My ANTI-Predictions for 2010
It's fashionable - if not expected - at this time of year for those of us in the business of economic and investment prognostication to inform and tantalize you with our predictions for what the New Year will bring. Yours Truly has done that a time or three.
As we begin 2010, however, a somewhat different urge is striking me. I have also been absorbing the views of many on what the 12 months ahead will bring, as far as the behavior of stocks, the economy, currencies, metals and all the rest. As always, the outlooks even of those I consider superior to their peers are all over the place; for example, one individual I have a great amount of respect for believes that 2010 will give us a 5.5% yield on the 10 year Treasury note. Another I respect equally says we will go back down to 3.2%. (I'll talk about the consensus views on interest rates, both official and market - and how I have different ones - shortly.)
For the big, noisy mass comprised of most Establishment economists, investment professionals and their respective talking heads on Tout TV, though, there are some fairly common themes/outlooks for 2010. This is largely to keep the masses of consumers and investors from really sitting on their wallets. Much of this propaganda that attempts to pass for reporting and forecasting is being fed the public because both Wall Street and the powers that be that enable it are quite worried that the public, by and large, does not have as rosy a view of things as our "leaders" would like. I have discussed a lot of the evidence of this recently in The National Investor, in part in reporting to our subscribers on the lack of any meaningful volume - and, thus, on the lack of sustainability - in the stock market's advance of the last few months.
It is primarily these consensus outlooks - some of which you might even be making investment plans based on - that I want to briefly address as my own way of giving you my take on what lies ahead of us. I call these my ANTI-predictions for 2010. (On the following few areas, I will give you my quick, general views; my subscribers will be more fully informed, including by my specific investment recommendations for them.)
Let's get right to it!
ANTI-Prediction # 1: There is NO "exit strategy."
Wall Street has been cheered by the idea that Washington is imminently going to withdraw at least some of its artificial support of both the financial system and the economy. For its part, the Federal Reserve has been making more noise about some newfangled ways it might "drain liquidity" from the system. They will talk about such things as "reverse repos." Next they will talk seriously about them. Following this, perhaps they will begin some "practice" or back-of-the-cocktail-napkin drills to figure out how such liquidity withdrawing would work if it really were done.
Those who believe all of this nonsense - together with those paid to convince more people of the veracity of this notion - are already placing their investment bets.
I believe that all of this talk is hogwash.
I'll talk about the interest rate part of this separately in a moment. Apart from that subject, the general notion that the Federal Reserve or the Treasury could extricate themselves from a deep, continuing involvement in the economy and financial system is completely unrealistic. Despite their rhetoric - which is designed, in part, to enlist your support as they try to bolster the economy and Wall Street -- these official parties could not stop their artificial support if they wanted to.
The Federal Reserve may tinker at the margins; but in no way can it even think about disgorging the $2 trillion or so worth of Treasury and mortgage paper it has bought to keep those credit markets from collapsing. And Chairman Bernanke himself has told us recently how important it is to keep feeding cash to banks in order for them to both strengthen their own balance sheets and help support the broader credit markets by using that "government" money to buy debt securities, rather than make loans to Main Street.
Over at Treasury, Secretary Geithner recently succeeded in extending the TARP program into late this year (at least.) Together with the Fed, Uncle Sam has also just decided it is necessary to become the largest owner of GMAC, lest that key consumer lender go belly up.
KEY CONSIDERATION: You must factor into your investment decisions the fact that the massive, unprecedented stimulus measures of 2008 through 2009 will NOT go away in 2010. Indeed, they may actually be bolstered out of necessity.
ANTI-Prediction # 2: The Federal Reserve will NOT raise interest rates
Earlier this week, I watched a segment on CNBC where a panel was asked when each of its members believed the Federal Reserve would raise the federal funds rate, ostensibly because the recovery we are allegedly in was gaining even more strength. One by one the experts held forth, prodded along by the network's always-giddy perma-bull, Larry Kudlow. (Though he's occasionally entertaining, always beware of Kudlow's angles; he would be unabashedly bullish even if NASA announced an asteroid was about to hit the Earth.)
Just about everyone insisted that the Fed would raise interest rates by midyear.
My take: as I have quipped a couple times recently, I believe the Fed will raise interest rates about the time the Chicago Cubs next win the World Series. (My apologies and condolences to those of you out there who are long-suffering fans of the inhabitants of Wrigley Field.)
Here again, the economy is simply too sick for the Fed to act. And the banking system needs the current historically steep yield curve - anchored by the current rock-bottom Fed funds rate - in order to reliquify itself.
KEY CONSIDERATION: In 2009, the Fed's maintaining of its 0 - 0.25% Fed funds rate level was taken as bullish by the market. In 2010, it will drive money back out of risk assets, once investors finally figure out that the Fed's maintaining of its low rate is BAD news for an economy that is NOT healthy after all.
ANTI-Prediction # 3: The market WILL NOT raise interest rates further; at least, in the near term.
As you may have already read, 2009 was the worst year for investors in long-term Treasury bonds since 1978. This was partly due to the distortion of the market having previously driven long-term interest rates to their lowest levels in generations, following the financial panic that hit in the fall of 2008. Of late, however, much of the rise in long-term market rates as the year ended was courtesy of the belief that better times - and the inflationary pressures usually attendant to them - are close at hand.
Among the things that occasionally bewilder me is that pundits who are quite bearish on the outlook for the U.S. economy insist that such will lead to a collapse in the bond market, and rise in yields. I don't know where they were for most of the last 16 months or so; but market yields crashed when economic (and financial) fears grew.
Even more so than is the case with views of what the Fed will do, it seems that almost everyone says that market interest rates will continue to rise, as Treasuries sell off. Maybe this will happen, IF we really are in a new expansion and IF consumers who now barely want a 5% mortgage (without government help via a tax credit) will rush to lock one in at 5.5% or 6% and IF the Fed stands back and does nothing as Treasuries get killed.
I think not.
KEY CONSIDERATION: Between the Fed really not getting out of the bond subsidy business and the economy's continued weakness, it is more likely that, in the months ahead, long-term market interest rates will FALL.
ANTI-Prediction # 4: The U.S. dollar will STRENGTHEN for much, if not all, of the year.
A growing number of market watchers have come around lately to embrace the dollar's recent rebound; now saying that it suggests better days ahead for the national and world economies. To be sure, this optimism - and the idea that the Fed will raise interest rates sooner rather than later - has helped fuel the dollar's rebound.
Inexplicably, some of these same folks suggest that the dollar will shortly resume its secular downtrend. Why? Well, I guess it's because that dollar decline is what helped make 2009 such a good year, as it bolstered pretty much all manner of assets. And since these folks are trying to talk themselves (and us) into more profits, I guess we'll all just wish the dollar lower.
Now, you might think that (if I'm right) a realization that the economy is still in trouble via a Fed that does NOT raise rates would weaken the greenback. And under normal circumstances you'd be right. But don't forget that jillions of dollars have been and still are being bet on a global recovery. Many of those bets - on assets such as stocks, emerging market paper, commodities and currencies - have been made with borrowed dollars. Once it dawns on investors that the global economy is not recovering, those assets will be sold, and the dollars borrowed to buy them will be repurchased. Few, I think, are prepared for the kind of huge upside move we might end up seeing for the U.S. dollar for a while (even if, eventually, the greenback is doomed.)
One more reason why I take this view is because - and this is honestly hard for even me to say - the dollar will be viewed even more this year as "less bad" among a lot of alternatives. The national finances of Great Britain and Japan are worse than ours. The euro has recently plunged, bogged down by the implications to that currency of the troubles in Greece, Italy and Spain. China is not about to allow the yuan to rise against the dollar any time soon.
KEY CONSIDERATION: Where both the U.S. dollar and all the assets that benefitted from its decline are concerned, expect reversals of what we saw from the cheap dollar and the related carry trade activity in 2009.
From these four items, you can pretty much extrapolate to determine what everything else is likely to look like. Though we may not suffer everything to the same degree as in late 2008 and early 2009, I think we'll see weakness for pretty much every kind of risk asset. Commodities will not be immune from the funk, either (though I'm looking at a few isolated, special situation type of plays for my subscribers in hard goods, especially in agricultural and other areas that were late to the overall commodity party.)
There is one more subject I want to tackle for now, though.
ANTI-Prediction # 5: China will be a BANE, rather than a boon, to the markets.
Much of the gains in risk assets of 2009 owe themselves to expectations that a country that accounts for about 8% of global G.D.P. has both the interest and capacity to pretty much carry the rest of the world on its shoulders. These views - together with the cheap financing available via the dollar carry trade - served to push up all manner of commodities and other assets in price last year.
Apart from the speculative nature of many of these trades, there is cause for concern. Let's say China has not overheated, and is not headed for a consolidation (if not the latest of its occasional nasty busts.) We still have to wonder, as PIMCO's Mohamed El-Erian so eloquently did in a recent interview, whether investors have lost their faculties if they think that a country that accounts for that 8% of world GDP is capable of carrying everyone else on its shoulders. America could once do that; when its share of the world's economic output was 50%+. It's dangerous to think that China even wants that job right now, let alone that it could handle it.
Further - as I wrote to my subscribers in our November issue in a report entitled "What Does China Want?" - investors must look at what is in China's long-term interests. I believe that shrewd, calculating nation - which, unlike the U.S., knows how to "look out for Number One" - has some surprises in store for us all in the year ahead!