2011 predictions
Posted by Jason Apollo Voss on Dec 13, 2010 in Blog, Predictions | 15 commentsThis is the first of what will become a regular feature of the blog. My intention is to put in electronic stone my sense of things as they are and will be. Hopefully this provides actionable information for each of you. It also neatly provides criteria by which you can assess my continued skill as an investor.
As the title would imply, the focus here is on intuition, since facts, by definition are things that occurred in the past, yet investing unfolds in the future.
Let’s get to it, with a focus on what my intuition tells me now about 2011…
OVERALL THEMES
- Cohesion – The economies of the world will finally start to move more in lock step than they have since the Great Recession ensued. Until now some economies have emerged from the recession growing more quickly than others. While others have been laggards. 2011 will witness a return to more even, more cohesive economic growth. That is, the “system” will be operating in a more unified, healthier and more robust fashion.
- Stabilization – Nervousness has been present in the economic body for the preceding three years. Anxiety will begin to depart the emotional make up of business owners, workers, consumers and politicians. In other words, the system will stabilize as trust replaces hope.
- Back to the Future – Greater cohesion and stabilization will result in a rhetoric and an imagining on the part of individuals with an emphasis on the future. Folks have been focused on the immediate present in an unhealthy way. That has led to short-term decisions whose consequences are not fully understood. An analogy would be when you first get a severe cut on your body. Your attention is focused entirely on how to stop the bleeding. Then your attention shifts to how to stop the pain. Then your attention shifts to what the long-term ramifications are to your body – this is the stage we are entering in my opinion. Ultimately, the injury creates a scar that serves as a reminder of what went wrong, but the focus returns to the future.
Economy
- U.S.
- Stock markets – I feel that they are going to be up between 10-14%. This is because my feeling is that businesses will start to be able to grow their revenues in a meaningful way for the first time in almost three years. In turn, that will lead to an improvement in the unemployment situation. In general, investors will begin to focus on business issues and much less on economic issues as the economy is trusted again.
- Federal Reserve (monetary policy) – The Fed will continue to be impotent quantitatively having pulled all of their policy levers already. Instead, the power of the Federal Reserve will be qualitative. In other words, what they feel is happening in (i.e. their commentary and opinions about) the world economy will be more important than any specific action that they will make. They are also likely to leave interest rates flat for all of 2011.
- Congress (fiscal policy) – Will be gridlocked and unable to make any substantive changes. There will be movement on taxation and pro-business type issues. In particular, look for an extension of the Bush-era taxation environment.
- U.S. dollar – Despite the desire of the Federal Reserve to weaken the U.S. dollar, it will likely strengthen as the economy strengthens.
- Economy, in general
- Gross Domestic Product – There will be no double-dip recession. Instead GDP will likely grow around 4%.
- Consumers – The improvement in hiring (see below) will see a much improved consumer mood. So the consumer will start to increase her/his spending relative to income. This will lower the savings rate. I would expect by the end of 2011 that spending levels and personal income levels will be roughly equal. Meaning that consumers are spending what they earn.
- Businesses – Will finally start to see modest revenue growth. In the aggregate this will be 5-9%. Because of the bare bones expense structure of businesses, this will result in a POP! in earnings. In turn, businesses will begin to hire again. I would expect that the unemployment rate exits 2011 in the 7.8-8.7% range.
- outside of the U.S
- Europe – The debt storm that is passing through Europe right now (Portugal, Ireland, Italy, Greece and Spain) will subside with not much consequence in terms of the economy. Instead, the predominant result will be political (see comments on Germany below).
- China – The Chinese are on the brink of two ugly things: massive asset inflation and the bursting of that bubble, and social unrest. Expect to see social protests in China as the haves and have nots gap widens. In typical authoritarian fashion though, the protests will be convincingly squelched. Expect to hear, if not see the true, dark underbelly of China. I would also expect a conflict with the U.S. over its currency, the Yuan. The U.S. (see below), in the form of Barack Obama, will pressure China on its currency. The Chinese will fight back to increase the fervor of nationalism there to distract from their own internal economic problems.
- Japan – Will continue to be an economic zombie. Expect very little change out of Japan as its inexperienced new government struggles to deal with a set of problems that are a generation old. For example, an economy that has gone sideways since the early 1990s!
- India – Will begin courting the United States to increase business and trade ties. The underlying goal is to begin to isolate its nemesis, Pakistan. Look for grand, friendly gestures, that are ultimately hollow, as the flirtation is explored.
- Brazil – Will continue to try and coordinate their economy with their geopolitics awkwardly. Ultimately, for Brazil to attain “world power” status, the government and business world must work together to establish Brazil on the world stage. So far, Brazil has done this without consistency. This leads to suspicion and reluctance on the part of other nations to deal with Brazil. Expect more of the same improvement in its economy, with uncertain messages from its politicians.
Geopolitics
- U.S.
- Barack Obama (Executive branch) – In order to re-establish the Democratic party and to help his re-election chances, Barack Obama will focus on foreign policy as he cannot move a gridlocked Congress. There will be a pull-out from Afghanistan where there will be some tenuous political, rather than military, settlement. He will talk about his kept promise to pull troops out of Iraq. Obama may also focus on trade issues. But most of all, he will begin battering China on a whole host of economic and trade issues.
- Congress (Legislative branch) – Will largely be gridlocked. Watch a fascinating fencing match as the Republicans and Democrats fight to paint the other as the source of the obstruction preventing “real” change from happening. The only movement will be on freebies for the American public and business community, such as a continuance of the Bush-era tax cuts/debt increases and press-friendly economic incentives for businesses. In other words, the same as it always has been. Result: an increase, rather than a decrease in the debt levels of the U.S.
- Europe
- Germany is feeling out its mojo for the first time since World War II. They will continue to use the economic crises in europe as the justification for their meddling in other european nation’s affairs. Expect Germany to warm to Russia and to talk about the need for NATO to evolve to fit a more modern world.
- France will experience an existential crisis as its nearly 50-year vision for Europe starts to unravel because of an emboldened Germany. The French are likely to warm to the United States and look for meaningful ways to strengthen its relationship with the U.S.
- China – See above.
- Japan – The new and partially naive government will be unable to change the economic reality. So look for them to follow Obama’s strategy of emphasizing foreign policy. It is very likely that they will join the U.S. in China-bashing. They will also begin talking about a military that is not just for defense, but offense as well. This will be for the first time since the end of World War II.
- Middle East
- Iran – I feel that they will begin to assert their dominance in Iraq’s politics. They will have internal divisions between the Ayatollahs and the Presidency, but the net effect will just be noise and stress.
- Iraq – Will see an increase in violence. Iranian backed Shiites and Saudi backed Sunnis will vie for power to fill the vacuum left by a reduced U.S. military presence. The Iranians are likely to win this one.
- Saudi Arabia – Is currently going through a succession crisis. The question is will it become a less archaic state under new leadership? Because of the Iranian power surge, this will be a challenging year for the Kingdom.
- Afghanistan – The U.S. and NATO will try and broker a peace accord with the Taliban. Just how they will relate this story back to their publicks will be fascinating. But no foregin power wants to be there any longer and strategically the nation is irrelevant. Look for the U.S. and Europe to ask Russia for support for any new Afghan coalition government. Unlike Europe and the U.S., Russia actually has an interest in a more stable Afghanistan. Additionally, India and Pakistan are likely to jockey for influence in Afghanistan. So expect a courting by both sides to win U.S. favor.
Miscellaneous Issues
- Gold – Is very overvalued in my opinion. As the U.S. economy and U.S. consumer sentiment both improve markedly, expect a big sell off of gold. Gold’s initial run was due to an increase in demand from the growing wealthy populations of China and India who wanted luxury. Then gold became a safe-haven for investors who retreated there in the event of the onset of a Depression. Then speculators, seeing the big momentum in gold prices added their own capital. This will come to an end in 2011.
- Oil – Prices are likely to remain at their current inflated, unjustifiable levels, due to continued speculation. Expect real price spikes when the noise in the Middle East gets too loud (i.e. Iraq’s sectarian battles and Saudi Arabia’s succession issues) for markets to bear.
WILD CARDS
- Russia – Because of the U.S. obsession with the Middle East over the past decade, Russia has become resurgent. The government of Medvedev and Putin is calculating, cunning, courageous, and motivated to return Russia to the global stage before the U.S. frees its Middle Eastern resources. Russia is active in Germany, its periphery, Afghanistan, and Iran. In other words, in all of the hot spots. Russian choices will be a wild card for the world system.
- China – The timing of the bursting of its economic bubble is difficult to assess. This is because the government there has demonstrated a willingness to use lying, manipulation, and authoritarianism to gloss over its problems. Yet, inevitably a day of economic reckoning will come in China. Just how severe its economic bubble bursting is, and its timing, is crucial.
- U.S. Congress – If the Democrats and Republicans find a way to work together then the net effect of the entire globe will be positive. But don’t count on this. Instead, look for partisan politics to get even more absurd. What the effects will be from this are very, very difficult to gauge.
I am not a person who hides from responsibility and accountability so I will be returning to these predictions at the end of each quarter in 2011 to assess how I did.
I just added your blog site to my blogroll, I pray you would give some thought to doing the same.
Looks like you are an expert in this field, you really got some great points there, thanks.
– Robson
Constantly handy… no matter how many times read this!
I’ve recently started a blog, the information you provide on this site has helped me tremendously. Thank you for all of your time & work.
Thanks for the great post. Bookmarked
Can I just say what a relief to find someone who actually knows what theyre talking about on the internet. You definitely know how to bring an issue to light and make it important. More people need to read this and understand this side of the story. I cant believe youre not more popular because you definitely have the gift.
That’s very kind of you to say. I hope that the predictions I have made are born out by history and that, as a consequence, they make your life better.
Jason
*This is the right blog for anyone who wants to find out about this topic. You realize so much its almost hard to argue with you (not that I actually would want…HaHa). You definitely put a new spin on a topic thats been written about for years. Great stuff, just great!
Jason,
I must have missed this post. I too believe that there will be gridlock between Repubs & Dems. I’m hoping with increased confidence we see home purchases rise this spring. Just Tweeted our post!
Angela, you are the best. Thanks for the re-tweet and loyalty, too! Jason
Definitely believe that which you stated. Your favorite reason seemed to be on the web the easiest thing to be aware of. I say to you, I certainly get annoyed while people think about worries that they just do not know about. You managed to hit the nail upon the top as well as defined out the whole thing without having side effect , people can take a signal. Will likely be back to get more. Thanks
Hello Jason
I have a question about your gold prediction. With the fed printing money faster than I can say “the fed is printing money”, rising turmoil in the middle east (although not new), another war, and not too dramatic increase in job creation, do you still see a major sell of in gold within this year?
Thanks
Peace
Clint
Hi Clint.
Thanks for the question and I wish that you hadn’t asked the question : ) It’s not that I feel gold is a steal at current price levels and that I made a mistake. It’s just that gold of every asset is the hardest to assess. For your edification I would go back to some of my earlier posts that are specifically about gold…
gold?!
anecdotal evidence of a gold bubble
That will give you some of the background as to my thinking about gold.
Regarding gold, it seems that there are two arguments: that it has no intrinsic value, or that it is the only asset that really has any value at all. Sigh! Where do I stand? Somewhere in between. Why? How? I am going to answer this question using demand and supply fundamentals. But because supplies of gold are largely fixed, the gold discussion is only interesting from the demand side of things. Let’s get to it…
Gold Has No Intrinsic Value
I completely disagree. First of all, gold is one of nature’s best electrical conductors so some demand for gold makes complete tangible economic sense. Second of all, there are lots of goods that have no tangible value that nonetheless we would all argue are valuable. For example, our favorite album, or our good health. That gold is in demand because of its use in wedding rings or in other jewelry or in other forms of bling is legitimate demand for gold in my mind.
What kind of gold demand do I think is illegitimate? Speculative demand. As I have written about many times before on the What My Intuition Tells Me Now blog, speculators don’t really care about their absolute price entry point into an asset. What they care about is price volatility around that price point. If prices fluctuate enough they make money from their hedges. It’s my feeling that a lot of gold demand is speculative in nature. It’s demanded the same way mortgage backed securities and dot.com era stocks were in their bubble periods. The usual argument against this is that gold is the only asset class with any real value.
Gold Is The Only Asset With Any Intrinsic Value
The thinking here is that gold has always been a unit of exchange and if the world goes crazy it will be that again. Therefore, in periods of inflationary monetary policy or political upheaval (to Clint’s points) you want to be invested in gold. Now here is where the gold story always gets difficult. Here is why I dislike these arguments. One, say that all of the upheaval does occur that gold bulls use as motivation to buy gold, what will really have value then? What will have value is what has always had value: real assets, like land and agriculture; and skills, like farming, fire-making, weaving and fighting. Say the world goes all Mad Max and apocalyptic – the nuclear meltdown scenario – and clean water and food are very scarce. If you have the clean water and the food are you going to give it up for a shiny rock? If you have the loom, the hoe and horses, the wools bane (fire starter), or the distillery are you going to trade it for a shiny rock? I think the answer is no. Adam Smith (yes, that Adam Smith) and I agree, gold only has value for what you can exchange it for. But wait a second, isn’t that same argument as is made for Treasury Notes? After all, in the apocalypse, who cares that this piece of paper is backed by the full faith and credit of the Untied States (yes, I meant that misspelling). So this is my problem with speculation based on apocalypse. At this level gold has the same intrinsic value that cash does. Do we covet cash because it has intrinsic value in and of itself? No. We only covet it because it can be exchanged for something we need or want.
Clint’s question has reasons to demand gold, but what about those reasons?
The Federal Reserve is not my favorite institution. To my way of thinking each of the last two recessions were due to very poor Federal Reserve policy. The Fed’s problem seems to be that they don’t include prices of assets like stocks and real estate in their inflationary calculations or targets. I think the economic history of the past 15 years demonstrates aptly that this is ignorant. Now the Fed is engaging in Quantitative Easing – in other words, printing money to prop up the U.S. economy. I definitely do see this as inflationary. However, asset prices for stocks look fairly valued to me relative to profits. And real estate prices look slightly undervalued to me depending on the geographic region of focus. Not only that, but the Fed is easing out of Quantitative Easing and just last week the Fed intimated that interest rates will rise by the end of the year. Lastly on this point, the Fed has acknowledged that it now looks at asset prices as a form of inflation. So demand for gold from inflationary pressure has to be considered a weak argument at best.
What about rising turmoil in the Middle East? I think that the pressures in the Middle East are going to lead to regime change, but only slowly, on balance. Not only that, but truly who cares what goes on politically in the Middle East? The only real concern is whether or not the real gold, oil, keeps flowing. As I said recently on the blog, oil discomfort is overblown. Why? Because whomever survives politically in the Middle East will be in the business of selling oil. And the reason for that is that there is practically no other asset of value in most of those countries. Without an economic backbone to put food in the mouths of a people there is no political backbone to sustain a nation. So regardless of the Middle East outcome, oil will flow. To me this reason to invest in gold looks like a convenient momentum player’s excuse to buy gold futures. In fact, if I were such a large player I would be out there in the media talking about my concerns about the Middle East like crazy. Hmmm.
There was a mentioning of “another war.” I am assuming you are talking about Libya. The United States has officially stopped its overt, hot war, activities in Libya and turned over the operation to the European members of NATO. If the U.S. is going to be sucked into “another war” I think it will actually be a re-entry into an old war: Iraq. Iraq is the countervailing weight standing against Iranian domination of the Middle East. That we destroyed Saddam Hussein (not a nice guy) removed the balance of power in the entire Middle East. Many reports about 2011’s Middle Eastern unrest have Iran behind the “revolutions.” It plays well in the New York Times and on Fox News, but the reality is that the Middle East is largely a land ruled by Medieval thugs, ruling over those who would like to be the feudal thug.
Now to the final point in the question, “weak job creation.” I think here you mean the weakness of the economy and its inability to create jobs. Without doubt this is a real concern. Now new jobs = no new monthly income = no new profit growth = more layoffs = another recession. While I think this is a legitimate concern, the recent evidence is strongly suggesting that the final vestiges of the Great Recession are now disappearing. So it would be difficult to advocate that there is demand for gold here, too.
Where is all of that gold demand coming from? I think three sources: speculators, China, and hype. Speculators have been in gold for the last three years because all of the conditions that usually lead to gold speculation have been in place: economic instability; poor monetary policy; and political upheaval. Yet, each of those is disappearing as a reason to invest in gold. What about China? Word is that the Chinese economy is experiencing a catastrophic bubble that the government there is hiding (poorly) from the rest of the world. If the Chinese economy collapses, and at some point it will, gold demand from the Chinese Nouveau Blinge (ne Riche) will dry up.
Now if you take care of these first two sources of gold speculation, the third, hype, takes care of itself. So its hard to make the bull case for gold right here. After a nearly five year bull market in gold can you say that we are closer to the bottom in gold prices or the top in gold prices? I think you would have to say we are more near the top. Then the question becomes what types of returns can I get in other asset classes? I think a very strong case could be made that real estate is actually an asset class nearer to the bottom in price than gold and that offers higher future returns than gold.
And lastly, not sure if you know it or not Clint, but I was quoted in Smart Money’s March cover story about gold, I said then and I will repeat it here: “I don’t like to invest in things that depend on people’s nervousness.”
But why was I reluctant to answer this question? Because you asked if my 2011 prediction still held? The timing of the unwinding of the gold bubble is the only thing I am uncertain of. That gold is a massive speculative bubble I have no doubt. But that you can’t make money by investing in gold this year? That’s a harder question to answer because who knows what will spark speculators’ run for the exits? And that I just cannot answer. But I can say in closing that investing in gold at this point has a lot more that can go wrong than can go right. The “wrong” things are all of the large trends I addressed above; and the right things would be those large trends reversing themselves completely – highly unlikely.
Jason
Hey thanks for the thorough explanation!! In all honesty I hoped you still had a date for a big sell off so I could buy more physical gold at a steal :-).
Thanks, and keep up the writing!
Peace
Clint
Mega schön