In my follow up to last week’s 2010 look-back, I will close out this two-part commentary with a look at what the tea leaves are saying may lay ahead for us in 2011.  It is important to remember this is only for fun and by no means is intended for someone to interpret as recommendations or investment advice.

1.    The US bond market is in for a heck of a year. The 30-year will trade at BOTH 3% and 5%. The prospect of increasing Federal budget deficits and rising government debt finally begins to weigh on the bond market. The yield on the 30-year U.S. Treasury approaches 5% as foreign investors become more demanding and the Fed’s money printing loses steam. 

2.    When over, 2011 will be viewed as the year of volatility.  The stock market will see a 30%+ swing from high to low but ending the year less than 10% from where it started.  In spite of the volatility investors hang tough as they see the alternatives to stock as incredibly less appealing.

3.    Gold continues is bull run and climbs well above $1650/oz as investors realize that “real assets”, while more volatile, should take up greater portions of their net worth.  There is a chance that if the Fed continues with ongoing quantitative easing, Gold could turn to the speculative 3^rd wave of its cycle and push well beyond $2000/oz as real estate did in 2004-2006 when it seemed like everyone wanted to participate.   

4.    Inflation will begin to raise its ugly head as 2010’s double digit increases in commodities and food can no long be absorbed by manufacturer’s (who are under the gun to keep margins from falling).  2011 will be the year that costs will begin to be passed along in the form of higher prices at the stores. In some parts of the world, food riots will take place.  In spite of these increased prices, US Governmental inflation reports will only reflect only a slight increase over 2010’s numbers.

5.    Continuing demand from a healing developed world, expansion in the emerging economies and a failure to bring on stream new supply causes the price of oil to peak at over $120 per barrel.  Prices will be driven not only by the above factors but also by speculators who have once again shifted assets around looking for the next quick buck. 

6.    State and local governments, faced with massive deficits will be forced to balance their budgets (assuming the Federal Government doesn’t come to the rescue with a bailout).  This austerity will force a different unemployment source than the prior two years keeping the unemployment rate above 9% throughout the year.

7.    The banking crisis continues and another 150 bank/savings & loans will be closed by the insolvent FDIC.

8.    2011 will see at least one municipal bankruptcy come to the forefront in part because local leaders are out of financial gimmicks and tricks and in part because the GOP may push the issue.

9.    The US will end 2011 with a full year deficit in excess of 1.5 trillion dollars (that is almost $50,000 for every man, woman and child in the US)

10. In spite of all the potential headwinds for the US in 2011, Europe’s problems will make ours pale in comparison.  First Portugal and then Spain will be “convinced” that a bailout is the right thing to do thereby sparing the Euro from its total demise.  Since the IMF will be contributing, all Americans will be proud that their tax dollars went to help save Europe.  As such, the Euro will trade at or near parity to the dollar at one point during 2011.

 Have a great week, everyone!

I thought it would be fun to go back and review the set of predictions I put together for 2010 and see how well I did. I scored it as follows +1 for getting it right, ½ for getting it partially right and 0 for being wrong and completely off the mark.  Here is how my scorecard for last year looked

1. The dollar will continue its long-term trek downwards from highs in early ’09 but not without first rallying. The world has become awash in U.S. dollars as foreigners currently hold over $10 trillion in dollar-denominated assets that can be dumped at any time. With the Federal Reserve continuing to expand its monetary base to record highs, as soon as banks begin lending their excess reserves a spike in consumer prices and a rush to get out of U.S. dollars is possible setting up for a real $ collapse beyond 2010.  +1 – After falling for most of the year, 2010 ended with a strong rally in the dollar

2. Oil will continue its march from the 2008 $30 lows to over $100/bbl at its peak in 2010. Oil will remain range-bound, $60-$100/bbl, unless we experience a major “event”.  +1 – Oil ranged between $60 and $92/bbl.

3. Corporate profits will continue to improve in the first half but begin to stall out as the year progresses. Unless congress extends unemployment indefinitely, the continued decline in US household spending will take its toll and thereby cap corporate profits. As such, US Stocks will end slightly higher than they closed out 2009. But, increased volatility will cause the SP500 index to trade in a range between 850-1250 ½ – Corporate profits grew strongly throughout the year with no pull back in the second half.  SP500 range was 1010–1262.

4. The consumer will continue their frugal ways. Boosting savings and paying off debt will become the “new chic” lifestyle. Minimalism will replace shopaholicism. While this has very positive long term effects for our economic future it will play havoc on short term growth and stall any sustained recovery. ½ – Overall the consumer remained conservative up until the Christmas holiday season. Whether this portends a shift back to pre-2008 spending patterns or not will have to wait to see what unfolds in 2011.

5. Inflation on a CPI basis will remain relatively muted as U3 unemployment will peak at 10.5% but hover the majority of the year in the 9-10% range after peaking. U6, a more significant measure of unemployment, will touch 20%. A resultant lid on wages will be an unintended consequence of the more than ample labor pool. +1 Hit this one spot on.

6. Long term interest rates will rise at least 20% from where they ended ’09, maxing out in the 6+% range driven by the sheer volume of US Treasury debt issuance. 0 – big miss. Long term treasury bonds closed the year out just under 4.4%.

7. The credit crunch and the onerous effects of the soon-to-be-passed health care bill will severely hamper the small business growth engine (accounts for > 99% of all US businesses and >50% of employed) thereby limiting the prospects for a robust job recovery. +1- Job recovery was non-existent the entire year regardless of whether you looked at small, mid-size or large businesses.

8. Some soft commodity prices will surge driven by strong worldwide demand and weaker output as a result of an angry “mother nature” (climate and meteorological changes). +1- Hit this one spot on as the price on a number of commodities ended the year up more than 50% and most everything else up double digits.

9. Global growth will moderate nearing 4% GDP mainly driven mainly by growth in emerging markets. The Chinese economic machine will continue their upwards trajectory but will experience a correction along the way. This is because they have tied their currency, the Yuan, to the Dollar thereby indirectly allowing Washington to dictate their monetary policy. The US will shift from growth in the first half and begin to stagnate the second half of the year as the Gov’t punchbowl stimulus wears off. ½ – Got this half right

10. At least one sovereign default will occur most likely within one of the PIGS (Portugal, Ireland, Greece or Spain) nations first. The impact to the financial markets will be felt worldwide with the potential of driving risky asset prices down 30-40% as it stokes fears and a flight to safety.  0 – The prediction about a sovereign PIGS default was right on.  The outcome was off as the printing presses were revved up an ECB arm-twisting rammed down the throat of Greece.  This, of course, did nothing to fix the problem but rather only to kick the can down the road a bit longer.  Protests and riots continue but the markets were happy with the results and the expected volatility never materialized.

11. Commercial real estate will begin its ascent to the forefront of the real estate recovery concerns. The fragile banking recovery will, once again be challenged as the first phase of the commercial mortgage resets begin at the same time the second phase of the residential loans resets ramp up. The government will be compelled to step in and “assist” the banks by either being the lender of last resort or temporarily change laws to allow them time to recover.  0 – big miss. The CRE problems never really made it to the mainstream and flew under the radar for the entire year as the banks were awash in liquidity. Thanks in most part to the fed’s easy money (read turbo printing presses) policies.

12. The Republicans will see a net gain in both the house and senate seats during the midterm elections opened up by Obama’s missteps and falling approval ratings. Another push by the emboldened ruling Democratic party to create another stimulus package will be heatedly fought over and passed.  +1 Hit this one spot on.

13. With healthcare reform passing and a continuing deficit the government has to find a way to pay for, making increasing income taxes inevitable. The 2 top marginal brackets will increase to their 1990s levels of 36% and 39.6%. Also, Congress will let the long-terms capital gains tax rate reset back to 20% once that provision sunsets at the end of 2010. 0 – big miss. The President, in his bi-partisan attempt to work with the newly voted in Republican majority, extended the Bush tax cuts. 

14. Because healthcare took up so much of the agenda in 2009, estate tax reform fell to the wayside. However, it is unlikely that the government would cut off even one possible source of revenue. Expect to see Congress tackle this issue fairly early into the New Year, passing a bill extending current provisions of a top tax rate of 45% and exclusions at $3.5 million, and making it retroactive so that the estate tax does not disappear for 2010. +1 – Got the outcome right but the timing wrong.  Congress waited until the final weeks of the year to pass.

15. Gold, commodities, emerging markets, utilities and food will be the sectors with the best 2010 risk adjusted returns basis. +1 – Hit this one spot on too as gold, commodities, emerging markets, utilities and food all bested the sp500 on a risk adjusted returns basis.

Final score 9.5/15 – Pretty good if I were an MLB clean-up hitter but Jeane Dixon clearly has nothing to worry about.

Next week we will wrap this two-parter up with a look at what the crystal ball sees for 2011.  It is important to remember this is only for fun and by no means is intended for someone to interpret as recommendations or advice.