Heading-2010.html

    ReplyDelete