My Outlook For 2011: Turbulence Ahead
Black Swan Insights
You don’t need a crystal ball or Svengali to see that 2011 will be a turbulent year for the economy and the markets. Here are some prognostications for 2011:
1. Housing Surprises To the Down Side – Yes, everyone with a pulse already knows the housing market is depressed, but I think the market is generally underestimating the impact of further price declines (call it the Bernanke Put perhaps). We have already seen confirmation from key housing indices like Case-Shiller, CoreLogic, and Altos 20 City Composite of a dramatic deterioration in home prices. This is surprising, given the fact the Fed is printing trillions of dollars to prop up asset prices. It goes to show how egregiously overvalued US home prices are. The only question is: How much worse does it get? I think we could easily see 10% across the board declines, which would mean new lows for home prices, putting more pressure on the banks as they continue to hide losses (with government approval).
2. Stocks Decline When Priced In Gold – I do not waste any more time trying to predict stock market movements. After all, I am not a HFT bot and do not understand their algorithms very well. On top of that, the Federal Reserve has openly announced they are manipulating the market higher to increase the “wealth effect.” To put it plainly – THERE IS NO MARKET ANYMORE – just government intervention. Under the circumstances, it is foolhardy to guess if the market will rise or decline in 2011. What I can bet is that when compared to gold, stocks will continue their multi-year decline as dollar debasement takes it toll (thanks Zimbabwe Ben).
3. EU Debt Crisis Worsens – Again, most market participants already know the problems facing the PIIGS, but they continue to downplay the potential consequences. You can’t blame them really; the Fed, ECB, etc have showed they will always bail out irresponsible gamblers even if it means destroying the value of the national currency. So I think it is reasonable to conclude that Spain and Portugal will receive a EU bailout financed, of course, by ECB monopoly money. I do not think Italy or Belgium will receive a bailout in 2011 – that is what will happen in 2012. Right now, the markets remain completely ambivalent to the problems down the road in Europe. It is like the whole “sub-prime is contained” slogan in 2007 which the bulls used to propel stocks higher. Everybody with a brain knew it was a problem, but they ignored it at their peril.