December 26th, 2010
in Op Ed
Our economic predictions are for entertainment purposes as so many forces are in play, and global players have many different cards which can be played. It is unlikely that anyone can have highly accurate predictive powers for economic issues. If someone does find a year where such is the case, they better retire because lightening is not likely twice caught in a bottle. Predictions will end up being combinations of correct and incorrect elements. In this light, Econintersect presents its 2011 economic predictions, for entertainment purposes only. We are very confident we will not be ready to retire in 2011. Follow up:
The first macro-issue - or the wobble in everyone's economic predictions - centers on the bond markets. Econintersect overall believes there will be a lot of noise, smoke and visual effects. But there will be no fundamental collapse of the bond markets in Europe or the USA. If this basic assumption is incorrect - the predictions below are wrong.
The second problematic macro-issue is the price of oil. Econintersect believes oil increases will be moderate in 2011 with the price ranging from $80 to $105 a barrel during the year. If this assumption is too low, most economic expansion will be stifled. If this assumption is too high it is likely that the cause will be a fall-off in demand resulting from global economic activity being much weaker than we envision.
Goldman Sachs and others believe it will be the USA which begins to step up next year help drive the global economy. Econintersect believes political events in 2011 will conspire to pull the rug out of potential economic expansion.
Inflation. Everywhere in the world where economic growth is exceeding 5% - inflation will be accelerating. Most of the rest of the world will see lower inflation than seen in previous years (skirting on deflation). Econintersect doubts deflation can set in for the slow economies during 2011 unless the there is a major confidence loss in sovereign and USA state bonds.
USA. GDP likely will improve during the first half of 2011, only to be dragged down during the second half by austerity of the State government spending combined with USA government spending contraction. Overall 2011 GDP growth = 2.5-3%. Equity markets = Up 5-10%, with at least one 10%+ correction during the year. Inflation measured by CPI = 1.5%. Housing prices down 5% during the year (national average). Federal Reserve will continue QE throughout the year as they fear a yield explosion if they stop buying treasuries. Further, the Fed likely will step in and start buying state issued bonds to keep this market from collapsing after Congress takes no action to support the states. Unemployment remaining in the 9% to 10% range through the year.
Europe. Europe overall will drift into a slight recession due to the austerity programs of the governments. Overall unemployment will rise. The Euro countries will continue to fight loss of confidence in sovereign debt with yields continuing to drift upwards - but just doing enough to keep the crisis mostly under control.
Asia. Asia will continue to be the world's economic engine. India will exceed China in terms of GDP growth - but will be fighting inflation. Overall, India will do well economically as it is little effected by the global economy. China's fight with inflation will slow the economy taking it out of #1 position vis a vis GDP growth. But on a value basis, China will continue to grow faster then any country on the planet. Most of the rest of Asia will have slightly slower growth in 2011 due to the overall slower expansion of the world's economy. Asia equity markets generally will be flat throughout 2011 as booming growth was already built in. Japan GDP likely will continue to drift lower and the country may actually be in recession for part of the year.
Africa. Africa will have the fastest growth rate of any continent. Because it is a relatively small portion of the world's GDP (especially if South Africa is excluded), it will be ignored as an import market except for the international companies which are harvesting the African resources. For the locals, it means growing inflationary pressures as economies expand against insufficient infrastructure base. Africa is being pillaged by globalization.
Currencies. Most currency relationships will remain relatively stable if the bond markets do not start wobbling. The Euro will strengthen if the sovereign bond crisis can be contained to the market's satisfaction - but more likely the ECB will be fighting one shoe dropping after another which will continue to erode the Euro's relative value. If the Euro strengthens, the dollar will weaken.
Precious Metals and Commodities. Gold up 10% on the year - other precious metals 20%+. In general, commodities will be flat in 2011 as the world's growth rate moderates.
Bloggers are beholding to few and provide unbiased (and equally wrong) economic predictions. One of the best known prediction forums is the Bespoke Roundtable.
Any review of 2011 predictions would not be complete without Saxo Bank's Black Swan list for 2011.
Saxo Bank has today released its annual “Outrageous Predictions”, this year highlighting the currencies that could do exceptionally well and those that could fall to record lows, what could be one of the largest and controversial acquisitions, a political and pundit led challenge to the Fed’s authority as well as the price of commodities and investor strategies that could come into play.
Inspired by Nassim Nicholas Taleb, the Lebanese philosophical essayist, the ten predictions are an annual thought exercise to predict rare but high impact ‘Black Swan events’ that are beyond the realm of normal market expectations. Last year, three of the predictions were fulfilled. Compiled as part of the Bank’s 2011 Financial Outlook, to be released in January 2011, this year’s ‘Black Swan Exercise’ takes a look at the potential scenarios that could have a significant impact on the markets.
Saxo Bank’s Outrageous Predictions for 2011:
- US Congress blocks Bernanke’s QE3 - In the second half of 2011, the Fed is in the hot seat for having been the critical enabler of the US housing debacle and resulting bank bailout and public debt catastrophe. Meanwhile, the too-big-to-fail banks are back in deep trouble again. Congress blocks the Fed’s authority to expand its balance sheet, and sets up an eventual challenge of the Fed’s dual employment/inflation mandate.
- Apple buys Facebook - In interviews, Apple’s Steve Jobs has explained that Apple spoke with Facebook about partnership opportunities, but that the talks ultimately produced nothing. Facebook was after “onerous terms that we could not agree to,” according to the executive. This could trigger Jobs to buy Facebook outright.
- US Dollar Index tops 100 - - The economic growth trajectory in most areas of the world appears healthy for a time in 2011 but then trouble crops up in China. With the Chinese industrial base growing slowly this puts global risk appetite in a tail spin, and with the Japanese economy struggling and the Eurozone in disarray, the US dollar starts to look more appealing. The unwinding of these positions pushes the USD index 25% higher to over 100 by late in the third quarter of 2011.
- US 30-year Treasury yield slides to 3% - The dollar devaluation policy, with its roots in the ‘currency wars’ of 2010, force emerging markets to use more of their spare dollars on Treasuries. The Federal Reserve’s quantitative easing exploits fail apart from easing the balance sheet woes of American banks. The ECB, EU and IMF fail to cure the ills of the peripheral PIIGS pushing the flock of flustered investors to the safe haven of Uncle Sam. The feel-good factor vanishes in 2011 and the 30-year Treasury yield drops to 3%.
- Aussie-Sterling dives 25% - The UK returns to its traditional values; they work harder, save more, and soon enough a surprisingly strong expansion in 2011 is underway. Australia on the other hand is struggling with a weakening economy as China steps harder and harder on the brakes to stop inflation from getting out of control. Combined with the Australian property market it looks like a bubble ready to burst, and the case is for a decline of 25% in AUDGBP.
- Crude oil gushes before correcting by one third - Crude oil, now driven by fundamental investor macro expectations, gets carried away surging to over USD 100 a barrel in early 2011 on the wave of euphoria that the US economy has broken free of the shackles. Crude succumbs to a violent one-third correction lower later in the year.
- Natural Gas surges 50 percent - Natural gas goes into 2011 with a supply surplus as the global downturn has meant supply has exceeded demand for two years, resulting in two years’ of double digit losses. But increased industrial demand, historical cheapness relative to crude and coal, forward curve flattening and action on proposals to export more US natural gas reserves all combine to make passive investments in gas more profitable. And a cold snap leads to a rapid depletion of stocks, thus a one-in-25 year move up by 50% in 2011.
- Gold powers to USD 1800 as currency wars escalate - The ‘currency wars’ return with a vengeance in 2011, driven by improvement in the US economy. The US trade deficit widens and pressure piles on China and as investors flee to metals, gold shoots up to USD 1,800 an ounce.
- S&P500 reaches an all-time high - The Fed continues to pump liquidity into the system in 2011. Investors realise the only strategy worth following is to buy the dips, but the tactic actually works for the Fed even though it’s a house of cards and US consumers start to spend as their stock portfolios improve. Corporate America doesn’t buy the euphoria that a healthy share price is a good indicator of health and continues the deleveraging process that leads to a proper recovery. The US benchmark index sees the 2007 high in the rear-view mirror on its way to 1,600T.
- Russia’s RTS index reaches 2500 -The next global economic bubble starts to inflate early in the year, sending crude oil above USD 100 a barrel again. The average US investor won’t do anything with their money other than buy the dips on the US stock market. Investors at the Russian stock market realise value in their index at a 1-year forward P/E of 8.6 and price to book ratio of 1.26. The RTS nearly doubles to 2,500 in 2011.