http://globaleconomicanalysis.blogspot.com/2010/12/ten-economic-and-investment-themes-for.html
Mike Shedlock
December 22, 2010
1. US Municipal Bankruptcies Head to Center Stage
Look for Detroit and at least one other city in Michigan to go
bankrupt. Also look for increasing discussions regarding bankruptcy
from Los Angeles, Miami, Oakland, Houston, and San Diego. Those cities
are definitely bankrupt, they just have not admitted it yet. The first
major city to go bankrupt will cause a huge stir in the municipal bond
market. Best to avoid Munis completely.
2. Sovereign Debt Crisis Hits Europe
The ECB and EU are hoping things return to normal and they can deal
with things more calmly in 2013. The markets will not wait. Expect a
new Parliament in Ireland to want to renegotiate whatever horrendous
deal Prime Minister Brian Cowen agrees to. Portugal and Spain will
need bailouts. The surprise play in Europe will be Italy, a country not
on anyone's front burner. Italy will come under intense credit market
pressure, and when it does the whole Eurozone comes unglued. Europe's
banks are insolvent and ECB president Jean-Claude Trichet will have a
choice, haircuts or massive printing.
3. Cutbacks in US Cities and States
With Republican governors holding a majority of governorships,
with Republicans holding a majority in the House, and with a far
more conservative Senate, there is going to be little enthusiasm for
increasing aid to states. There will be some aid to states of course,
but nowhere near as much as needed to prevent cutbacks. Expect to see a
huge number of layoffs and/or cutbacks in services. Cutbacks in cities
and states will be a good thing, but that will counteract other gains
in employment. The unemployment rate will stay stubbornly high.
4. Public Unions Under Intense Attack
Public unions will face increasing hostility, not only in the US but
also the Eurozone and UK. Look for Congress to consider legislation
to kill collective bargaining. If it passes, the president would veto
it. The problem however will not go away. Cities and states in distress
will increasingly outsource every contract they can.
5. China Overheats, Multiple Rate Hikes Coming
China, everyone's favorite promised land, has a hard landing. China will
grow at perhaps 5-6% but that is nowhere near as much as China wants,
or the world expects. Tightening in China will crack its property bubble
and more importantly pressure commodities. The longer China holds off
in tightening, the harder the landing.
6. Property Bubble Bursts Wide Open in Australia and Canada
Australia, having largely avoided the global recession runs out of luck
this time around. Look for the Australian economy to fall into outright
recession. Look for Canada to slow dramatically as its property bubble
pops. The US property bubble is much further progressed, by years,
than Australia, Canada, and China. This matters immensely.
7. US Avoids Double Dip
The tax cut extensions and the payroll tax decrease will keep the US
out of recession. However, growth estimates are still too high. The tax
cut extensions do nothing more than maintain the status quo while the
payroll tax deduction is just for a year. Most will use it to pay down
bills. Look for GDP at 2.0-2.5%. That is the stall rate.
8. Year That Something Matters
For the global equity markets, this will be the year that something
matters. Certainly nothing mattered in 2010, and optimism for equities
is at extreme levels. I have no targets other than a suggestion this is
an extremely poor time to invest in darn near anything.
9. Decoupling in Reverse
I do not think any countries decouple in 2011, including China. However,
on a relative basis, the US could. Europe is a basket case, China is
overheating, Australia is headed for recession, the UK is going nowhere,
and 2.0-2.5% growth in the US just might look damn good compared to
anything else. Bear in mind far more than 2.0-2.5% US growth is priced
in, but on a relative basis that is likely to smash the performance of
the Eurozone, Australia, and Canada. China may grow 5.0-6.0% but with
10% priced in, overweight China, the emerging markets and the commodity
producing countries is a serious mistake. Actually, equities are a mistake
in general and so are commodities. Finally, falling commodity prices would
be US dollar supportive and supportive of a decreasing US trade deficit
as well, especially if grain prices stay high while oil sinks. Should
grains stay firm while other commodities sink, it would help boost US GDP.
10. US Dollar to Strengthen
Look for the US dollar to strengthen because of the net effect of all
the above issues.
Relative Performance Examples
On a relative but not absolute basis I like the US. On a currency adjusted
basis I especially like Japan. Here is a hypothetical example: Should
foreign equities drop 20% and the US dollar strengthen 10% the loss to
US investors would be 30%. Should Foreign investors buy US equities and
face a loss of 20% and a 10% rise in the dollar, they would see a 10%
loss. US investors of course would see the full 20% loss. Japan looks
attractive in nominal terms but strengthening of the dollar compared
to the Yen could negate some if not all of that. Equities in general,
with the possible exception of Japan do not look attractive.
Miscellaneous Issues
The order in which the above themes play out could be important. If
a muni crisis hits the US before a sovereign crisis in the Eurozone
and a slowdown in China, the dollar may not initially perform as
expected. Similarly, if the US strengthens more than expected in the first
quarter while Europe and China stagnate, another leg down in treasuries
may be in store with the US dollar quickly blasting higher.
I have no firm conviction for gold, silver, or US treasuries other than
gold is likely to hold its own and then some should the ECB decide to
print its way out of this mess.
US treasuries are now in no-man's-land dependent on the order of
things and the reactions of foreign central banks as the crisis plays
out. Seasonally, treasuries are generally weak until June (think
tax purposes). However, there are so many factors now, including Fed
purchases, it is hard to estimate.
2010 was a lull in the global economic crisis. Don't expect 2011 to be
the same. Something, indeed many things, are likely to matter in 2011.
Mike Shedlock
December 22, 2010
1. US Municipal Bankruptcies Head to Center Stage
Look for Detroit and at least one other city in Michigan to go
bankrupt. Also look for increasing discussions regarding bankruptcy
from Los Angeles, Miami, Oakland, Houston, and San Diego. Those cities
are definitely bankrupt, they just have not admitted it yet. The first
major city to go bankrupt will cause a huge stir in the municipal bond
market. Best to avoid Munis completely.
2. Sovereign Debt Crisis Hits Europe
The ECB and EU are hoping things return to normal and they can deal
with things more calmly in 2013. The markets will not wait. Expect a
new Parliament in Ireland to want to renegotiate whatever horrendous
deal Prime Minister Brian Cowen agrees to. Portugal and Spain will
need bailouts. The surprise play in Europe will be Italy, a country not
on anyone's front burner. Italy will come under intense credit market
pressure, and when it does the whole Eurozone comes unglued. Europe's
banks are insolvent and ECB president Jean-Claude Trichet will have a
choice, haircuts or massive printing.
3. Cutbacks in US Cities and States
With Republican governors holding a majority of governorships,
with Republicans holding a majority in the House, and with a far
more conservative Senate, there is going to be little enthusiasm for
increasing aid to states. There will be some aid to states of course,
but nowhere near as much as needed to prevent cutbacks. Expect to see a
huge number of layoffs and/or cutbacks in services. Cutbacks in cities
and states will be a good thing, but that will counteract other gains
in employment. The unemployment rate will stay stubbornly high.
4. Public Unions Under Intense Attack
Public unions will face increasing hostility, not only in the US but
also the Eurozone and UK. Look for Congress to consider legislation
to kill collective bargaining. If it passes, the president would veto
it. The problem however will not go away. Cities and states in distress
will increasingly outsource every contract they can.
5. China Overheats, Multiple Rate Hikes Coming
China, everyone's favorite promised land, has a hard landing. China will
grow at perhaps 5-6% but that is nowhere near as much as China wants,
or the world expects. Tightening in China will crack its property bubble
and more importantly pressure commodities. The longer China holds off
in tightening, the harder the landing.
6. Property Bubble Bursts Wide Open in Australia and Canada
Australia, having largely avoided the global recession runs out of luck
this time around. Look for the Australian economy to fall into outright
recession. Look for Canada to slow dramatically as its property bubble
pops. The US property bubble is much further progressed, by years,
than Australia, Canada, and China. This matters immensely.
7. US Avoids Double Dip
The tax cut extensions and the payroll tax decrease will keep the US
out of recession. However, growth estimates are still too high. The tax
cut extensions do nothing more than maintain the status quo while the
payroll tax deduction is just for a year. Most will use it to pay down
bills. Look for GDP at 2.0-2.5%. That is the stall rate.
8. Year That Something Matters
For the global equity markets, this will be the year that something
matters. Certainly nothing mattered in 2010, and optimism for equities
is at extreme levels. I have no targets other than a suggestion this is
an extremely poor time to invest in darn near anything.
9. Decoupling in Reverse
I do not think any countries decouple in 2011, including China. However,
on a relative basis, the US could. Europe is a basket case, China is
overheating, Australia is headed for recession, the UK is going nowhere,
and 2.0-2.5% growth in the US just might look damn good compared to
anything else. Bear in mind far more than 2.0-2.5% US growth is priced
in, but on a relative basis that is likely to smash the performance of
the Eurozone, Australia, and Canada. China may grow 5.0-6.0% but with
10% priced in, overweight China, the emerging markets and the commodity
producing countries is a serious mistake. Actually, equities are a mistake
in general and so are commodities. Finally, falling commodity prices would
be US dollar supportive and supportive of a decreasing US trade deficit
as well, especially if grain prices stay high while oil sinks. Should
grains stay firm while other commodities sink, it would help boost US GDP.
10. US Dollar to Strengthen
Look for the US dollar to strengthen because of the net effect of all
the above issues.
Relative Performance Examples
On a relative but not absolute basis I like the US. On a currency adjusted
basis I especially like Japan. Here is a hypothetical example: Should
foreign equities drop 20% and the US dollar strengthen 10% the loss to
US investors would be 30%. Should Foreign investors buy US equities and
face a loss of 20% and a 10% rise in the dollar, they would see a 10%
loss. US investors of course would see the full 20% loss. Japan looks
attractive in nominal terms but strengthening of the dollar compared
to the Yen could negate some if not all of that. Equities in general,
with the possible exception of Japan do not look attractive.
Miscellaneous Issues
The order in which the above themes play out could be important. If
a muni crisis hits the US before a sovereign crisis in the Eurozone
and a slowdown in China, the dollar may not initially perform as
expected. Similarly, if the US strengthens more than expected in the first
quarter while Europe and China stagnate, another leg down in treasuries
may be in store with the US dollar quickly blasting higher.
I have no firm conviction for gold, silver, or US treasuries other than
gold is likely to hold its own and then some should the ECB decide to
print its way out of this mess.
US treasuries are now in no-man's-land dependent on the order of
things and the reactions of foreign central banks as the crisis plays
out. Seasonally, treasuries are generally weak until June (think
tax purposes). However, there are so many factors now, including Fed
purchases, it is hard to estimate.
2010 was a lull in the global economic crisis. Don't expect 2011 to be
the same. Something, indeed many things, are likely to matter in 2011.
