Darshan's Blog

Darshan's Daily Market Ponderings

Monday 4th January 2010

12 Economic Predictions for 2010

Welcome to a new decade everyone. It's back to work but it's also the opportunity to capitalise on an exciting year. Looking around, it seems a lot of people are glad to see the back of the noughties.

What a decade it was! Ten years that nobody involved in finance will ever forget. How we ever managed to paper our way through the decade, will be ridiculed by economic historians in years to come. For me it's been a great year navigating the volatility of the first half of the year and the boredom of the second half. By the end of September, when it became clear that these markets were going to be gunned up before the huge crash, I targetted 10500-600 on the Dow, 1130 on the SPX and 5500 max for the FTSE by the end of year. We achieved just about those numbers - even if they did require a constant recalculation due to those pesky overnight bots gunning through resistances and supports.

More importantly, we managed to avoid being destroyed with the other bears with the famous July head and shoulders trap. Of course, not every prediction came true - I had expected the dollar to be way higher by now but it's starting the process. Can't get them all right can we :-) Thank you for putting up with over a 130 articles from me in 2009...I hope you have enjoyed them and they have helped your trading or your investment strategy. I hope I can do the same for you this year.

So what ten things should you look out for in 2010? Look around you - the media is pumping the economic recovery story, retail investors are believing it and there is severe complacency all around. At the same time, small companies (especially in tech) are working hard to become the next big thing. There is depression and optimism in equal measures. So based on that, here are my Top 10 ideas for the year ahead:

1) Housing goes DOWN again.

The cracks have been plastered over in 2009 but in 2010 the myth will be broken. Already news out at the end of 2009, showed that the US Treasury is pledging unlimited financial aid to Fannie Mae and Freddie Mac. It is also pumping another $3.8bn into GMAC, upping the total to $16.3bn. Geithner is pretty much saying - 'Look we're winging this with your money and we will keep on doing so - we're going to use YOUR money to save you from losing your homes - got that?'

Treasury aside, no matter what the Fed does with rates, the bond markets will still inflict pain on mortgage rates. Option ARM resets later this year and in 2011 will mean the illusion will have to be dealt with a total bailout of defaulting homeowners (This will further impact on consumption). Say hello to the new multi-trilllion dollar stimulus package. People will stop paying and just walk away and of course, banks holding their inventory in the hope that things will recover, will be forced into selling cheap.

In the UK - where the supply and demand issue is different, due to scarcity of land - things will be similar in terms of prices. This year, estate agents have marked prices back up and house prices actually finished 2009 up over 5%. Anyone involved in a house sale or purchase this year, will tell you how tedious the task was in reality and stamp duty policy and other incentives no doubt helped stoke artifical demand. It's been very much a short-term bounce and just as price would behave after a sharp drop, for any asset class - this is simply a retracement. Prices are just not as attractive as they were in 2008 or the beginning of 2009. 2010 will see the second leg down for UK housing. Jon Hunt, the founder of UK estate agent giant, Foxtons - was probably the smartest man in the business as he sold his business in May 2007. This landed him a #370m windfall and his decision to sell was based on? Yep, he said housing had hit a top. Someone with that much experience in the industry, would not have made that decision if things were to miraculously get better in under 2 years. So wait until 2012 and buy yourself something nice for at least 30-40% cheaper.

ps...the same goes for commercial property.

2) Facebook Hits The Nasdaq

The Nasdaq is entering 2010 very close to 2007 highs. It's rocketed up this year and anyone who threw money at it, would currently be able to spend their entire year on Facebook and Twitter - not having to do any work (so pretty much the norm then). I mean just look at Google, Amazon and Apple this year - amazing recoveries and gains on those stocks. Can they sustain it? Perhaps - Amazon expects growth from the Kindle, Apple is releasing the tablet and Google is pushing mobile hard. Essentially they are great companies, so they deserve success. They really do not have any major competitors (minnows can be acquired) and whilst Microsoft tries to find it's footing again, more money flow will gravitate towards the more attractive business models of Google, Apple and Amazon.

However, that is if the FED somehow manages to keep these markets hanging high. All three above are high-beta stocks - so if the market (and it will) does correct hard or we get a repeat of the 1931 crash, their stock will be hurt harder than the rest. That of course is a different issue for now but the real interesting shake up will be start-up IPOs. I really do think that Facebook will IPO - or at least attempt to...real time search and Twitter will force it's hand. Mark Zukerberg has been keen to get his face out to the public in every way possible this year and it's clearly a PR push to prepare Wall Street for the float. Whether they go through with it, is a different matter but if they do - it will certainly be interesting. We will suddenly have more information on what revenue models are in store for the site and we will also get to compare and contrast their thoughts with other Facebook dependent start-ups such as Zynga, that might also look to IPO. The transparency will be welcomed by many I'm sure. Another interesting factor will be how early stage employees treat it - do they cash out and leave or stay loyal? We shall see.

If Facebook does IPO - buy yourself some WALL or POKE or whatever the ticker will end up being. Just remember to get out of there before the initial hype dies down. You can always get back in cheaper in 2012.

3) The FED will lose the plot

The Federal Reserve is entering 2010 with $1.84 trillion in securities on their balance sheet. Yes held outright. Ben Bernanke has been given a second term and the 'genius' is being allowed to test out his PhD thesis on real life conditions. Remember, while the Fed is making the monetary policy, Geithner is in a different city making the fiscal policy. There is no harmony between the two at all. The Fed is 'trying' to stimulate the money multiplier (but in actually just carrying out a stealth recapitalisation of the "too big too fail" banks) and the Government is trying to stimulate the economy through direct stimulus. The latter cannot work without the former working - not in the long run anyway. You can build new infrastructure, you can create short term jobs, you can hand out cheques BUT you cannot make any of this sustainable unless the money supply is expanding.

More importantly, while the QE has not worked (some might say give it time but I look at these markets every single day and the money is all sitting in equities and risk right now - it's not being lent to SMEs) - the Fed have already indicated that liquidity will begin to be withdrawn in February 2010. I am not sure what the term for trying to do something, doing it badly and yet finishing doing it before it is done - actually is - but maybe we will find out by the time this year is out. How they are going to drain the $1.2 trillion of excess bank reserves I have no idea. All I do know is that the banks clearly know that more of 2007 and 2008 is about to hit 2010 and 2011.

(Inflation bugs can hush here - even if that money was put into circulation now, it would still be dwarfed by the deleveraging of the past two and half years). Maybe the term deposit facility being discussed might work; although why would the banks want to be paid interest for a fixed period of time, when they could just take that and pump up equities, commodities, gold, etc and earn a greater yield? Doesn't make sense to you? No, nor me.

So Mr Bernanke - I look forward to seeing how your great experiment unfolds - although the ultimate destruction of the Federal Reserve would be the greatest thing that has ever happened for the world - it's just a shame that it will impact ordinary people in the short term.

4) The UK will go to the IMF

The last decade, New Labour under the leadership of Tony 'I like grinning' Blair and Gordon 'I've never had any facial expression' Brown - has been thoroughly unkind to the UK. History will look back at it and think of it as the decade where we were duped into thinking that Brown was the financial saviour of the world...with his boast of ending the boom and bust cycle (Well not all of us were duped of course). A decade where we believed a man who has the charisma of a baked potato and the financial track record of Mugabe. Why oh why?

The result of all of this is the UK entering 2010 with a #178 billion budget deficit, over 2.2 million unemployed, a GDP to laugh at, a chancellor that makes Brown look like Soros in camparison, and the possibility of an election nightmare. Oh and new talk that QE might be extended. Oh joy. So in 2010, despite all the current Government's claims to solve this mess, I can see things only getting worse. I can see us maxing out our national debt limits and I can see the possibility that Britain's sovereign debt rating is pegged down a notch...thus, causing a run on Sterling. In other words, the IMF will be getting a call from someone in Westminster. Whoever, ends up as our new Prime Minister - will regret taking the job.

5) A protectionist trade war ruin the relationship between the USA and China.

Already the USA is throwing blows at China with a series of tariffs increases, as it tried to protect it's domestic workers. The yuan-dollar peg is really frustrating the competiting domestic industries in the USA and I guess, Obama is being forced to do something about it now. Especially, as it doubles up as a concession to get the national healthcare situation into gear. The latest US tariff is a 35% increase on import tariffs for Chinese tires. Why now? Well China is fast becoming a problem - it's now a country that has everything it needs and this makes it hard to bargain with. Sure it needs Western consumers but it knows it will always have those. It has the cheaper labour after all. I mean look at the recent Copenhagen climate talks. Diplomatic bargaining cannot work with China anymore. The only other strategy is protectionist policies, in other words, an aggressive approach. China of course doesn't like this retaliation but it's there. Now the question is do they hit the USA back and engage in a trade war?

Personally, any economist will tell you that tit for tat games are only ever won in the long run - i.e long enough for repeated cooperation, retaliation and forgiveness for their to be a payoff greater than the calculated loss from cooperating initially. So China and the USA are playing a dangerous long term game here. I don't see the sense in it but 2010 will make it interesting for sure.

Alternatively, China could drop the dollar peg. Wouldn't that make things interesting hey? Suddenly, the guarantee of cheap exports by pegging the Yuan to the US Dollar, will do a 360. The only reason to do this would be to create greater domestic consumption and throw a big V sign at the West. What's that Chinese proverb? Ah yes, we live in interesting times.

6) The USDX will head towards $90 and currencies go crazy

This past week was the first week since March 2009, where the uptrend for dollar short positions ended. With quadruple bullishness on the larger price timeframes - the USDX is preparing to seriously damage the dollar bears and appreciated to above March 2009 highs. Remember, I warned that $74 would provide some sort of a floor, well so far that has held to be true. Of course, I also think that there will probably be one more push down (max downside double bottom at 71 to the 2008 low) and then we're heading towards $90. Not only is this the case from a contrarian and price action view point BUT it is also backed up economically. Remember, the majority of world debt is in dollars. Like I have said, the deleveraging has barely begun and when margins are called, the demand for US dollars will be shocking and the flight to safety to US treasuries will yet again add to the problem. All it would take is for another Lehman type shock and we've got the fuel for the fire. So ultimately, while the Euro, Pound, Aussie, Loonie and Yen might appreciate against the dollar going into Feb or March, they should all end the year heading down towards all time lows.

Currency strength is a relative measure. Every major country has an issue - the USA is not in this alone. When things get rough again, the US dollar will be relatively the better choice to have your cash in. Europe has too much political risk - with the Eastern European countries always on default red alert and it's proximity to Russia, whilst the UK - well it has Gordon Brown and his merry band of crazies for now. Where do you want to keep your money when things get bad?

The best opportunities to make money this year, will come from currencies movements - due to the potential for both endogenous and exogenous shocks 2010 has in store for countries around the world.

7) Gold will dive (after possibly hitting a high of 1300 first) towards $600 and below

If I have to see another Cash For Gold commercial, I will cry. Look, everyone is gunning for a gold rush. It's not going to happen. As I have said, you just don't hear the words "Peak Oil" anymore on CNBC. By the end of 2010 we will not hear the words "gold is being bought as an inflationary hedge" again either. I understand the economic reasons for investing in gold but I also know that big money does not move towards rational reasoning either. The yellow stuff in theory is indeed an a store of wealth but in a world, where fractional reserve banking keeps the wealthy - well, wealthy - do you really think there will not be a strong resistance to keep the price of gold from becoming too attractive? Of course there will. That aside, at it's very simplest - you cannot eat gold, you cannot drink gold, you cannot fight a gun with gold, you cannot keep warm with gold - heck you can't really use it as money either due to the double coincidence of wants principle. It's an insurance policy but in the toughest times, the government will make it illegal to hold gold. (Anyone remember what happened after 1929?)

Okay putting EVEN that aside - simple demand and supply should flag warning signs. Look what happened when gold hit $1233 - it fell almost a $100 in a couple of days and to a low of $1074 in just a few weeks. We're now just meandering around. In essence everything about this is the same as the oil story of last year. I think gold is consolidating here, for a final thrust up towards $1300 and then as the USDX takes off and margins are called, the hot money will run towards the gold doors at the same time. I am looking to see gold head down towards $600 first and ultimately lower after that. (I see an all time low at $400. Sure it will hit higher numbers one day but that will be in a few years, when the governments have no option but to print actual money and let it come into circulation - when that happens, then we can have inflation - until then gold is a trap and just another source of short term yield for the banks)

8) Global markets will resume their trend to below March 2009 lows.

One thing that stands in the way of this happening is further government and Fed slush being thrown at the market. I am confident that we are near a major market top and can see at best 1200 on the SPX and 11200 on the DOW - at the same time, the best optimists should opt for in terms of a drop - should be a smaller correction to 9000 on the DOW by summer. If the big money somehow maneouvre this market through the danger zone and guarantee another year of bonuses, then 2011 is going to be a disaster without a doubt. Sometimes it's just easier to let market forces get on with what they should be doing. To me, this market is floating on thin ice and unfortunately, retail investors are about to be duped again. I have seen and heard too many normal folk go on about how well their portfolios are doing and how they are thinking of buying more stocks. If you know people like this, please shake them and take away their wallet. Banks don't hoard money, if they think things are going to be great! If things are so great, then professional investors do not park their money in short-term treasuries for a zero % return. Simple - wake up and do not fall for this. The equity bullish percentage is at highs last seen before the 1987 crash - when everyone is looking one way, something is happening elsewhere.

9) AIG's share price will collapse again.

Why the price is so high, is one of life's wonders. Oh yes, could it be that AIG is holding a lot of the counter-party risk to the derivatives betting on further economic collapse? Oh yes, that might be it. Pump it pump it pump it. However, you can only pump a dead company with such a great amount of public money, for so long. This patient is on a life support machine and the resources used to keep it alive, could be used to create growth elsewhere. In 2010, hopefully REAL market forces will engage the The Theory Of Keeping It Real.

10) US unemployment leaps over 15%.

As I have argued since the beginning of this mess - in a credit driven recession, the unemployment rate is a leading indicator and not a lagging indicator. As liquidity forces good business to turn down contracts and even shut shop completely, the unemployment rate will increase. Consequently, consumption will contract and on the cycle goes. The surprisingly positive NFP labour stats from December 2009, will be revised in January and by the end of 2010 - the unemployment rate will hit 15%. So the empirical evidence has been on my side so far all through 2009.

11) People physically revolt.

Ok this one is not technically an economic prediction but it is a function of economics. Hunger politics - returns. Not only do we have the potential for geopolitical flashpoints in 2010 in the form of Iran, Israel, Pakistan, Russia and the potential for Sovereign defaults in Greece, Spain, the Eastern European bloc and the UK BUT we also have a global population that is fed up. Fed up of unemployment, wage freezes, debt and uncertainty. Already, there are homeowners in the USA who are mobilising support for people to just stop paying their mortgages if banks abuse their trust. How are they going to be controlled?

There was also a Bloomberg report about Goldman Sachs employees in New York, applying for hand gun licences. I'm not a GS conspiracy fan (I think they're a very smart firm that unfortunately has no moral code - but that's Wall Street for you), so I am not focussing on that story itself; What I am bringing to your attention is what do the bankers know that we do not know. They have the figures in front of them - either they think they are going to have an even bigger bonus year and that will create a physical backlash OR they know that the truth will out and these markets are going to tumble into chaos. Just something to think about.

12) OPPORTUNITY will create a stronger and more compassionate society and new business models.

While all the above is happening - always keep your eye on the opportunities that are created. If you are left without a job - then use the time to spend time with your loved ones, improve your skills, plan for your next step. When you have nothing to lose, you have the chance to hit goal after goal with no fear. Use it. Thousands will see the opportunity provided by the mess created and exploit it in the best way possible. Every economic cycle needs a thorough wash-out and every society needs a social shock to create a positive outcome. Use 2010 to find what you want to do and do it.

I forsee, us coming out of this mess in a couple of years with new leaders who understand that business cannot just be about profit maximisation- it needs to be ALL about sustainable profitability and new business models that allow the labour force to be far more individual than before. The trend going forward (it already is starting to be that way here in London) will be for graduates and the unemployed to become their own bosses and make something out of what they love and dream about. It certainly is something I take in to account when looking for talent to join the team at my firm. So all is not lost :-)

I would love to hear your own thoughts about my 10 ideas and definitely would love to hear your own ideas too. So start filling up the comment section below.

Good luck in 2010 and let's see if we can get through this year with some serious gains. For me, my aim is take advantage of far more trading set-ups than I did in 2009 and capitalise on a potentially great year. Ready, set, go.....

Happy trading for today (I see us reaching a short-term top here and then a small correction. In other words do not buy too much at this price)

Thanks for listening and happy new year again! (What date is it not okay to still be saying that to people btw?)

Darshan

ps...If you want to follow my real time market thoughts - add me on Twitter @chiefchimpanzee - thanks!

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