Germany digs in against a Greek bailout

The Financial Times reports that Germany is not backing down from last week's tough talk about a bailout, recent charges by Greece that German banks are profiting from the crisis no doubt only making things worse.

Germany has set out three fundamental preconditions for any rescue package for Greece, including involvement of the International Monetary Fund, and a commitment by its European Union partners to tough new rules to control public debt and deficits in the eurozone – including necessary EU treaty changes.

A senior government official in Berlin said there would be no agreement at this week’s EU summit on a specific rescue package for the debt-strapped Greek government.

If there were to be agreement on a “mechanism” to provide such assistance, he said, it could only be triggered once Greece had exhausted its capacity to raise money on the international capital markets; the IMF had agreed to make a “substantial contribution” to a rescue package; and the EU members has agreed to negotiate new rules to prevent any reoccurrence of such a debt crisis.

The German position was revealed in response to growing pressure from the European Commission, and other EU member states, to reach agreement on the mechanics of a rescue package for Greece at the European Council meeting on Thursday and Friday.

It looks like the common currency will be moving down again this week, but, over the long-term, the pain that is now being endured in Europe could prove to be quite helpful in demonstrating that the eurozone is serious about a sound currency, that is, if it survives.

Read more...

What exactly does Germany want?

A simple Google news search on "Greece" yields the following results this morning, making clear what Germany does not want for the Greeks and their growing debt problem. The question is, what do they want?
The European Union summit in Brussels that intends to somehow address the issue that has, once again, reached crisis levels will not begin until Thursday, so it looks like the Germans have three days to figure that out.

Read more...

China, Big Macs, Roach, and Krugman

The Economist's recently updated Big Mac Index seems to add credence to the views of Mr. Krugman over those of Mr. Roach from this item earlier today, part of an increasingly nasty dispute (at least, for economists) about China's currency policy.
Does anyone know if there is any empirical data on using the Big Mac Index as the basis for a FOREX trading strategy? It seems pretty simple and, over the long run, would likely be profitable to bet against the overvalued currencies and go long the undervalued ones.

Read more...

"Take out the baseball bat on Paul Krugman"

Economist Steven Roach of Morgan Stanley Asia has some not-so-kind words for economist Paul Krugman and his view that the Chinese currency should be allowed to strengthen considerably from its current level.

Click to play in a new window

Says Roach: "America doesn't have a China problem, it has a savings problem ... We should take out the baseball bat on Paul Krugman. I mean I think that the advice is completely wrong .... We’re lashing out at China rather than tending to our own business".

According to this report, Krugman replied, "I’m a little surprised at Steve for saying that. What I said is actually based on pretty careful economic analysis. We have a world economy which is depressed by China artificially keeping its currency undervalued."

Read more...

The high price of failure in North Korea

The Guardian reports that there's more than just career risk when you fail at monetary reform in North Korea - you could lose your life, as Pak Nam-gi apparently just did.

North Korea has executed a senior official blamed for currency reforms that damaged the already ailing economy and potentially affected the succession, a news agency in South Korea reported today.

Pak Nam-gi was killed by firing squad last week, said Yonhap, citing multiple sources. The Workers party chief for planning and the economy had not been seen in public since January.

The 77-year-old was put to death as "a son of a bourgeois conspiring to infiltrate the ranks of revolutionaries to destroy the national economy", the agency said.

But it reported that many North Koreans did not believe the explanation, citing one source who said: "The mood is the leadership has made Pak Nam-gi a scapegoat."

If you're not familiar with the story, you might be interested to know that North Korea introduced a new local currency a while back that could be exchanged for the old currency at 1-to-100 in an attempt to control inflation and drive out foreign currencies that were thriving on a very active black market.

Like most such attempts, this move did not produce the desired results - prices soared, hoarding increased, people starved - and, in the process, it wiped out the meager savings of many citizens while benefiting state workers who were paid in the new currency.

Read more...

On the prospects for a China currency move

The funny thing about the escalation of the U.S.-China currency spat is that, apparently, both sides think that things are going well enough that they can take something like this on.
From the Tom Toles collection at the Washington Post.

Read more...

The China currency debate heats up

The war of words between the U.S. and China regarding the Chinese currency appears to be entering a new, more serious phase, particularly in light of developments on Taiwan arms sales, visits with the Dalai Lama, and Google's imminent departure from the country.

Hopefully neither side will be reading Ambrose Evans-Pritchard's latest thoughts on the matter as this could just push one or both sides over the edge.

China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.

Within a month the US Treasury must rule whether China is a "currency manipulator", triggering sanctions under US law. This has been finessed before, but we are in a new world now with America's U6 unemployment at 16.8pc.

"It's going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we're not going to get anywhere," said Paul Krugman, this year's Nobel economist.

It looks as though Krugman is taking a stand on the China currency issue, citing it as a "significant drag on the global economy" in commentary yesterday.

It's funny how no one ever complains about oil exporting countries in the Middle East who also peg their currencies to the dollar and are widely considered to be undervalued, though not nearly as much as the Chinese currency.

We don't normally complain about exporting nation's with pegged currencies who build up massive holdings of U.S. debt unless we think we can compete with them with our exports, something that doesn't seem likely in the case of Saudi Arabia.

In any event, the Chinese government doesn't seem to like where the conversation is going.

China's premier Wen Jiabao is defiant.

"I don’t think the yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency," he said yesterday. Once again he demanded that the US takes "concrete steps to reassure investors" over the safety of US assets.

"Some say China has got more arrogant and tough. Some put forward the theory of China's so-called 'triumphalism'. My conscience is untainted despite slanders from outside," he said

Days earlier the State Council accused America of serial villainy. "In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers' rights are seriously violated," it said.

"The US, with its strong military power, has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights," it said.

Here's where it gets interesting.

Clearly, Beijing is in denial about is own part in the global imbalances behind the credit crisis, specifically by running structural trade surpluses, and driving down long rates through dollar and euro bond purchases. No doubt the West has made a hash of things, but the Chinese view of events is twisted to the point of delusional.

What interests me is Beijing's willingness to up the ante. It has vowed sanctions against any US firm that takes part in a $6.4bn weapons contract for Taiwan, a threat to ban Boeing from China and a new level of escalation in the Taiwan dispute.

In Copenhagen, Wen Jiabao sent an underling to negotiate with Mr Obama in what was intended to be - and taken to be - a humiliation. The US President put his foot down, saying: "I don't want to mess around with this anymore." That sums up White House feelings towards China today.

We have talked ourselves into believing that China is already a hyper-power. It may become one: it is not one yet. China is ringed by states - Japan, Korea, Vietnam, India - that are American allies when push comes to shove. It faces a prickly Russia on its 4,000km border, where Chinese migrants are itching for Lebensraum across the Amur. Emerging Asia, Brazil, Egypt and Europe are all irked by China's yuan-rigged export dumping.

Michael Pettis from Beijing University argues that China's reserves of $2.4 trillion - arguably $3 trillion - are a sign of weakness, not strength. Only twice before in modern history has a country amassed such a stash equal to 5pc-6pc of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression.

It could be a very interesting week ... and decade.

Read more...

Dollar rises on new dollar fears

I, for one, will be quite happy to someday see a completely new global monetary system, a much-needed development that is not likely to be painless or voluntary. Then, at least, we can stop reading reports like this one from the Associated Press:

Moody's warning on US, UK ratings lifts dollar
The dollar got a lift Monday morning after a leading credit ratings agency warned that the U.S. and the U.K. could see a downgrade of their top AAA credit rating.

That triggered a pull-back from riskier assets such as emerging-market currencies and stocks as investors sought safety in the dollar.
...
While Moody's Investors Service said the U.K. and the U.S. don't face an immediate threat to their AAA ratings because they are still able to service their debts. Rising interest interest rates could make it more expensive to do that, however.

Investors fled riskier assets into the less-risky dollar that could be downgraded...

Of course, it only works this way for the world's reserve currency - the U.S. dollar - which is, in itself, a big part of the problem.

Read more...

Jim Rogers is long the euro

Famed investor Jim Rogers talked to Damien Hoffman at Wall Street Cheat Sheet and shared his thoughts about the future of the common currency in this interview:

Well I’m long the Euro because I expect them to come through this one okay. Either Greece is going to be papered over and they’ll give a blast to the Euro, or they’re going to let Greece go bankrupt. In my view, this is what they should do because then people would say, “Wow. They’re serious about sound economies in Europe.” That would make the Euro very strong. Then people would know they are not just going to print money or paper over failure.

Either way, I think there’s probably a rally coming. There’s a huge short position in the Euro and whenever there’s been a huge short position in anything, it’s sometimes profitable to go to the other side. So, I am long the Euro because I think there are too many pessimists.

Maybe Greece will go bankrupt and the Euro will collapse before people realize, “That’s good … that’s not bad.” Sometimes it takes a lot for perception to become reality or reality become perception.

Amid all the talk about the troubles in Europe and the limitations of a common currency for more than a dozen disparate nations, this is the first time that I think I've heard this line of reasoning about why this could make the euro stronger - because the euro zone is actually doing something about deficits and forcing member nations toward sounder government finances, whereas, the U.S., U.K., Japan, and others just seem to be barreling toward a cliff.

The rest of the interview is also worth a look as Rogers talks about such topics as how you can't really sustain the kind of economy that we're trying to sustain here in the U.S.

Read more...

CFTC to rein in currency traders

The CFTC (Commodities Futures Trading Commission) is apparently intent on reining in the amount of leverage available to those who trade in the FOREX markets and, according to this story($) in today's Wall Street Journal, someone in Michigan is none-too-pleased.

An attempt by regulators to protect investors from volatile global currency markets has triggered an uproar among lawmakers, currency dealers and thousands of small traders.

The Commodity Futures Trading Commission has proposed rules that would reduce the amount of borrowed funds that retail investors can use when investing in the U.S. foreign-exchange market to as much as 10-to-1, from the existing 100-to-1 for major currencies.
...
Todd Lambrix, a currency day trader in Flint, Mich., is one of the many small investors opposing the CFTC plan. Mr. Lambrix has $5,000 in his currency account and often uses 100-to-1 leverage to trade currencies. Three years into trading foreign exchange, he said, he has learned how to control risk by setting enough technical limits that automatically close out trades. Last year, he broke even. "What right do you have to tell me that I can't spend my money on things I choose?" he said.

Indeed! In fact, why have any government limits on leverage at all?

If some FOREX trading company wants to allow Mr. Lambrix to have 1,000-to-1 leverage or, for that matter, 1,000,000,000-to-1, aside from the possibility that a million Mr. Lambrixes might destabilize international currency markets, why should the government stop him?

Read more...

Dr. Doom brings the gloom

Marc Faber of the Gloom, Boom, and Doom report thinks that U.S. stocks could fall 20 percent after making new post-crash highs this spring. That would see the S&P 500 rising toward 1,200 and then falling back below 1,000 for the first time since late last summer.

He also thinks the euro is oversold and a good short-term bet, along with Treasuries.

Read more...

Greece, credit default swaps, and the SEC

In reading about the many problems confronted by the Greek government in trying to, somehow, become a bit more prudent with the nation's finances, it quickly becomes clear that credit default swaps and other credit derivatives have been and still are playing major roles.

Word comes in this Reuters report that the SEC is now taking an active interest in these products that one former Fed chairman used to speak glowingly about.

SEC examines destabilizing effects of CDS
Securities regulators said on Thursday they are examining the potential abuses and destabilizing effects of credit default swaps, a financial instrument that can be used to speculate on an issuer's credit worthiness.

The Securities and Exchange Commission comments come after Federal Reserve Chairman Ben Bernanke said regulators were looking at how Goldman Sachs and other Wall Street companies helped Greece arrange derivative deals. The SEC would not confirm or deny it was investigating Goldman's role in Greece.

"As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices," SEC spokesman John Nester said.

In this report it is learned that the notional value of the derivatives market now stands at about a half quadrillion dollars (yes, that would be almost $500 trillion) and that elected officials in Washington, thus far, are making little or no progress in moving forward with any kind of regulatory reform.

Read more...

The Greeks and their gold in Germany

The latest development in the ongoing saga of the Greek budget troubles and the European Union is that, apparently, the Greeks want some of their gold back that the Germans took in World War II. Either that or they want or an apology, or maybe even a thank you, according to this report in the BBC today.

Greece angers Germany in gold row
Greek Deputy Prime Minister Theodoros Pangalos has accused Germany of failing to compensate Greece for Nazi occupation during World War II.

Mr Pangalos made the remarks during a wide-ranging BBC interview about Greece's financial difficulties.

"They [the Nazis] took away the Greek gold that was in the Bank of Greece, they took away the Greek money and they never gave it back," he said.

Here's where the story kind of breaks down:

"I don't say they have to give back the money necessarily, but they have to say thanks. And they [the German government] shouldn't complain much about stealing and not being very specific about economic dealings."

Mr Pangalos' comments elicited an icy response from German Foreign Ministry spokesman Andreas Peschke. "I must reject these accusations," he said.

It sounds as though conditions are not improving over there and downgrades (or the threat of downgrades) do not seem to be helping much.

Read more...

A big week for the Greeks

This week will be a big test for confidence in the euro as the Greeks are planning to go forward with a bond sale of up to $7 billion amid continuing confusion about what, if anything, the currency union members have pledged to do to provide aid.

Here's a short summary from this story at MarketWatch.

Earlier today, the European Commission contradicted a report that appeared in the German weekly Der Spiegel that a plan was already in place to provide up to $34 billion in aid to the troubled Aegean nation.

Meanwhile, Greek Prime Minister George Papandreou found time for an interview with the German magazine on timely topics such as "massive corruption, rampant tax evasion, and efforts to get his country back on track" as plans are made for a general strike later this week and more workers protest throughout Europe.

From the MarketWatch report:

Labor unrest spread across Europe on Monday as pilots for German airline Deutsche Lufthansa AG started a four-day strike and the union representing British Airways cabin crew prepared to announce the outcome of a strike ballot, while other countries such as Greece also braced for unrest.
...
The pilots walked out after negotiations over their work contracts collapsed. The union is seeking a 6.9% pay increase and reassurance that the airline wouldn't start using pilots from recently-acquired airlines like BMI and Austrian Airlines on union-flown routes.
...
It wasn't just the airline sector that was affected by strikes on Monday.

Unions representing French oil company Total on Monday called for a refinery strike to spread to all French plants.
...
Meanwhile as Greece struggled to cope with its ballooning debt crisis and the government committed to massively reduce spending, threats are looming of a big private-sector strike on Wednesday.

Government efforts to get debt under control are also spurring worker action in other countries. In Portugal, unions representing the country's public-sector workers are gearing up for a March 4 national strike to challenge a wage freeze. Labor unions in Spain have planned demonstrations against proposed changes to the retirement age starting on Monday.

They seem to strike first and ask questions later over there...

Read more...

China and all the U.S. debt they hold

Ambrose Evans-Pritchard at the Telegraph looks at one of the more interesting developments today in an increasingly shaky global monetary system in this report about how the Chinese government may be exiting U.S. corporate and municipal bond markets.

China orders retreat from risky assets
China has ordered managers of its vast currency reserves to withdraw from risky dollar assets and retreat to core debt guaranteed by the US government, a clear sign that Beijing is battening down the hatches for fresh trouble on global markets.

A Communist Party directive leaked to the Chinese-language edition of the Asia Times said dollar reserves should be limited to US Treasuries or agency mortgage debt such as Freddie Mac that enjoys Washington's implicit backing.

BNP Paribas said the move has major implications for global risk assets. "The message from Beijing is that we don't like this environment," said Hans Redeker, the bank's currency chief.

"When the world's biggest investor turns risk-averse, that is something you take notice of. We think this could become the new theme for the markets in the medium-term," he said.

Recall that a couple years ago the Chinese quickly soured on agency debt from Fannie Mae and Freddie Mac back around the time that the two became wards of the state.

Unless they've taken a renewed interest in GSE-related debt (which, according to this report, it looks like they have), they'd be restricted to U.S. Treasuries only.

The directive covers both the State Administration of Foreign Exchange (SAFE) and China's state-controlled commercial banks. Together they have an estimated $3 trillion (£1.9 trillion) of foreign holdings.

The exact break-down of China's holdings are a state secret but it is understood that SAFE bought large amounts of corporate debt as well as municipal and state bonds during the boom years of 2006 and 2007. Any move to liquidate holding of California debt at this crucial juncture could have serious implications.
The exact motives for China's shift of strategy are unclear. Analysts say the authorities may fear that the end of quantitative easing by the US Federal Reserve could cause risk spreads to widen sharply, triggering heavy losses. The shift in policy appears unrelated to the US spat with China over Taiwan.

In related news, Reuters reports that the PLA (Peoples Liberation Army) is urging that the sale of U.S. debt be considered in response to continued U.S. arms sales to Taiwan.

This was bound to come up eventually - after all, if you were a Chinese military leader, you'd probably look at all tools that were available to you in response to a military threat. To think that they would not is naive and now U.S. debt held by foreigners starts to take on some of the same characteristics of MAD (Mutually Assured Destruction) from the late 1900s.

Read more...

The word from Berlin

Today's commentary appearing in Spiegel Online about the ongoing mess in Greece contains a disturbing analogy about debt - Lehman Brothers in 2008 and Greece in 2010:

(The situation is reminiscent of) Lehman Brothers, that seemingly unimportant New York investment bank whose September 2008 bankruptcy led the world into a crisis that is still affecting us. First came Lehman and the banking crisis, now it's Greece and its national crisis. History is repeating itself.

Similarities can be seen in how the crises emerged -- but perhaps not in terms of how they are dealt with. EU governments still have the opportunity to respond, and they may come up with a better reaction than President George W. Bush and his aides, who thought they could isolate and punish Lehman, and by doing so set the financial system in flames. Attempting the same approach at the country level would be tantamount to Russian Roulette. If Greece falls (and it already has daily problems borrowing money in the financial markets), then Spain, Portugal, Ireland will probably fall too.

Therefore it must be helped with all the fiscal brutality within the realms of legal possibility. The European Commission has taken the first step to put the country under its control, and virtually deprive it of its sovereignty. This is the worst imaginable punishment for a nation, but it is also a consequence of being a member of the European community. It is only in times of crisis that you see what a system is capable of. And the euro system has many possibilities -- even if they hurt.

The European Union is certainly being put to the test and it is not at all clear if or when this will all be resolved. Meanwhile, the euro is being pummeled - now down to $1.37 - and everything that moves opposite the trade-weighted U.S. dollar is sinking fast.

But, there is some good news here - the U.K. never adopted the common currency.

Had the British hopped on the euro bandwagon back in the 1990s, all hell would be breaking loose right about now as European Union officials would, presumably, be telling the Brits to get their financial house in order by slashing government payrolls and benefits much as they are now instructing the government of Greece.

From The Economist comes this data that makes the problems in Greece look rather tame in comparison to one much larger Anglo-Saxon country to the northwest.
Of course, Greece's trade deficit only compounds their troubles and lying to the EU about their finances probably didn't help the situation either, but, in many respects there are much bigger budget deficit problems around the world.

In absolute terms, there's no comparison. The Greek government is talking about making cuts of $10 billion or more - that's about two-days worth of borrowing to fund the U.S. budget deficit that was just announced earlier in the week.

Fortunately for the U.S. and the U.K., there's no one telling them what they can and can't do.

Read more...

Geithner to make like Kashkari and cash in?

There seems to be a growing consensus that Secretary Tim Geithner will become President Obama's sacrificial lamb at the alter of what has become a populist outrage over the U.S. government's much too cozy relationship with rich Wall Street banker types.

In today's commentary at Bloomberg, Caroline Baum adds to the case against Geithner - one that may see its profile elevated after tomorrow's testimony before the House Oversight and Government Reform Committee on the AIG bailout - drawing the following conclusion:

Geithner has been a public servant his whole life, holding various positions at the Treasury, the International Monetary Fund and the Fed. Somehow he managed to shed the stigma of tax scofflaw, but now BOTH Democrats and Republicans in Congress want blood. His may be just the scalp Obama needs to pacify the populist outrage, especially since he’s perceived as being too cozy with bankers.

Following the loss of the late Ted Kennedy’s Senate seat in Massachusetts, Obama is trying out his populist voice. By all rights, he should sacrifice one of his political advisers, who seem to have miscalculated the Massachusetts election and misjudged the public’s appetite for health-care reform when the chief concern is jobs.

Axing Geithner might be good for president and Treasury secretary alike. Obama would be seen as an ally of the people. Geithner would be free to claim his just reward: that plum offer from Goldman Sachs. The circle would be squared. Obama would have his man on the inside.

It seems all but inevitable that Geithner will go. He'll no doubt join former Treasury Assistant Secretary Neel Kashkari, now employed by Pimco, by cashing in big in the private sector, all of which might make his personal, underwater housing situation all the more easier to bear.

Read more...

Hopefully, asset prices won't collapse

The interactive graphic from which the image below was obtained comes from the World Economic Forum's new Global Risk Report 2010 where (surprise!) an asset price collapse is viewed as not only the most severe, but the most likely global risk.
That little red dot in the chart directly above and to the left along with the high reading for "connection strength" mean that we'll be in a world of hurt if the price of stocks, commodities, housing, and other assets head south, but, of course, you already knew that.

Read more...

Predictions for 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.

Read more...

Quote of the day, Venezuela edition

It's hard to keep track of the goings-on in Argentina and Venezuela these days, what with central bank chiefs being fired for not allowing foreign exchange reserves to be used to service debt in the former and after radical currency devaluations in the latter cause panic in the streets as citizens rush to spend their money while it's still worth something.

The most memorable quote of the day so far comes from this WSJ story in which a harried Venezuelan shopper stops long enough to talk to a reporter:

At Caracas's middle-class Sambil shopping mall, lines at cashiers reached 50-deep. Carmen Blanco, a 28-year-old accountant, waited to buy a 42-inch flat-screen television she doesn't need because she already has one at home.

"It doesn't make any sense to keep my savings," Ms. Blanco said Saturday. "I'd love to see how things work in a normal country."

Relative to the U.S. Dollar, President Chavez slashed the value of the local currency in half last week, however, in order to protect the buying power of the poor, for essential items such as food and medicine, only a modest devaluation was implemented.

Of course, black market exchange rates remain much different than the government's exchange rates, always a nagging problem for "command economies" such as North Korea and Venezuela. According to the report, black market exchange rates have the bolivar worth about a third less than the new "official" exchange rate and about two-thirds less than the exchange rate for essentials.

Read more...