The Year 2011 – a look into the Crystal Ball

It has a been a long time in between posts, and I fear it will be even longer from now until my next post.  Life has a funny way of getting in the way of the more fun, interesting, and thoughtful pursuits.  I did however, feel compelled to write a prediction piece, just so I can have a documented, published account of how I see the next 12 months unfolding.  That way I can look back and find out how backwards my thinking really is.  I will try and touch on some of the posts I wrote in the fall of last year, just to tie it all together.

The Economy – Economic activity will pick up markedly this year.  GDP estimates from most economists show decent growth at around 3 to 3.5 percent.  I think it will be up around 4 percent for the year.

Why the optimism in the face of such looming potential hazards?  After all aren’t the states going bankrupt, along with the peripheral Euro countries like Greece, Portugal, and Ireland?  Aren’t housing prices expected to stay flat?  Well, the reason for my optimism is cash.  Corporate entities have a ton of it sitting on their balance sheets, waiting to be deployed.  Whats the hold-up, you ask?  Well the last two years have made these large firms fearful and unable to find productive uses for the funds.  Therefore, they have horded cash to be safe, shore up their balance sheets, and wait for a time when it makes more sense to invest in growth and productivity.  Now, as the economy recovers, moderately, these companies will feel safer starting to spend that money as they go from survival mode to growth mode.  This means capital investment will pick up, and so will…!

Employment – Unemployment will drop to below 8% by the end of the Year.  (7.5 is my official prediction)

We are sitting at a 9.4% unemployment rate at the moment, which still does not tell the entire picture of jobs in the US right now.  There are a staggering amount of people who have been out of the workforce for more than 12 months, who will need to be retrained, and there are also a lot of people who cant move in order to find a job, because they are underwater in their Mortgages.  So again, why the optimism?  Corporations have been running skeleton crews to survive the last two years and now as demand starts to pick up, they will need to spend some of this cash on their balance sheets to grow the business.  That means hiring new employees.  And, while the pace of hiring will be moderate, with more people employed, brings more consumers willing to buy goods, which of course will spur even more job creation.  The problem with the current outlook is that most economists look at trend lines, without going out to the second derivative.  In other words, they miss the growth of the growth.

Stock Market – A solid 10 to 15 percent year, with another mid-year panic thrown in.

The growing economy and improving job scenario will lift markets higher through the rest of winter and all of spring.  Europe will be able to push past their sovereign debt problems for the time being with Germany reluctantly agreeing to increase the European Financial Stability Facility (bailout fund), which will allay investor fears of default in the near-term at least.  The summer will show correction type behavior as harsh austerity measures provoke the inner rioter in the European youth.  Optimism turns to caution domestically, as employment and productivity numbers come in good, and investors look to take profits, wondering when the other shoe will drop.  At the end of the year however, things are better, again, then they were last year.

Inflation – Still very very modest at 1 – 2%.

Even though I am predicting improvements in the economy, the inflation rate will stay muted for two reasons.  Wages will stay fairly flat, and housing prices will remain low.  That means the low-for-long interest rate policy of Mr. Bernanke will prevail for most of the year.  All of the believers in the hyper-inflation “my dollars will be worthless” scenario are sensationalists with no basis in economic reality.

Gold – Bubble will maintain some air with lingering concerns on sovereign debt.

The price wont move dramatically higher thanks to other asset classes performing well, however, the negative real-interest rate environment (US 3mo. at .01%, and Inflation at 1%, means you are losing purchasing power on your savings), will hold the price above $1,000 (currently around $1,350).  With all the threats of sovereign defaults in Europe, military action in Korea, and political uprisings in the middle east, expect gold to be incredibly volatile as these events unfold.

China – Investors beware.  Cracks in the greatest growth story of the last 30 years make this the biggest risk of 2011.

While everyone has been very high on emerging markets as the fuel of economic growth of the last 10 years and for the next 10 as well, there are still a lot of problems that need to be worked out.  Again, if you read my post on China it will give all the details, but it basically boils down this; massive amounts of frustrated Chinese workers who want a better quality of life, a currency that needs to appreciate soon, a real-estate bubble ready to burst, and a gargantuan pile of US Treasury Bills that are going to lose value as interest rates go up.

Commodities – Volatile across the board.  Again, play with caution

Food prices have been rising, and do not currently show signs of slowing.  Oil is getting close to $100/bbl again, and everything from coffee to cotton, is rising in price as well.  Whether this continues or not through 2011 is very much up in the air.  My official prediction would be most of these commodities go lower, but another few draughts and floods could mean otherwise.

Conclusion – From Ron Weasley “I know what this means.  There’s going to be loads of fog tonight”

Obviously the course of 12 months can take many different paths, and there are an infinite amount of uncertainties over the horizon.  Knowing full well the futility in making and relying on predictions, its still a worthwhile analytical exercise merely for the sake of exploring cause and effect relationships.  If a prediction does not come to pass, why not?  What factors play in the shaping of world events?  One thing we do know for certain….just like the crystal ball, the future is cloudy.

Let me know your 2011 predictions.

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