Sunday, December 25, 2011

2011 Predictions-- Final Grades

1. There Will Be No Recovery in the US: As a nation, we will borrow about $1.8 trillion at all government levels (Federal, State and Local), of which roughly half will be by way of money printing. Simply put, the answer to a problem of debt is not more of it. One day soon enough we will have to live within our means.. and we will not do it voluntarily but at the point of a bond market's spear like Greece. The American people will begin to understand in 2011 that the only recovery thats happening is on Wall Street. Look for the U6 measurement of unemployment to stay above it's current 17%.

A-. The U6 measurement today is still above 16.5%. Unfortunately, most people also know that Wall Street bonuses are still spectacular and realize that Wall St. is the only place  (other than North Dakota) experiencing some sort of recovery. 

2. Muni Bond Implosions: With the end of the Build America Bonds program.. which was an important financial tool for local governments.. and the election of a Republican House, it seems that pretty much all Federal aid to state and local governments will end. With this, look for states to balance their budgets by cuts to local governments. I think dozens of cities and counties will bite the dust financially this year, either with a formal declaration of bankruptcy or by simply falling dramatically behind on their bills. California, Illinois, Michigan, Florida, Nevada and New Jersey cities and counties look particularly vulnerable. Look for Obama to try.. but fail.. to throw them a lifeline. Bernanke may also begin purchasing Muni's. Muni's will lay off at least 200,000 employees. These failures will shake ordinary Americans.

D+. There were a few big name muni busts, but nothing like what I was expecting. The muni bond market held up relatively well. I did, however, get the 200,000+ layoffs correct.

3. Euro Crisis v2.0.. the Spanish Flu: The EU/ECB/IMF plans to deal with the cascade of bad debts, overleveraged banks and overindebted governments is suspect. The EU's central bank, the European Central Bank, has essentially reached the limits of what it can do. Look for Spain, which needs to borrow $400 billion this year.. much of it in the first quarter.. to hit the wall and need to be bailed out. Belgium and Portugal are also in trouble. I forsee the EU/IMF fumbling the ball and asking Bernanke for a backstop, which I believe he will do.. and will catch holy hell back in Wash DC, but I do think the financial system will not crumble. If this one is mishandled, it could be exceedingly dangerous very quickly. In general, the economic conditions in Europe scare the bejesus out of me. The EuroBond is one possible and real answer, but I doubt Germany will agree to essentially co-sign all of Southern Europe's debts.

B-. Europe was a huge mess, but it was not Spain but rather Italy which came to the fore. Bernanke did come to the rescue by re-opening the so called "swap lines" in early December. The EuroBond is indeed dead in the water thanks to German opposition.

4. QE 3.0.. the MBS Edition: I look for Bernanke to begin purchases of MBS in fall; look for it to be in the neighborhood of $500 billion. The state of the US housing market will become dire by mid summer, threatening the health of many big banks.

D+. QE3 did not officially happen. A few other operations, like Operation Twist, QE 2.5 and the aforementioned swap lines did occur however.

5. Stock Markets: I don't see a lot changing.. the Dow will continue to be stuck in neutral, bouncing between 10,000 and 12,000. Many thanks will be sent to Ben Bernanke for keeping this casino open.. and sadly, that is what the NYSE has become. 

A-. The year ended at a tad over 12,000; the low was a tad above 10,000. 

6. US Gov't Bonds: I forsee the US Ten Year Bond, which today is at 3.35%, to touch 4.5% at some point in 2011. If the crisis in Europe plays out as I suspect (or some other crisis abroad) or there is a sharp stock market correction here, look for the yield to go below 2.75% again.

B-. The high was a tad above 4%, but when the problems in Europe occured, the lows plunged below 2%, much lower than I expected. Still and all, not bad. 

7. Commodities: I believe commodities will have an up year as the economic surge in Asia continues. If the Euro Crisis is serious enough, it could bring commodities downward as the US Dollar surges. Look for crude to hit $100, silver to hit $35 and wheat to hit $8.50 again. Americans will grumble loudly as gasoline approaches $3.50/gal and grocery bills are higher, due in large part to Mr.Bernanke's printing presses.

B-. Commods did have an up year for the most part. It has begun falling apart in the last month or so for sure. Both silver and wheat exceeded my expectations, but are now well below the highs. 

8. Beware of Black Swans: The world is a complex and dangerous place and has an exceedingly fragile economic system. One good shove will likely be enough to send the world's economy over the edge. A new Korean War, a war with Iran, a revolution in Greece or even an angry Mother Earth might be enough to send us all into an economic apocalypse thanks to the monstrous debt levels and credit default swaps. In 2002, the world's total debt was $60 trillion. This year, that amount reached $188 trillion, nevermind the hundreds of trillions more in credit default swaps. As I have always said, one day this will end very badly and very quickly.. but I doubt 2011 will be the year.

A-. Fukushima and the revolutions sweeping Arab nations certainly quailfy, though they did not cause any major financial problems. Yet.

Overall I'll give myself a B-. Fellow prognasticators Mish & Krasting outdid me; Gonzalo Lira not so much. 2012's predictions will be up next weekend. It's going to be a wild one. Perhaps the Mayans were right after all. 


  1. Not bad Mr. K. I'll look forward to you 2012 predictions soon. I predict the world will not end in 2012. The Euro will still exist and people in the US will keep shopping. In other words things will be much the same as 2011.