Wednesday, January 13, 2010
This year's prognostications come a bit later than usual - about two weeks - however, don't think for a second that the delay was used to "game the system" by allowing time to review what other seers think 2010 will bring.
After having read a few of these, it quickly became more confusing than when the process first began a couple weeks back and I now regret having opted to nurse a slight hangover and watch football on January 1st rather than knocking this out as has been the routine in recent years.
Even without a plethora of other opinions, seeing into 2010 has proven to be much more difficult than looking ahead into 2009 a year ago, simply because, after the events of late-2008, conditions couldn't get much worse - they had to get better.
This is clear to see in the Predictions for 2009 made 54 weeks ago and then discussed in last week's follow-up A Review of 2009 Predictions where a rebound from the dismal 2008 results occurred for the economy, financial markets, and my own forecasting performance.
As for the new year, some things seem certain, others not so much.
Off we go...
1. Maybe the Last Really Bad Year for Housing
It's hard to understand how anyone can really think that the nation's housing market managed to "stabilize" in 2009 when prices continued to decline on a year-over-year basis even after government support to this sector on a scale never before seen by Mankind.
Homebuyer tax credits, central bank purchases of mortgage-backed-securities, a sharp increase in FHA lending, and a host of other factors have merely "kicked the can down the road" and that road will be "uphill" in 2010. Mounting foreclosures, loan resets, and an increasing number of homeowners who simply "walk away" from underwater mortgages will cause a relapse in housing this year and month-to-month gains will turn back to losses.
As measured by the 20-city S&P Case-Shiller Home Price Index for October 2010 (to be released in late-December), home values will decline by another 8 percent. The U.S. government will extend the homebuyer tax credit again in the summer and late-2010 will be a good time to start looking to buy property in most parts of the country.
2. The Dollar Will Continue its Descent
The dollar fell modestly last year after a surprisingly strong 2008 and it will continue that slow, steady decline in 2010 after a surge of safe-haven buying in the spring after equity markets have another little hiccup, temporarily boosting the greenback's appeal.
The trade weighted dollar ended 2009 at about 78 but will end 2010 at 72 after briefly dipping into the 60s and scaring the bejeezus out of the entire world as the long-anticipated "global currency crisis" once again looks like it is at the world's doorstep.
The dollar weakness will be driven primarily by concerns about funding the U.S. budget deficit as traditional buyers become more scarce and the entire world begins to realize that the economic recovery in the U.S. will be very long and very slow.
3. Stocks Will End the Year Lower
Broad equity markets in the U.S. will advance early in the year and then, peering into the future of the domestic economy and not liking what they see, have a relapse right along with the housing market.
Retail investors will continue to pull money out of stocks, in the process muttering Will Rogers' famous words about the relative concern for the words "of" and "on" when they are placed between the words "return" and "principle". Whatever or whoever drove stocks higher in 2009 will have much less success doing so in 2010, however, it won't be a complete washout as the Dow will lose 10 percent and the Nasdaq 15 percent.
Stocks in China will get about half-way back to their 2007 highs before reversing and ending the year only modestly higher. Gold and silver mining stocks will fall in sympathy with other equity markets but will rebound faster and end higher than most other sectors.
4. Short-Term Interest Rates Will Stay at Zero ... Again
Like last year, short-term interest rates in the U.S. will end where they began - at zero - but the central bank will tack another $1 trillion onto its balance sheet.
Chairman Ben Bernanke will be re-confirmed for another four-year term as Fed chief but will receive the highest number of 'No' votes in history and many elected officials voting 'Yes' will regret their decision by summer as the economy sours and the mid-term election nears.
The Fed will stop buying mortgage backed securities in March and the housing market swoon will intensify. Bernanke and crew will then resume their purchases in May because no one else was willing to buy at anywhere near what the central bank was paying.
5. Energy Prices Will Go Up and Then Down
After rising to $95 a barrel during the spring, the price of crude oil will dip to as low as $45 and then end the year at $65 a barrel. Peak oil will have to wait until global growth begins to post much bigger numbers and that won't happen this year.
The price at the pump will rise from their current $2.70 a gallon to more than $3 a gallon early in the year and then retreat back to the low $2 range. Gasoline was one of best commodity investments last year, this year it will be one of the worst.
None of the green energy job initiatives will amount to anything and that's just sad.
6. Gold and Silver Will Soar ... Again
The end of 2010 will mark ten straight years that gold bullion has ended higher than it began and most Americans still won't own it, continuing to put their trust in the mainstream financial media that, for the most part, still doesn't understand it or recommend it.
The yellow metal will make new all-time highs at just over $1,400 an ounce in March and then begin its every-other-year 18 month consolidation, ending 2010 at $1,300 an ounce. Silver will rise to $24 an ounce in the spring and end the year at $21 an ounce.
An increasing number of retail investors will eschew the advice of Money Magazine and buy gold and silver anyway, but a good number of them will sell it over the summer when metal prices correct. They'll be back in 2011.
People will start talking about junior mining stocks at cocktail parties - just like internet stocks in 1997. (As noted the last couple years, I'm going to keep saying this until it's true).
7. The U.S. Economy will Barely Avoid a Double-Dip
Economic growth will stall by the second quarter as Congress finds it politically difficult to make additional stimulus funds available during an election year. Following an impressive growth rate during the fourth quarter of 2009, the first two quarters of the year will see rates of between zero and one percent with the economy posting a small negative number in the third quarter.
The overriding theme in the economy during 2010 will be the continuing revival of a more frugal lifestyle following the credit and consumption binge of recent decades and the savings rate will continue to rise, from about 4 percent in 2009 to 7 percent by year-end, still well below the pre-Reagan administration average of about 10 percent.
8. Inflation will Surprise to the Upside
Consumer prices will rise much more than most economists expect early in the year driven higher by continuing unfavorable year-over-year energy price comparisons and the government's "official" annual inflation rate will reach a peak at over three percent as the grass starts turning green.
Then commodity prices will plunge and we'll start hearing about de-flation again.
9. Only a Few Jobs will be Created
Next month's benchmark revisions to the Labor Department nonfarm payrolls data will show an additional loss of 1.2 million jobs during the early-2008 to early-2009 period (greater than the currently estimated 840,000 loss) and there will be only modest net job growth in 2010 of about 500,000 jobs, all of it in health care.
The unemployment rate will reach a peak at 11 percent early in the year and remain above the 10 percent mark during all of 2010, save for a two-month dip in late-summer as millions of jobless become discouraged and stop looking for work.
10. The 2010 Elections will Be Shocking
As the economy turns from weak to bad again over the summer, there will be some surprising developments leading up to the fall elections as young and old alike express their displeasure with the status quo, namely, the cozy relationship between elected officials and the leaders of the FIRE (Finance, Insurance, and Real Estate) economy.
A record number of independents will run for and be elected to office and Washington will start to get the message, but Wall Street won't.