Predictions for 2010

As the year comes to an end, let me list my predictions for 2010.  Note: Anyone who says their predictions are based on modelling is an idiot or a liar.

As was clear from our experience in 2009, politics, connections, favours, and plain old everyday third world corruption play a major part in any economic outcome today.

The “logical” prediction for 2009 would have been the bankruptcy of AIG, the bankruptcy of a number of major US and UK banking institutions, deflation, a continued stockmarket collapse, a spike in long-term interest rates (caused by a decline in demand for T-bonds due to US govt deficits), a collapse in the value of the US dollar and a spike in gold.  Almost none of these happened because of the multiple, trillion dollar interventions of the Fed and the US Treasury.  AIG was saved, US and UK banks received hundreds of billions in bailouts, swapping toxic trash at the discount window 100 cents in the dollar, the stockmarket was artificially supported, the long end of the bond market was (allegedly) supported by the Fed, and gold was shorted relentlessly by the primary dealers.

So predictions for 2010 are really political predictions and these cannot be taken very seriously.  Nevertheless, it’s fun to speculate, so here goes:

1.  A CRE and housing bust in Oz in the second half of the year due to (a) wholesale funding costs jumping for Cth Bank and Westpac in particular and a fight for deposits (b) APRA liquidity requirements kicking in (c) high $A killing exports and local manufacturing, combined with a generally slowing economy due to a fall in Asian growth and a crisis in Japan (d) pullback of the FHBG and other handouts from Rudd Bank (e) pull back on the govt backing of Oz banks, exposing them to “market” rates for wholesale funds especially for LT debt (f) housing prices already being ridiculously too high, as Steve Keen has pointed out many times in the last 3 years.  It should be a bloodbath in CRE in 2010. 

We’ll see whether the govt and the desperate Oz banks can hold back the receding tide.  Unlisted funds with illiquid assets were massacred in 2009 by the govt’s bizarre, indiscriminate bank guarantee (thereby predictably and savagely killing off the supply of liquidity for unlisted CRE trusts).  This should mean that the marginal players in the finance industry have simply had their executions stayed, not commuted. Will this now infect the whole CRE market, as supply continues to overwhelm declining demand due to liquidity tightening for the dumb Oz retailers of debt?  Bank guarantees should have engendered moral hazard in the marginal lenders.  This should have made the problem worse.  This problem may be deferred until 2011, but something tells me this Ponzi-scheme can’t be sustained throughout 2010.  We’ll see.

2. S&P 500 down for the year, with a “crisis” in early and/or mid 2010 due to (a) the fallout from the bubble being delayed this year – meaning that the bust will be even bigger and flow into 2010 (b) a significant portion of consumers (70% of the US economy) being bankrupted in unsustainable debt (c) debt levels threatening the long-end of the US bond market (d) unemployment continuing towards 15% in official terms and 25% in unofficial terms (e) a possible US dollar/bond crisis, with an unprecedented volume of bonds being needed to be flushed into the market (f) the banks being supported, but the bulk of US industry being left to die.  The S&P 500 includes much more than just Goldman Sachs (which will continue to perform well, given they print their own profits).

3. Gold up – for all the reasons in (2) above, plus the fact that the Fed will continue to pour e-dollars out into the market in the trillions, without any effect (see Japan over the last 15 years).  So gold will be the only place for the e-dollars to go.

4.  Silver to go up more than gold – for all the reasons in (3) above, plus the fact that silver is a tighter market with the massive short positions in silver finally having to be unwound on reality.

5.  Oil higher.  Inflation’s got to go somewhere.   And Peak Oil has arrived.

6.  Food and food inputs higher.  Possibly significantly higher.

7.  Fed Funds Rate probably around where it is now.  The big story will be everything BUT interest rates.  Interest rates will stay low (to save the banks) but chaos and volatility with be a tempest around stable, low rates.  The debt load is massive and people will be killing themselves to extract themselves from this killer debt-load by repeatedly trying – and failing – to spark a new bubble in the stockmarket.  Then in desperation they’ll spark a bubble in oil, food, gold and silver.  Currency volatility will be unprecedented.  There is the real prospect of a US dollar meltdown.  If so, gold will soar on its angelic wings.

The overall theme for 2010 will be continued unprecedented volatility.  Price swings, especially in the stockmarket, will be violent as liquidity sporadically dries up due to the unsustainable debt loads and banks desperately juggling debtors to stave off insolvency – both in their clients and themselves.

The Makian Distribution predicts increased volatility with increased debt.  We have increased debt.  So, according to the theory we must have increased volatility.