December 30, 2011 Forecast - Updated to July 5

By: Ian Campbell | Wed, Jul 6, 2011
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In a December 30, 2010 e-mail commentary I set out how I then saw things unfolding economically in 2011, and in some cases beyond. On March 31, I updated my views. My updated views referenced by what I said on March 31, are shown in italics. What I am saying now is in bold. On December 30, 2010 I said:

1. I saw 2011 shaping up to be both 'interesting' and, from the point of view of equity investors and traders an 'ever more "think for yourself" environment'.

March 31 update: If I believed that on December 31, 2010 I am even more certain of it now.

July 5 update: As things continue to develop I become ever more certain that I am correct. Broadly speaking politicians, government officials, and money managers for different reasons have to take an optimistic view of the markets and the economy. I am becoming ever less trusting of their views, and believe investors owe it to themselves to take increasing responsibility for reading, studying, and having inputs either directly or through their respective investment advisors into where and why their money ought to be invested - all in the context of their own individual risk profiles.

2. I didn't see China taking steps to meaningfully alter its currency exchange rate unless that is clearly in China's best economic interest - and I didn't see how that could be the case until the Chinese economy becomes more self-sufficient.

March 31 update: Nothing in the past three months has changed my view on this.

July 5 update: Ditto.

3. I saw China continuing (in 2011 and beyond) with its strategic acquisition program - particularly in the resources area (read Oil & Gas, Base Metals, and Agricultural related commodities in particular).

March update: Again, I see this now as I saw it then.

July 5 update: Ditto. As only one example, there was an article in the past week in Toronto's Globe and Mail Report on Business that discussed China's interest in working toward the development of a new pipeline from Canada's Alberta based Oil Sands to water access on Canada's west coast. I can't see how the U.S. can stand aside from such a plan, but that is what the article implied. It may, of course, be that the U.S. believes (perhaps with significant merit) that environmentalists and other 'vested interest' parties will stop such a pipeline proposal in its tracks, in which case it may become a non-issue.

4. I didn't see the U.S. unemployment situation improving in 2011 in a meaningful way.

March 31 update: If anything, I am more pessimistic now about the U.S. unemployment than I was three months ago. I only began focusing on what I see as U.S. Structural Unemployment after 2010.

July 5 update: I am even more pessimistic now with respect to U.S. unemployment than I was at the end of March, given in particular the recently reported drop in U.S. GDP growth for 2011 and the reported continuing drop in U.S. house prices, and my ever stronger belief that structural unemployment exists in the U.S. I continue to be particularly concerned about U.S. youth unemployment, as people who in my view ought to be retired are taking jobs in an attempt to maintain their lifestyles that I believe should be available to young people. I see this as a 'rob Peter to pay Paul' scenario, where Peter is needy, younger and stronger than Paul - and where this eventually is going to 'bite America', and all other developed countries that are following in the same pattern, square where they don't want to be bitten.

5. I didn't expect to see U.S. housing prices or markets improve in meaningful way in 2011, unless there are further U.S. Federal subsidies thrown at this sector - which I said I doubted would happen given the then recent new Republican strength in Washington. If such subsidies were legislated, I said I would see that as a 'sign of desperation'.

March 31 update: I now am more pessimistic about U.S. housing prices than I was at December 31 - particularly in light of U.S. February New Housing Sales, and now having a better understanding than I did of how New Housing Starts and Housing Resales are accounted for in the United States.

July 5 update: It turns out I was right to be more pessimistic on March 31 than I was on December 31. Today I would like to think average U.S. house prices have, or are, bottoming out. However, I see Main Street Americans running on a rather vicious circular treadmill where jobs are unavailable, declining house prices and non-durable inflation are resulting in lower consumer confidence, and the partisan politicians in Washington are deadlocked over the U.S. debt ceiling increase. Accordingly, I am at least as pessimistic about U.S. housing prices and markets now as I was at March 31.

6. I saw the potential of increased 'residential housing foreclosure' problems in 2011.

March 31 update: I don't have a changed opinion on this, although news on the U.S. foreclosure front has been subdued (at least from what I have seen) in Q1 2011.

July 5 update: There has been only sporadic news on the U.S. foreclosure front in the past three months. However, foreclosed and vacant U.S. housing has to be physically deteriorating, putting financial pressure on both the banks who hold those properties and the municipalities who depend on those properties being 'kept up'. Unless those properties are kept up the reputation of those municipalities as attractive destination points for businesses and tourism likely will fall, as will the municipal tax revenues real estate generates. At some point in the next six months I suspect we may hear much more on the U.S. residential foreclosure front than we currently are - and I am not expecting that news to be good.

7. At December 31, 2010 I said that following from all the then recent media coverage on U.S. State and Municipal debt problems, I couldn't help but think that 'where there is smoke there is fire', and that while this might not prove in calendar 2011 to be as great a problem as forecast by Meredith Whitney in late 2010, I couldn't help but think that could prove to be a problem of some significance. I also said I had for some time been saying in these e-mails that the State and Municipal income and sales tax bases have had to have been eroding after 2007, and that has led to or will lead to obvious State and Municipal financial problems.

March 31 update: Nothing has changed my view on this, if anything I feel more strongly about those views than I did then.

July 5 update: There has been some incremental news on these issues in the past three months. As just one example of financial difficulties faced by U.S. State and Municipal Governments, the Minnesota State Government 'shut-down' on July 1 when it failed to reach a budget agreement by its June 30 deadline. I expect we will hear and read more about similar events over the next six months and beyond.

8. I said that in 2011 I saw the U.S. continue to run substantial monthly net trade deficits, a large budget deficit, and suffer a substantially increased cumulative National Debt - while Washington politics suffers from partisan gridlock. In particular, I said that with the Republicans having a greater say in things after October, 2010, I was not expecting to see further Quantitative Easing measures.

March 31 update: Three months later I am still of the opinion the U.S. will continue to run substantial monthly trade deficits, will continue to run large Federal budget deficits, and will continue to substantially increase its cumulative National Debt. However, I am not so sure of my December 31 position on Quantative Easing. QE2 has been reaffirmed to June 30. At the same time there seems to be increasing focus by the U.S. Federal Reserve on doing what it can to support ongoing strong financial markets. Three months ago I would not have bet on QE3, today I wouldn't bet against it.

July 5 Update: I have not changed my views on any of the foregoing going forward from here for the rest of 2011. I do expect that, after much gnashing of teeth by both the Democrats and the Republicans, the U.S. Federal Government will agree to increase the U.S. Debt Ceiling. I also increasingly expect that after that happens, following a two - three month hiatus period after June 30, that the U.S. Federal Government (read Federal Reserve) will introduce further 'subsidization programs', although it may not refer to them as 'Quantitative Easing'.

9. I said I expected to see an ever increasing gap between the wealthy in America and America 'Main Streeters'. I also said I didn't see that as a good thing.

March 31 update: No change here.

July 5 update: Ditto.

10. I said I expected to see a continuation of what I see as U.S. economic weakening as measured against the economies of China in particular, and perhaps when measured against resource rich and 'stable' political Australia and Canada.

March 31 update: Again, no change here.

July 5 update: Again, ditto.

11. I said I expected to see further, and perhaps more exacerbated 'Sovereign Debt' issues rear their heads in the Eurozone in 2011.

March 31 update: Again, no change here, witness what occurred in Portugal just last week.

July 5 update: I feel even more strongly that Eurozone 'Sovereign Debt' problems will 'weigh world recovery' down and enhance 'world economic risk' going forward from here. As I see things - witness what currently has transpired in Greece over the past week, and what continues to transpire there - Sovereign Debt problems in the Eurozone, in the U.S., and elsewhere are continuously being 'kicked down the road'. Eventually they have to be faced four-square, because postponement strategies related to problems that can't or don't go away never work.

12. I said it would not surprise me if we see an increasing number of social unrest 'hotspots' as 2011 progresses, as people in the developed economies in particular come to an increasing realization that the standard of living they enjoyed (at whatever level that was) is eroding, and likely will continue to erode, for a great number of them - and as youth unemployment becomes a greater and greater problem in some of those 'developed economy' countries.

March 31 update: Witness what has happened in Egypt, Libya, Syria, Tunisia, etc. If anything, I am more concerned about such things than I was three months ago.

July 5 update: I think things are going to get worse before they get better on this front, and 'getting better' in this context I see thing is 'way down the road', and may simply continuing to exacerbate as food and other non-durable inflation continues, populations continue to grow apace, and government's introduce austerity measures that reduce the living standards of their populaces. My repeated mantra: You can't take things away from people and leave them happy. Witness Greece currently. As I see things, societal unrest is becoming increasing unpredictable - which in my view might auger well for the trend price of physical gold and perhaps physical silver, but not much else in an economic or investment context. This is a prediction where I badly hope I am wrong in making.

13. I said that although I don't want to go there, whether it happens in 2011 or beyond, I see an ever increasing change of meaningful 'terrorism incidents' in the developed countries - particularly in the U.S. - and I also saw what I thought beyond 2011 to be an increasing possibility of country confrontation as the world population continues to increase, and as economic power shifts increasing to the emerging market countries.

March 31 update: Again, no change in my views over the past three months.

July 5 update: The U.S. elimination of Osama Bin Laden after March 31 causes me to feel even more strongly about this than I did at the end of March. In the same vein, a week ago President Obama announced pending U.S. withdrawal from Afghanistan. Canada is pulling out of Afghanistan as I write this. As I see things, these withdrawals similarly lead me to the same current conclusion.

14. I said that with respect to the equity markets, I have for some months seen them as over-reacting on the high side, and that to December 31, 2010 I had been proven to be wrong. I said I thought the equity markets were not factoring in all of the economic issues I saw out there, and expected those markets to reflect those things in 2011 in a way they haven't in 2010.

March 31 update: I continue at March 31, 2011 to be of the same mind I was at December 31, 2010, while the equity markets continue to charge ahead. Frankly, I just don't 'get it', even in circumstances where I am becoming more concerned about world inflation than I was three months ago.

July 5 update: Same deal, I continue not to 'get it'. As I see the equity markets, they currently are to a large degree 'trading markets' that respond with 'instant gratification' or 'instant concern' to events 'as they happen' - and are not particularly concerned about, or focused on, the longer term. I have never believed in the validity of the 'efficient market theory', but if until now I had believed in it, I would now become a disbeliever.

15. I said that in the uncertain economic environment we all live in, I expected to see the price of physical gold to continue to trend upward in 2011, and (2) right or wrong, I see physical gold as a 'save haven' protector of 'purchasing power'.

March 31 update: Gold closed at U.S.$1,421 on December 31, 2010. This morning it is at U.S.$1,432. My view for the balance of 2011 is unchanged today.

July 5 update: Gold closed on July 1 at U.S.$1,482, down by U.S.$70 (4.5%) from its June 22 high of U.S.$1,552. That said, while the price of physical gold may very well drop further in the near term for any number of reasons, I continue to think it will trend upward as world economic and societal events continue to develop. I indirectly own physical gold and physical silver. However, right or wrong I see physical silver in quite a different light than I see physical gold. Most of the commentators who write about physical silver and its future pricing are far too one-sided in their views for my taste, and I continue to say in these commentaries that I find the physical silver market to be far more complex and difficult to understand than I find the physical gold market.

As a final comment, the only thing that is certain is that we live in uncertain - albeit interesting - times. As I see things, world economic and societal events are becoming less certain with each passing week.



Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Business Transition Simplified

Through his website and his Business Transition & Valuation Review newsletter Ian R. Campbell shares his perspectives on business transition, business valuation and world economic and financial markets influences on those two topics. A recognized business valuation and transition authority, he founded Toronto based Campbell Valuation Partners Limited (1976). He currently is working to bring his business valuation and transition experience to both business owners and their advisors in our new economic, business and financial markets normal.

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