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.

4. Debt Deflation In Europe – The combination of ECB monetary policy along with recent austerity measures in the PIIGS region will all but ensure numerous countries in Europe enter a new recession. This keeps the ECB on hold throughout the entire year. Can you imagine what would happen to Spain, Ireland, etc if the ECB starts a rate hike cycle? Depression! That is why I am shocked when analysts predict an ECB rate hike in 2011. The market is expecting 50 bps by the end of 2011 which still seems too aggressive. The bifurcated economic growth in Europe is finally putting strains on the ECB. For example, the German economy needs higher rates as it is growing quite well, thanks to strong exports. But the PIIGS need low rates forever just to limp along and skirt a full-blown depression. Because the EU and therefore ECB are politically oriented, they will side with easy monetary policy to preserve this misguided monetary union at all costs.

5. The Fed Keeps Interest Rates at 0% – As they continue with their policy of bleeding the middle class and honest savers to funnel money directly to their overlord bankster owners. This will complete 3 consecutive years of the almost 0% rate earned on money. To recoup their lost income, millions of Americans will be forced to gamble their money away in the ponzi-scheme we refer to as the stock market. All part of Zimbabwe Ben's attempt to create new and more powerful bubbles to "rescue" the economy. Commodities will continue to be favored by investors as real assets increase in popularity as they cannot be printed out of thin air. The only problem for the Dear Chairman at the Fed is what to do when oil surpasses $100 and starts to really depress consumer spending and increase input costs for companies, thereby putting pressure on margins? I can hear the term "margin contraction" becoming a popular buzz word on CNBC in 2011. The surgically enhanced stock fluffer at CNBC, Maria Bartiromo, may at first have trouble saying the term correctly, but after a few speech lessons, she will master it. But to conceal her depression at having to announce earnings misses, she may have to load up on some BOTOX extra strength to get through the year intact.

Well, there you have it, my outlook for 2011 for what it is worth. Happy trading!

Reprinted with permission from Black Swan Insights.

January 13, 2011

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