2010, Do I Dare Predict?

For 2009 I did predictions that I labeled as items I hoped would not occur. They were all pretty much doom and gloom predictions, though some, like unemployment topping 8% ,were a bit too optimistic. Still, my predictions on the stock market being down significantly were not right for the year (but would have been had the year ended March 9). So with the new year coming, is the gloom passing? Is the doom behind us? Am I an idiot?

Let's start with me simply posting here the first six headlines as they appear at this very moment at Bloomberg:

•China Manufacturing Grows at Fastest Pace in 20 Months, Cementing Recovery
•U.S. Jobless Claims Unexpectedly Decline to Lowest Level Since July 2008
•South Korea's Exports Rise at Fastest Pace in 17 Months as Demand Revives
•Commodities Post Biggest Annual Gain in Four Decades as China's Use Surges
• Hatoyama Says He'll Focus on Deflation, Jobs as `Honeymoon Period' Ends
•AT&T Biggest Winner With $15 Billion Savings From Lowest Yields Since 2005

Wow!! Those are some incredible stories!! Everything is absolutely fantastic!! And so, it is with heavy heart that I am still a pessimistic sod.

Now my quandry here is that I believe we are in a major bubble building process and I have no idea how long this process will last. I suspect it will pop in 2010 or 2011, but it could last longer. Still, I am going out on a limb and predicting the "POP" in late 2010 or early 2011. Too much air in too little time and too little balloon to handle it, in my opinion. So here are my predictions for 2010 (I am just guessing here so do not invest based upon them):

1. The U.S. is going to start to run into some serious issues in getting other countries to buy its debt and finance stimulus spending. I am not expecting a massive sell-off by sovereigns, primarily China and Japan, who hold our debt but they will be net sellers, not net buyers in 2010, and their purchases will be hard to replace.
2. As I did last year I am predicting the S&P will be down 10-20% by year end from where it ended today. Hey, the prediction did not work for 2009 so if I keep predicting it every year eventually I will be right. In truth, I do believe the market is well over bought and we have no where else to go but down as stimulus dollars wear off and the government runs out of stimulus dollars to throw at this mess. I really think we will be more than 30% off our current highs but am being a bit conservative in my prediction.
3. The Euro will have some major hits as countries, like Greece, suffer some major ratings downgrades. Do not look to the Euro to replace the dollar any time soon.
4. Interest rates in the U.S. will end the year roughly 2% above where they are currently. Mortgage rates have already increased steadily for the past four weeks. The Fed is running out of ammo to keep them down.
5. Housing will remain stable but will not climb off the bottom it is at. Adjustable rate/Alt-A loans will peak in defaults and this will keep the banks on the sidelines. Fannie Mae and Freddie Mac will continue to provide most loans, with government support, and their books will continue to look worse and worse. Commercial real estate will continue to decline in the U.S. We are so overbuilt in this area that we could go a decade with no construction and still not catch up. Bottom line, real estate on the residential level is probably at its low or near there but do not expect any big increases.
6. Tiger Woods will find the 19th Ho.

Disclosures: None.

When Will We Learn? ... Apparently no time soon

Let me start by apologizing for not blogging in quite some time. I know one of the regular rules of being a successful blogger is doing regular entries. Nonetheless, I have been in a state of disbelief for some time and have not felt like speaking out. To be honest, I have questioned dearly whether my pessimistic predictions are totally off base. After all, the stock market since the March 9 lows has been rather consistently skyrocketing, sales this holiday season seem decent, manufacturing indicators seem on the rise and housing seems to have stabilized, if not improved, in most regions, so what is there to be down about? Well, let's talk.

I will begin again by saying I am not a perma-bear. I love a good bull market and love to do trading into them. But I want a true bull, which means things are improving fundamentally over the mid-to-long term. Still, I admit to some day trading during the dot.com bubble and making some profits there. It was a fun ride while it lasted. If you rode that ride I ask you to look back and see where the Nasdaq was then versus today. Almost a decade exactly ago it was around 5000, whereas today it is a little over half of that. So you say, this is but a small blip in the market history and we will return to normal soon. So let us look at Japan a moment.

I recall in the early 80s being highly disturbed about how the Japanese were taking over the U.S., buying up all our landmarks and quickly becoming the number one economy. The U.S. was in a mild state of shock/awe that we could be taken over economically so easily, but Japan beat us at our own game. And then their bubble burst as well. The Nikkei 20 years ago was roughly four times as high as it is today. And this is not for a lack of trying. The Japan government has been spending excessively to revive the economy there. So much so that predictions are the debt will reach 246% of the GDP in the years to come. To put that in economists' terms, they have a whole world of hurt ahead of them.

http://www.calculatedriskblog.com/2009/12/japan-twenty-years-later.html

Undoubtedly the U.S. can never go that far into an economic abyss - - right? Well, I hope so, but in my view our reaction to this recession has been very poor, even disastrous. Why do I say this?

You do not need a doctorate in economics or finance to understand that when you have too much debt the answer is the cut back, spend less and pay down the debt. Not fun, but necessary. Yet the Administration has been hell bent on getting us to spend and do so while increasing debt. I have no idea why other than a political desire to create the short-term appearance of a recovery. That is absolutely all it will do as in the mid to long term it is highly problematic.

It does also not take a degree to understand that a country cannot survive by simply buying things. We need some productive, fruitful endeavors. Spending money to buy stuff is not a productive endeavor. Yet 70% of our GDP has been just that, buying stuff. Moreover, we have bought this stuff with credit, increasing our enormous debt load.

So let's return to some basic math. Tax receipts from individuals are down just under 30% YOY. Now there are several variables here but I am going to assume that a 30% reduction in tax receipts equates roughly with a 30% reduction in income. This is on an individual basis as on a corporate level there are no tax receipts at all as they are generally losing money. So if income is down, be it 30%, 20% or even 10%, how can the stock market and economists be signaling a grand recovery? If consumer spending is 70% of GDP and consumer incomes are down around 30%, how can the GDP be sustained?

http://seekingalpha.com/article/180174-the-coming-economic-nightmare-part-1

There are only two possible answers. First, we are incurring more debt to buy stuff. With mortgage rates low and a lot of refinancing taking place this is possible, though certainly not sustainable. Second, we are purely doing this off of government stimulus, which is what the stimulus is meant to do. So I have to ask, is spending built on government stimulus a good thing? Well, I suppose if it works to restart the economy, yes. But I tend to think with the record levels of private debt load in this country and others, stimulus spending cannot stimulate what does not and cannot exist. Just like Japan is learning, we have spent our wad and need to hunker down, pay down debt and perhaps do something called saving. This will take many years and the government throwing money at it only makes the situation worse, not better.

Why worse? Because the government is running up massive debt and our creditors are not real happy right now. Now we built most of this debt propping up the jerks that caused the problems and that makes me sick, but that aside we have a massive public debt problem building in this country. The sovereigns who have been buying our debt are increasingly less willing to do so and increasingly shifting their investments to short term investments. This enables them to pull the plug faster and from what I can see they are in the process of pulling the plug. If, when, this happens the new bubble we are building will burst. There are plenty of other pins around this bubble that might burst it, but this is one of the sharpest.

So as the new year arrives, all I can say is to be careful out there.

Disclosures: None.