2011 Predictions Half Year Update

Today marks the end of the first half of 2011, so it is time to return to my 2011 Predictions to see how I have done so far this year.  For ease in evaluation I will re-post each prediction in its entirety, followed by evaluation and commentary.

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.

Evaluation:  This has largely been borne out by the statistics of the world’s major economies.  With the exception of the United Kingdom, the top 20 economies in the world, that account for fully five sixths of total worldwide gross domestic product (GDP), have grown.  This is a marked improvement from 2010.  Grade: A

• 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.

Evaluation:  So far this has largely not come to pass in the United States, though the European economy seems to be experiencing a diminished sense of nervousness.  Meanwhile, anxiety is certainly much higher in Japan, largely having to do with the massive earthquake and the resulting tsunami and nuclear crisis.  China continues its march toward an economic bubble, but the Chinese themselves seem to be more giddy.  Grade: C

• 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.

Evaluation:  With a massive political crisis in the Middle East, an environmental and economic crisis in Japan, the Greek debt crisis, and the U.S. debt crisis all rearing their heads in the first half of 2011 it would be hard to say that folks have switched from a conscious focus from their immediate situation.  When these various crises have not been raging there has been an emphasis on more long-term issues.  Grade: D

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.

  Evaluation: So far this year the S&P 500 is up exactly 5.0%, that compares to a half year prediction of up 5-7%.  So I did alright there and businesses are, in fact growing their revenues in meaningful ways.  However, that has not led to an improvement in job creation or a reduction in the unemployment rate.  Furthermore, the various macro level crises that have plagued investors this year have meant that there has been a predominate emphasis on non-business specific issues.  Grade: C

  • 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.

  Evaluation:  This prediction has been pretty much spot on.  In fact, the Federal Reserve has announced in the last several weeks that it will end its Quantitative Easing (i.e. printing money) stimulus of the economy.  Simultaneously, the Fed has acknowledged the weakness of the economy.  These two facts taken together are an indication that the Fed recognizes that it doesn’t have the power to resuscitate the economy.  Additionally, I have called into question some of the Fed’s statements which, to me, look like attempts of “talking up” the U.S. economy.  Grade: A

  • 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.

  Evaluation: This has largely come to fruition.  In fact, it is rumored that the U.S. debt crisis is getting hung up on the Republican party’s reluctance to not extend Bush-era tax cuts.  Grade: A

  • U.S. dollar – Despite the desire of the Federal Reserve to weaken the U.S. dollar, it will likely strengthen as the economy strengthens.

  Evaluation: The U.S. dollar has weakened almost 7% relative to the Euro – its chief currency competitor.  Against the Chinese yuan it has fallen 1.8%.  Grade: F

  • Economy, in general
    • Gross Domestic Product – There will be no double-dip recession.  Instead GDP will likely grow around 4%.

    Evaluation:  There clearly has not been a double-dip recession, which was a fear permeating the economic consciousness in late 2010.  GDP has so far grown %, clearly this is below my estimate.  While less than expected, I predicted the trend’s direction correctly.  Grade: C

    • 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.

    Evaluation: Hiring has not materialized, so not surprisingly consumers have not increased their spending much.  Instead their spending is only tracking slightly ahead of where it was last year.  But consumers have increased their spending relative to savings.  Lastly, my prediction that consumers would spend additional dollars, rather than save them has been borne out.  Grade: B

    • 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.

    Evaluation:  Right now the unemployment rate is 9.1% and is largely unchanged from where it was in December 2010 – the moment of my predictions.  Yet, revenues for the S&P 500 are up for the year.  In fact, the increase has led to analysts upping their full year sales growth rates for the S&P 500 to up 10%.  This is a doubling of the previous consensus.  Grade: B

• 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).

  Evaluation:  Clearly we are still in the middle of the Greek debt crisis.  However, the crises of Portugal, Ireland, Italy and Spain have largely dropped from investor consciousness.  The impact here was largely psychological and not economic.  Also, with the Greek parliament agreeing to additional austerity measures, the Greek crisis will likely pass, too.  So again, the damage was largely psychological, not economic.  It’s important to remember that at the end of 2010 many pundits were forecasting a double-dip recession due to the escalating European debt crises.  Grade: A

  • 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.

  Evaluation: Social protests in China are indeed spreading and they have to do with growing economic disparity.  Those protests have, in fact, been squelched violently.  A conflict between the U.S. and China over currency has not yet happened.  However, I still feel that as the presidential election cycle nears that the Obama campaign will still bash China.  Grade: B

  • 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!

  Evaluation:  Throw in the after effects of the massive earthquake and the above forecast looks even more potent.  However, I missed the forthcoming earthquake – hopefully you will forgive me for that oversight.  Grade: B

  • 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.

  Evaluation:  This has happened to a very small degree.  The U.S. has flirted with improving trade ties with India as a way of making the Pakistanis nervous.  However, as of this writing, the above described prediction has not happened.  Grade: C

  • 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.

  Evaluation:  One of this year’s surprises is the election of a new president in Brazil who seems to be trying to rectify the very situation I describe above.  It is far too early to tell if she will succeed in her efforts.  Grade: C

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.

  Evaluation:  I was correct that Barack Obama would shift his focus from domestic to foreign policy.  He has in fact notified the world of his intention to draw down forces in Afghanistan.  Additionally, his administration has been talking with the Taliban of Afghanistan in order to reach a political, rather than military, settlement.  Iraq still appears to be on schedule.  But the battering of China which seemed to be gaining steam in October and November of 2010 lost steam.  Grade: B

  • 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.

  Evaluation:  This is pretty much a spot on prediction.  Grade: A

• 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.

  Evaluation:  This has come to pass as true.  However, Germany has been a bit more introspective than I had expected.  So the focus on dominating the EU has not quite been what I had expected.  Grade: B

  • 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.

  Evaluation:  The French are indeed warming to the United States, even asking for U.S. assistance in Libya, where the French could not coax the Germans into participating.  Additionally, the French have clashed with Germany over its growing coziness with Russia.  Grade: A

• 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.

Evaluation:  Japan has engaged in some China bashing.  However, the earthquake in Japan has been its preoccupation.  Yet, the government there has looked impotent and naive in its handling of the nation’s various problems.  Grade: B

• 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.

  Evaluation:  Iran has increased its meddling, not just in Iraq, but throughout the Middle East.  Furthermore, there has been real crisis between the Ayatollahs and President Ahmadinejad.  Grade: A

  • 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.

  Evaluation:  Because the pull out of coalition troops won’t happen until August, it is too early to properly evaluate the above prediction.  However, there have been increased suicide bombings in Iraq due to sectarian tensions.  Grade: N/A

  • 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.

  Evaluation:  Reports are that the Saudis are, in fact, in crisis due to their succession crisis, but also the up-swelling in Iranian/Shiite power.  Furthermore, the news is rife with news of Saudi women refusing to adhere to the driving ban – a real challenge to their archaic culture.  Grade: A

• 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.

Evaluation:  Coalition forces have been dealing with Russia in an attempt to create a more stable Afghanistan going forward.  As I described above, coalition forces have been negotiating with the Taliban.  Grade: A

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.

Evaluation:  This has yet to happen.  Gold has experienced large sell offs in 2011, but then prices have recovered.  However, I feel that gold still remains a gigantic asset bubble and feel that it will eventually pop.  Grade: C

• 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.

Evaluation: Well this prediction has been spot on.  Though, I didn’t predict the political crises that have embroiled the Middle East this year.  Grade: A

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.

Evaluation:  All of this has been true.  However, I expected the Russians to be a bit more bucolic than they have been.  Grade: B

• 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.

Evaluation:  I have written extensively about this on the blog.  All I will add now is: ditto.  Grade: A

• 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.

Evaluation:  Beat a dead horse and it doesn’t get deader.  Grade: A

Overall GPA: 3.04, B

Jason