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David's Macro Blog

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Tag: stock market

It is always interesting to go back and read what I wrote last year because often I’ve forgotten! Plus it is humbling to realize how imperfectly we see the future, which looked so clear at the time.

My favorite quote for 2010 is:

“Prediction is very hard, especially about the future.” – Yogi Berra

Let’s take a look at the past year and what happened. My next post will contain my 2011 predictions.

Notable Events During 2010

Economic

  • The unemployment rate is just below 10%, which is about where it was at the end of 2009. Most of the decrease came from a decline in the Labor Force Participation Rate and Employment Population Ratio. Some new jobs were created but far below the number needed to decrease unemployment down to a reasonable 6% range.
  • Consumer spending recovered remarkably well despite no real improvement in unemployment.
  • Credit was tight for those at the lower ends of the financial spectrum but was certainly extremely loose for large financial institutions and businesses.
  • The stock market continued its climb back up from the 2008 Financial Crisis lows, yet suffered the May-6 Flash Crash. There was plenty of volatility in the trading ranges.
  • The S&P 500 rose about 12% to 1257.
  • Commodity and precious metal prices rose during the year. Gold and silver are at new highs and oil is back to $90 per barrel.

Real Estate

  • Real estate prices continued to stabilize across most markets.
    • The residential market is of course driven by location. Most lower priced homes already fell dramatically because subprime loans were the first to fail. Now higher priced homes are showing weakness.
    • In the commercial market, there was a bifurcation of assets. The best assets actually saw increased prices and rents because investors were chasing yields higher than bonds. The lower-end assets fell because they don’t produce much stabilized income.
  • U.S. home mortgage rates fell to multi-generational lows in the mid-4% range. This wasn’t expected originally because it was projected to rise when the Fed ceased buying additional mortgage debt.

Political

  • Reappointment of Ben Bernanke as Fed chairman in closest vote ever.
  • The Federal government still has a $1 trillion budget deficit. We’ll see if the new, more conservative Congress reins in spending (not too likely). At some point the Federal debt problem will have to be addressed as in Greece.
  • States, counties, and cities did not go bankrupt en-mass yet. However some politicians are speaking out on their budget crisis finally. We may see radical change in 2011.
  • The Federal government passed sweeping national health care reform. The effects are just starting to be known.
  • The Federal government also passed financial reform legislation. The effects aren’t clear yet, but does anyone think radical reform will improve abusive behavior?
  • The power of the financial industry over the American economy and the government became more evident.
  • The Fed kept the money flowing with Quantitative Easing 2 (QE2). When QE2 ends, will QE3 be required?
  • Economies in Europe and even the Euro currency experienced major challenges. There were bailouts in Greece and Ireland, with more on the way for Portugal, Spain, and maybe Italy. Curiously Iceland opted out of the bailout scheme and is recovering faster than expected.

Now let’s review some of my 2010 predictions and grade them.

Most Accurate Predictions from Last Year (2010)

Perhaps unemployment might fall below 10%, but it should remain at or near double digit territory.

Pretty accurate, unemployment for December 2010 came in at 9.7%.

[Interest rates] are at zero and should remain there for 2010. Remember, Japan had zero interest rates for 10+ years. It can happen.

There wasn’t any hint that short term rates would move up from the 0% -0.25% range they’ve been in for awhile now. Honestly this wasn’t difficult to predict so it hardly qualifies as a “most accurate prediction.”

If forced to make a firm prediction, I’d say the best chance of a currency crisis is in the EU, not Asia or North America.

The European Union did have a very large currency crisis in the form of bailouts. The EFSF was formed to backstop unmanagable debt in countries like Ireland, Greece, and eventually Spain and Portugal.

Least Accurate Predictions from Last Year (2010)

The market indices should fall in 2010 and stay within their prior 2 year trading range with a 1/3 chance of retesting the prior lows of March 2009.

The stock market finished up about 12% (S&P 500). There were some swing trades up and down but in general the stock market continued its recovery.

If the economy doesn’t suffer a major meltdown and doesn’t recover either, then gold prices will probably flatten and possible show downward bias.

Gold (and silver) prices didn’t fall in 2010 – they increased instead as investors and hot money flowed into alternatives to risky paper money.

Oil prices remained in the $60 to $80 range for most of the year [2009]. I expect more of the same and a downward bias too.

Oil prices finished year 2010 at $90/barrel as the global economy strengthened and GDP grew. I expected slower growth, which would have likely kept oil prices lower.

Before I share with you my 2010 predictions, we should first take a look back at the prior year’s predictions and the actual results. The main thing I keep in mind is humility. It is extremely difficult to predict the future in regard to specific targets and time ranges. Instead it is much easier to make general predictions based upon the fundamentals.

This reminds of one of Warren Buffett’s well known quotes:

“In the short term the market is a popularity contest; in the long term it is a weighing machine.”

What Happened in 2009?

  • Stock market bottom and recovery
    • Intraday low on the S&P of 666 in March and year finish at 1115.
  • Real estate prices fall but show some stabilization
    • Residential prices plummeted but leveled off in most markets. Some price appreciation at the very low end in growth markets like Phoenix and San Diego.
    • Commercial real estate price continued to fall because rents and occupancy are down and loans are difficult to qualify for.
  • Unemployment rose above 10% (from just 4% in only 2 years).
    • Any decrease in unemployment is due a reduction in the workforce participation rate, not new people actually getting jobs.
  • Credit crunch still in place but has loosened some.
    • The main question is what will happen when the Federal government stops all support of the credit markets (Fannie & Freddie, FHA, commercial paper, FDIC), and many other programs to buy debt.
  • The Federal government has a trillion dollar budget deficient and of course over 10 trillion dollar debt.
  • State governments have deficits and debts and the problem got worse.
  • TBTF – Too Big To Fail – became mainstream language
  • “Privatize the profits and socialize the losses” became apparent to the public
  • Failure to pass sweeping national health care reform
  • Failure to pass sweeping banking regulations

Essentially the US and the world have avoided Financial Armageddon so far. The government, the Fed, and the Treasury deserve credit for the short term fix. However the main problem is still there: there is more debt than can be serviced. Many of the debts just got moved from the private sector to the public sector (i.e. Privatize the profits and socialize the losses).

Most Accurate Predictions from Last Year

“There will be a surplus of government intervention to combat mass unemployment. I expect we get close to 10% unemployment (U3) by year end.”

Right on, December’s unemployment was 10.0% (U3)

“Defaults grow beyond comprehension and models for these debts” (mortgages, credit cards, other loans)

Look at the charts and you’ll see defaults are beyond any models considered accurate just 2 years ago.

“Debt monetization and bail out of the FDIC (which wouldn’t be allowed to fail).”

Had you ever heard of “debt monetization” prior to last year? The Fed has monetized the debt through quantitative easing plus the FDIC was given an unlimited lifeline to additional funds.

Least Accurate Predictions from Last Year

“The markets have been in an uptrend since the market low in November around 748 on the S&P. This appears to be a bounce/retrace of the October market crash. A standard 50% rebound would have the S&P peak between 1000-1100. Naturally I expect this rebound to be short lived and for new lows in 2009 as companies report very low earnings.”

Well, much of this was correct, the market did retrace over 50% to the 1100 range but essentially I predicted a fall back to the market lows which never occurred. Thus, this is definitely a miss.

“Economic growth in China turning negative.”

Totally missed this one. Even if we don’t trust the numbers from the Communist government, the growth rate didn’t go negative.

“Unemployment will peak at 8.5%” under the Obama rescue plan

OK, this wasn’t my prediction (it was President Obama’s), but it just shows how clueless politicians are in general about the economy and perhaps that they are willing to say anything to be politically popular.

Quotes of 2009

“The ego has landed.”

“I had to hold my nose and stop those firms from failing.”

— Ben Bernanke, US Fed Chairman

Also check out: Favorite Videos of 2009.