Monday, January 3, 2011


-Gold will be higher a year from now but off its peak. At some time in the fall, gold will be near 1,800 and the New York Times will do a front-page story that gold is on its way to 2,000. That will be the high point of the year.

-Spain will be the next sovereign debtor that falls prey to the market. This will happen before the end of the 1st Q. The package to bail them out will exceed $500b. This will exhaust the EU resources. There will be very high expectations that contagion will then move to Italy. That will not happen in 2011 (2012?) The European Central Bank will step up to the table (finally) and support the market for Italy.

-The ECB will be forced to issue bonds that are joint and several debt of the EU members. This development will stabilize the EU temporarily, but it will be hated in Germany. The amount of the new issuance of these bonds will be small. The program will be terminated in 2012.

-The dollar versus the Euro will be all over the lot. The low for EURUSD will be ~1.17. The really big surprise is that toward the end of the year the Euro will be pushing 1.50.

-The US will have a full year deficit of 1.4 trillion dollars. This depressing reality will hang on the US economy/markets. Congress will talk about the problem endlessly, but little will be accomplished. By the end of the year the problem will be so acute that belt tightening is put in place for 2013-15. But it will be too late by then.

-QE2 will be the last QE we see. The program will end (on schedule) on 6/30. Perversely, long-term interest rates will rise as long as QE continues. When the program is finished rates will begin a rapid decline. This will not go unnoticed by academia. The result will be that QE will be a disgraced policy that will not be used again for at least five years.

-Oil will rise to $130 in the next six months. It will be above $100 at the end of the year.

-China’s inflation rate will continue to rise. Food will be the primary driver. The central government will respond with monetary tightening and an acceleration of the Yuan appreciation. It will not work. Inflation will push 7%. The domestic economy will continue to grow but at a much smaller pace. 5% GPD will be all that China sees for the year. The trade surplus will fall by a third.

-Brazil will continue to shine as a resource rich country that runs a trade surplus and has low budget deficits. The surprise of the year will be Argentina. Food will be the reason. Argentina’s fortunes will improve with rising wheat and soy prices.

-The US will wind down its presence in Iraq. With every step we take out the door domestic violence will rise. Iran will assume a larger roll in the south (Basra). This will not go over well with the US. Much of the year will be spent debating what should be done. US warships will be off the Iranian coast waiting for a phone call, but no shots will be fired. Russia and Germany will not go along with strong sanctions against Iran. The problem will fester toward a resolution in 2012.

-Kim Jong-Il will die. His son will take over. The heir is a nut, there will be more military exercises that results in shells landing on S. Korea soil. China will make public statements that it is trying to bring order; behind the scenes they will be applauding the chaos.

-Obama’s popularity will continue to fall. The legislative “successes” at the end of 2010 will convert to a series of failures. There will be no new stimulus. Portions of the health care legislation will be dialed back. The mandatory participation feature will be found unconstitutional. Without this feature the legislation makes no economic sense and a great debate will be initiated as to what to do about it. Nothing will be accomplished. Reason? There are no “answers” to this problem.

-Obama will propose a means test for Social Security in his State of the Union Address. Retirees who are living the high-life (Warren Buffet types) are going to have their SS checks cut to the bone. Any senior with income of $200k will be impacted. The great socialization of Social Security will have begun. The popularity of this program will fall of a cliff.

-The 2% reduction on worker contributions to Social Security will be extended and expanded to 3% for 2012. Rates will not go up in future years. Social Security will have to be gutted as a result. This will not happen in 2011. But the seeds will be sown for this to occur in 2014.

-There will be at least three more 'Flash Crashes'. The SEC will launch another investigation into how this could happen. The conclusion will be that ETF's and how dealers manage them are responsible for the liquidity problems in individual stock names.  There is no solution to this problem. The market will be on edge looking for the next mini crash. A stock will fall prey to this and drop 20% in seconds. Unlike prior examples there will be no recovery in the stock. Holders will protest the losses. There will no restitution. Market confidence will fall as a result.

-Unemployment will not go down. The average for the year will be above 10%. The number of workers who leave the system will rise to 20mm. These workers will find part-time jobs that pay cash. The new day-workers will compete will illegals for employment. Social tensions will be the result.

-The Singapore dollar will be the strongest currency on the globe in 2011.

-Apple will not come up with a new product this coming year. The rest of the consumer tech manufacturers will gain some market share. The problems with dropped calls with the iphone will be an issue. Apple will respond with alliances with a number of other providers. ATT's stock will suffer as a result.

-Headline inflation will rise a bit. It will push through 2%. Those numbers are meaningless. The price of a pair of jeans will be 50% higher. Food will cost us 15% more. Gas will be at $4. Bernanke’s QE will be blamed for the inflation.

-Much to my chagrin and surprise Tim Geithner will not be replaced as Treasury Secretary. He will continue to do a very mediocre job for us. He will be replaced in January of 2012.

-There will be violent weather episodes all over the globe. The La Nina condition that is now dominating global weather is the strongest in 50 years. This will make a dramatic shift to El Nino conditions this summer. This will set the stage for a very big Atlantic hurricane year. There will 12 named storms. Two cat. 4 storms will hit the mainland.

-There will not be a failure of a government bond auction. But the coverage for each issuance will grow smaller. China, Russia and Brazil will reduce their holdings of US reserves. The mysterious "household" sector will show a huge increase in Treasury holdings. This will be confusing as it will not match up with other data. UK reserve holdings will show a decline. These are actually holdings of China that were not included in official reserves. This will bring uncertainty.

-The narco violence in Mexico will expand to many more cities. Tourism will be hurt as a result. Some of the violence will pass over our border. Anti immigration attitudes will expand. Because the low-end economy will remain in the dumpster the actual number of illegal aliens will decline by more than 1mm. This will add to the RE woes in some US areas. It will stress the countries that they originated from as $ remittances decline.

-The Fed will come under attack from all sides. They are truly in a no-win situation. Unemployment will continue to rise while inflation rises and the dollar declines. One side will shout that the Fed did too little (Krugman), others they did too much (the rest of the world). Everyone will hate the Fed as a result. Bernanke will not lose his job, but his term as the boss at the Fed will be forever tainted.

-ZIRP will be with us for yet another year. Bernanke will not let go of this loser policy. Inflationary expectations will respond at some point. By the end of the year a Fed Funds rate increase will be seen as imminent even though the economy will be soft.

-Social unrest will become visible in America in 2011. There will be demonstrations in many major cities. Some will turn violent. Economics will be at the heart of the anger. The frustration that was evident in France in recent years will come to the US.

read the whole thing at ZERO HEDGE

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