Welcome to 2010! It’s the first day of the year (and the decade), so it’s time for me to continue my tradition of putting my predictions out there for the world to see. I’ve been doing this for a few years now, and it’s my chance to share some of the economic and financial insight that I work hard to accumulate over the year. Exactly a year ago, the world was in complete tumoil and chaos, with the economic decline at full panic. We hadn’t seen the bottom of the stock market crash yet, and it was clear that 2009 was going to be a turbulent and painful year. Having said that, my predictions for what would come in 2009 turned out to be pretty accurate. Below are my predictions from a year ago, along with some hindsight that I’m able to add today. (my original comments are in burgundy — and if you want to see the original post I made last year, you can see it here.)
In what I think is going to be a no-brainer, I’m convinced that the U.S. dollar is going to see signficant weakness in 2009. This will result in other currencies gaining strength against it (including the Canadian $ which I anticipate we’ll see hit par in the next 12-18 months), as well as commodities that are priced in U.S. dollars.
Check. In 2009, the Canadian dollar strengthened by 16% against the U.S. dollar, about what I had expected. The overall trend continues to be towards parity, and we almost saw that point reached in 2009. I also predicted that gold would rise again over $1,000 and that if it did, it would likely remain above $1,000 going forward. That seems to be holding as well, with gold having hit almost $1,200 in 2009, and ending the year right around $1,100.Big picture, I think the U.S. economy is in for more pain in 2009, and the fears of deflation are unfounded. While there may be very temporary signs of deflation, the problem facing the U.S. next year will be the risk of soaring inflation. The new Obama administration and the U.S. Fed will continue on the path of massive ‘stimulus’ and bailouts, and the result will be the destruction of the U.S. dollar (and inflation as a result).
Check. Deflation hasn’t been an issue, and in fact inflation continues to rise — even though it has largely been hidden by many of the incredibly foolish things the U.S. government is doing right now. The massive stimulus plans continue, and today, the government is considering a third round of bailout money to go to GM. It’s insane, but it all leads to one place – destruction of the U.S. dollar, as I outlined last year. However, that destruction has only begun.2009 will bring the collapse of more major corporations, including Chrylser and likely GM. I think we’ll also see some large companies like Nortel fold up shop, unable to compete with the crushing debt on their books. I also expect that some of the firms that have been bailed out, including AIG, will end up collapsing anyway.
Check. While I don’t like to be right about these kinds of things, because it affects thousands and thousands of people, the writing was on the wall — and it came to be. Chrysler and GM did collapse, and it was only through massive injections of capital from the government and a ridiculous bailout disguised as a tax break that they avoided complete extinction. However, I think the revival of these 2 dinosaurs is temporary, and eventually they’ll be back in the same place. Nortel officially went bankrupt and is gone.Fannie Mae and Freddie Mac will likely take a different form by the end of next year as well, either both gone altogether, or possibly merged into a new, brilliant home financing entity created by the new administration, intent on putting it’s stamp on the mess. Many retailers are going to struggle to survive, and consumer spending plummets.
Check. Consumer spending is really the story here, as that’s the underpinning of the U.S. economy (with about 70% of the economy based on the consumer. With consumers shutting down their spending, we’ve seen massive pain in the retail sector, with many major retailers going into protection or bankruptcy. As for Fannie Mae and Freddie Mac, they’ve been allowed to continue existing, but only with massive loans from the government. Don’t count on this remaining for much longer.One of the core problems causing the continuing economic challenges will be the significantly higher unemployment rates that will rise throughout 2009.
Check. If you saw the other signs coming as I did, then predicting higher unemployment wasn’t a difficult call. However, it’s worth pointing out — and reminding you — that I made these predictions a YEAR ago, so while a lot of these look pretty obvious today, I got a number of nasty emails last year, saying I was crazy and was completely out of touch.Oil has been trading below its rational level for some time, caused in large degree by the massive unwinding of hedge fund and institutional positions. While global demand has declined, the world relies and runs on oil, and it’s a matter of time before the fundamentals start to take hold again. I believe oil will trade up into the $70s in the 1st half of 2009, and remain there and above, possibly getting into the triple digits by the end of the year. This would be from both the currency impact of a lower U.S. dollar, as well as demand beginning to return slowly around the world.
Check. This was the one I was least confident about, because there are so many factors that go into the price of oil, this was the one I thought was the most difficult to predict. However, looking back, I did pretty good on this one! Overall, through 2009, the price of oil gyrated in the $65-$80 range, and it finished 2009 at $79.30. As I said last year, most of the rise was attributed to the weaker U.S. dollar, but we’re also starting to see growing belief that a global economic recovery will contiune to take shape in 2010, driving the demand for oil higher.While the central banks will be tempted to raise interest rates to try and contain inflation, they’ll have no choice but to keep interest rates low so they don’t destroy what economic activity is left. I expect the U.S. to retain its rates at the current “zero to quarter point” range, while Canada will likely leave things as they are now as well throughout 2009.
Check. While a lot of people were predicting massively increasing rates in 2009, I was convinced that the central banks would rather see the inflation risk and keep rates low. Raising them simply wasn’t a viable option, and I think this situation remains today and into 2010. Neither the U.S. nor Canada raised their rates at all during 2009, as I expected.The US real estate market is going to continue to slide into 2009, but the year-over-year declines will start to slow down after the spring. By and large, the best news that most markets will get is that prices aren’t dropping any more, but an actual recovery in terms of prices rising is well off into the future for most markets.
Check. The double digit drops in U.S. home prices started to slow down midway through 2009, but now we’re just looking at numbers that are just “less bad”. Price increases are still off in the distances as I predicted, and the median home price is still dropping around 4% year over year at the end of 2009.In Canada, prices will remain soft, flat for the most part. Some areas will see larger decreases than others. In particular, I expect Ontario to struggle with the problems in the manufacturing industry (caused both by lower consumption in the U.S., higher costs for exporters, and a languishing auto sector. I believe we’ve seen most of the declines in Alberta, and 2009 will be primarily flat.
Check. Overall, things unrolled as I expected, with one exception – Toronto’s housing market has definitely more dynamic that I had expected last year. I anticipated the manufacturing downturn would hurt Ontario overall more than it has. There’s still a lot of pain in Ontario and the government isn’t doing anything to improve that, but it hasn’t impacted real estate as much as I thought it might. The ultra-low interest rates have been one reason for this, and the Canadian economy is really turning the corner much faster than the U.S. This is giving Canadian consumers much more confidence, meaning they’re buying houses and optimistic about the future. In Alberta, we saw prices bounce back and wipe out some of the previous declines, resulting in a flat overall year as I expected.I believe from a social perspective, we’re going to see a significant rise in anger and resentment against the financial industry, and my hope is that more people choose to take control of their investment decisions and learn how to make better decisions.
Thankfully, this is turning out to be true. I’m seeing a LOT of new people stumble across my blog and our programs, looking for more guidance and help in taking control of their finances. We saw a number of punitive taxes and penalties imposed on financial companies that were paying out huge bonuses to their executives, and while I don’t agree with many of these moves, the fact is that the public outrage boiled over in 2009. I can only hope that this carries into 2010, and that people finally realize that the financial industry is NOT geared to help them build wealth, but to deliver huge profits to shareholders.Again, let me remind you that we’re currently in a period of significantly little visibility, but I think the major theme this year is going to be watching the U.S. dollar. Obviously, if the decline I anticipate does not come, that will have fundamental impact on many of the critical economic trends for the year.
But given all the planets lining up as they are against the U.S. dollar, I’m making my personal investments decisions on this basis, and I’ll check in with you a year from now to see how my expectations turned out!
And here we are, a year later — and this happened much as I expected. In fact, the U.S. dollar is one of the most talked-about stories on CNBC and all the business channels these days. Most economists recognize that the trillions of dollars of stimulus that the U.S. government has undertaken (and the resulting record deficits that are going to continue for many years to come) can lead to only one place — massive inflation. It’s not a matter of if, but a matter of when. I have to admit, I’m mildly impressed myself at these predictions, given how little visibility there was when I made them a year ago! Ok, enough self-congratulations. Let’s talk about what really matters — what does 2010 have in store for us? I’ll tackle my 2010 predictions in my next post, which you can look out for tomorrow! Until then, enjoy your New Year and New Decade!]]>