what my intuition tells me now: 2011 predictionsPosted by Jason Apollo Voss on Dec 13, 2010 in Blog, Predictions | 14 comments
“What My Intuition Tells Me Now” 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…
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.