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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.
Mish
GlobalEconomicAnalysis.blogspot.com
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Mish's Global Economic Trend Analysis
Thoughts
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