A diptych showing a rabbit chastising a monkey who has assaulted a toad
2011 is the Chinese Year of the Metal Rabbit, but the Year of the Metal Tiger is not over. The Year of the Metal Tiger was certainly one for the bold, what with the flash crash and the political upheaval that has placed extremely unpredictable characters at the helm. And metals certainly were the most astonishing of all tigers, with gold up almost 30% and silver up 80%. The rare earth miner Molycorp was up almost 300%… in half a year!
My predictions for last year were better hedged than my portfolio, so I underperformed the market. My worst decision for the year was selling SLV after a 94% gain. Had I held, that would have been a 160% gain. It was also definitely not a good a year to employ stop losses. The market bounced around so wildly that stop losses (i.e., sales) were triggered on stocks/options that then quickly recovered. Even if you bought back in before the rise, you paid the taxes. One stop loss was triggered by a lull in trading on a security that some clever person had arranged to put in a buy for at about one-third market value, sort of a mini-flash crash. I am still beating the S&P by about two points per year over a ten year span, but this year certainly chastened me.
The economic predictions for the upcoming year are pretty clear. For ordinary Americans and southern Europeans (and Ireland), it will be rotten. (Roubini says unemployment stays above 9%, growth an anemic 2.7%, inflation a very tame 1.4%, home prices continue to fall)
For corporations, the wealthy, northern Europe, and probably Asia, 2011 will probably be great. Corporations will doubtless engage in mergers and acquisitions to be followed by layoffs and even worse service. But there are still a lot of potential wild cards that could make this less fun a ride for the wealthy and corporations than they imagine.
A lot depends on how serious congressional Republican radicals are. If they refuse to raise the debt ceiling, make major budget cuts, or if they force major states into bankruptcy or radical cuts in services, then it’s Katie bar the door. We could easily end up on the road to a very long Depression. They could just revert to looting the country through reckless tax cuts and rampant corruption, as happened from 2001-5, which would be less damaging in the short-term, but very damaging in the long term. Or there might be stalemate, as the lust for re-election trumps the desire to p—s off liberals, which seems to be the sole guiding principle of Republican policy. By the time that the Year of the Rabbit makes its entrance, a lot of this residual uncertainty will be resolved.
The mortgage revolt will probably be squashed by compliant courts. The Supreme Court is a reliable defender of wealth and can probably be trusted to invent whatever law is necessary to prevent home owners from gaining justice. When it comes to money issues, even the liberals on the court aren’t. The Congress can of course legislate, but that begins to look like ex post facto law, which even the courts are nervous about, since it intrudes on their powers (not to mention, is unconstitutional).
The Chinese say that the Year of the Rabbit “signifies calm, diplomacy, sensitivity and consideration for others.” and Metal signifies “unyieldingness, rigidity, persistence, strength and determination.” If this were interpreted as financial advice (which I decidedly do not give), that equates to “alertly stand pat.”
For what they’re worth, my predictions are as follows:
- US markets have a decent first half and a bad second half. Financials, fixed income, and consumer stocks do the worst and hard assets (but not oil) do the best. Even among the hard assets, the metals have run too far, and should correct. Healthcare companies continue to mint money. By the end of the year, unless the Republicans fall to looting, a second Great Depression looks very possible.
- Europe has a serious scare, including financial panics on the periphery. That may force serious reforms, though whether of purely the impoverish-the-middle-class or the let-countries-float-their-currency variety is unclear. If there are no serious reforms, expect the Eurozone to fragment in the medium-to-long term; a new wave of radicalism, both left and right, could also emerge. The Russian and Germany economies do the best, but there’s enough ugly everywhere to meet any appetite. Bonds and financials lead the way down.
- Latin America and Asia have the best time of it, but even there, it’s a nervous time, with volatility especially high in Asia. Both Brazil and China emerge as clear world leaders as US influence in Asia declines. Japan gets extremely nervous; it’s possible ultranationalism re-emerges as a serious force.
So, there are basically two scenarios. First, if nothing bad happens, then anyone invested in the market makes money, but especially in Asia. The world economy gradually recovers. Bonds fall. Commodities continue to be a good investment.
Or, if a lot of bad things happen, depression and deflation become the big concern. Bonds continue to rise. Most commodities fall, though some hard assets maybe not. Asia gets hurt, especially export-dependent countries.
The usual thing to do is to say, well, it will be a little bit of bad and some good. But I don’t think so. I think that there are enough hidden landmines that if one big one goes off, there will be widespread damage. On the other hand, the landmines have been hidden in order to allow the real economy to grow its way out of depression. So, if no big landmines are triggered, we get into safer and safer territory.
There. I’ve laid my marker, and now it’s time to calmly and diplomatically hop away.