Fearless Predictions for 2010 (part 2)

CNN today, and like most of the ‘news’ channels this weekend, the focus is on predictions for 2010. And who do they bring on?  A psychic.  How perfect.  That’s about as good as advice you’ll ever find on CNN or any of the other ‘news’ channels when it comes to investing and financial expertise. In any case, it’s time to look forward for 2010, and gaze into the crystal ball I received as a gift a couple of years ago (seriously – in fact it’s one of the coolest gifts I’ve ever received, which was given to me by several students). So let’s fire the crystal ball up and see if I can do as well this year with my predictions as I did in 2009.  I’ll try to keep my comments limited so I don’t drag this post out longer than it needs to be. U.S. & Canadian Economies As a general comment, the two countries will see very different economic patterns.  The U.S. will continue to deal with signficant economic headwinds, and will likely have to continue and extend both the first time homebuyer’s program that is due to expire in April, as well as additional stimulus and bailout programs (disguised as tax breaks and government guarantees).  The U.S. will continue to ramp up its offensive debt loads, which will continue to erode global faith in the strength of the U.S. economy and the U.S. dollar. Canada, on the other hand, will continue its economic recovery and will become one of the leading economies in the G20, helped in part by the continuing recovery and growth of commodities.  Assuming the oil and gas prices continue to gain strength, I expect that Alberta will become the leading province again by the end of 2010, and will lead the country into 2011. Interest Rates People love obsessing over what’s going to happen with interest rates.  The central banks continue to have the same challenge as last year — they want to raise rates to reduce the risk and likelihood of inflation, but they know that if they do, they’ll likely crush any economic recovery.  There’s a lot of talk these days about spiking interest rates and that we’re going to see huge increases in 2010, but I’m projecting that we will see very little, if any, interest rate hikes in 2009, both in the U.S. and in Canada. In the U.S., there’s no doubt the general economic recovery is lethargic, and there are still some significant risks ahead that could cause the U.S. to go back into a recession.  It’s extremely fragile right now, and the U.S. government is doing everything it can to prop up the economy and the consumer.  They absolutely CANNOT afford to raise interest rates, because that will have a very serious impact on the economy, which is highly sensitive to interest rates right now.  Higher rates will reduce consumer borrowing and spending, and slow the economy down even more.  So, my prediction is that the U.S. will see between zero and possibly up to 0.50% of an increase in 2010.  The only reason we’d see an increase is because of the Fed trying to scare Americans that they’re going to jack rates up and to slow down inflation if it starts to rise sometime during the year.  But I’m guessing that won’t happen and we’ll see flat interest rates through the year. In Canada, the economic recovery is well underway, to the extent that we’re seeing a housing recovery unlike anyone would have predicted.  This is leading government leaders and industry experts to suggest we might be seeing the start of another real estate bubble.  The Finance Minister is threatening to raise rates and slow down the housing increases with additional restrictions, but DON’T believe it.  The Canadian government also cannot afford to raise rates significantly in 2010, because doing so will drive the Canadian dollar to the sky, which has its own set of economic consequences in Canada.  For 2010, I expect the Bank of Canada to increase interest rates no more than 0.50% in 2010, but you’ll hear them scream and squawk all year long, trying to ensure Canadians don’t get ‘drunk’ on all the cheap money floating around. Gold A truly odd investment, gold has risen more than triple over the past several years, and now has entrenched itself above $1,000.  Gold is strange, because as an investment it really hasn’t performed well over the long term.  As I always say, you should look at gold as insurance, and not an investment.  Gold is the hedge against inflation (ie: it goes up when inflation goes up), so by investing in gold, what you’re really doing is betting than inflation is going to rise in the future (hence, it’s insurance against massive inflation). We invested in physical gold in mid-2008, because we felt there might be a massive run of inflation with the weakening of the U.S. dollar.  We saw significant weakness, but the overall panic and fear that we saw in late 2008 and early 2009 has largely passed.  Therefore, in my view, the need for significant insurance against inflation has reduced significantly.  That’s not to say we don’t face the prospect of inflation going forward — only that the likelihood of hyper-inflation has gone done quite a bit. The continuing economic challenges in the U.S. will drive demand for gold through 2010, and unless we see a lot more positive economic signs in the U.S. than I expect we will, I believe gold will trade in the $1,000 – $1,400 range throughout 2010.  I expect gold will spike when we see a correction in the stock market, and the widespread belief is that the U.S. is headed into a deeper economic hole — this fear will drive people into gold.  If a series of negative stories come out that create sufficient fear and anxiety, we may see gold reach the $1,600 level — but this is unlikely, unless serious economic problems surface beyond what the market is aware of right now. Oil Since hitting a low of approximately $35 a barrel in early 2009, oil has raced back and has been trading consistently in the $65-75 range for the latter half of 2009.  Going into 2010, inventories appear to be slowing reducing, and global demand (particularly in China and other areas of Asia) appear to be slowly coming back to life.  I believe the days of oil in the $30s and $40s are over, and had we not seen the economic tsunami we did in 2008/2009, oil would have never returned to those levels. Going forward, for 2010 I see oil trading in the $75-100 range overall.  I believe it will dip down into the $60s early in 2010, and by the end of the year, we will have seen oil over $100, likely remaining close to that level when the end of the year comes.   I also expect that the global warming story and momentum will lose some of its steam, because it’s going to become more clear in 2010 that the science behind the global warming theory doesn’t hold as much water as previously thought.  In other words, people are going to start debating the reliability of global warming and carbon emissions, and the energy sector will begin an aggressive campaign to show that it’s not the evil empire that the environmentals want it to be portrayed as. On a related note, my expectation for natural gas is that we’ll see it relatively volatile again this year — trading betweeen $5.00 and $6.75 over the course of 2010.  There will be a major psychological threshold at $7 but if it does break $7, that will create significant optimism and expansion in Alberta once again. The Stock Markets Because of the massive declines suffered in 2008 and early 2009, the stock markets had significant gains in 2009 — the TSX (Canada’s largest stock exchange) had the best year it’s had since 1976.  The problem is, most investors missed the upside, because the decline leading up to it wiped them out, or scared them enough to take their money and run. Incredibly, even after factoring in this recent increase in the market, an investment in the stock market over the last 10 years would have yielded you a return of .. zero.  That’s right.  Overall, stock markets are exactly where they were when we entered this past decade.  Anyone who says ‘buy and hold’ works is an idiot and that’s the proof! In any case, the stock markets have been on a tear around the world in the last few months, and I believe we’re going to see a significant correction, likely in and around the March timeframe.  Expect a 15-20% decline in the stock market this year, and tremendous volatility.  As for where it’s going to finish, I believe we’ll end the year very close to where we enter — so expect the stock market to gyrate up and down over the year, but not to make much progress overall.  The decline I expect we’ll see early in the year will slowly be made back uip over the course of the year, but you’ll be no further ahead a year from now.  Expect the TSX to do better than the Nasdaq and Dow Jones, driven by strong commodity prices. U.S. Real Estate I wish I had better news, but I expect continued problems in the U.S.  The foreclosure story is going to remain, especially since a lot of homeowners will not be able to obtain permanent modifications on their loans, and more people will walk away from their ‘under water houses (where they owe more than it’s worth).  2010 will mark the year when it becomes socially acceptable to default on a mortgage, and I expect that while price declines will slow down by the end of 2010, we’ll continue to see slight decreases throughout the year.  We won’t see a rebound or recovery in U.S. home prices until at least 2011, other than a few specific markets that are going to perform better than most other areas.  That’s not to say you can’t make money in this market — but you really have to know what you’re doing, and pick your markets carefully.  Overall, I expect that we’ll see an additional 5% decline in median home prices, and cities like Las Vegas will still see an additional 10-12% decline in 2010. Canadian Real Estate At the other end of the spectrum is the Canadian real estate market, which rebounded and hit record highs in 2009.  Driven by low interest rates, an economic recovery and increasing consumer optimism, the Canadian real estate market is on fire — to the extent that many people are saying it’s a bubble and is going to suffer another decline. Don’t believe it.  The low interest rates are certainly helping, but the lending standards are STILL very high in Canada — higher than they’ve ever been — and therefore, it’s not like there are millions of Canadians getting in way over their head when buying a home.  I believe 2010 will see the overall Canadian real estate market rise by 4-5%, and in my backyard, Alberta’s market is going to do very well.  Alberta’s recovery has lagged other provinces, primarily because it was one of the last to step out of the growth period of a couple of years ago.  However, I think in 2010 this lag will disappear, and Alberta will be one of the top performers this year. The declines and bottom are behind us in Canada, so if you’re planning to invest in real estate, or even just buy your own home, I’d suggest now is the time, because prices will be higher a year from now. The U.S. + Canadian Dollars With the continuing divergence of the U.S. and Canadian economies, as well as the mess that the U.S. government is creating with its record deficits and continued bailouts, there will be continued pressure on the U.S. dollar in 2010.  In Canada, there will be continued pressures to increase interest rates to slow down the economic growth that I think will really hit mid-2010, but the Bank of Canada will refrain from driving them up.  Expectations of interest rate increase in Canada alone will fuel the loonie, and I believe we’ll see parity occur in the first 60 days of 2010.  I also expect the Canadian dollar will trade near or above the U.S. dollar for most of 2010, and it will likely hit the previous record we saw a couple of years ago of $1.10 (ie: one Canadian $ buys $1.10 of U.S. money).  Ultimately, the U.S. needs its currency to decline, and they’re doing everything out of the “How To Destroy Your Currency” playbook. So there you have it — some of the major trends I believe we’ll see in 2010. What do you think 2010 is going to bring?  Think my predictions are nuts?  Post a comment below and let me know what you think! And whatever happens, I hope that 2010 is a wonderfully abundant and prosperous start of the new decade for you!]]>