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Thread: 10 Economic & Investment Themes for 2011 - Mike Shedlock

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    Default 10 Economic & Investment Themes for 2011 - Mike Shedlock

    from

    (snip)

    Ten Economic and Investment Themes for 2011


    1. US Municipal Bankruptcies Head to Center Stage

    Look for Detroit and at least one other city in Michigan to go bankrupt. Also look for increasing discussions regarding bankruptcy from Los Angeles, Miami, Oakland, Houston, and San Diego. Those cities are definitely bankrupt, they just have not admitted it yet. The first major city to go bankrupt will cause a huge stir in the municipal bond market. Best to avoid Munis completely.

    2. Sovereign Debt Crisis Hits Europe

    The ECB and EU are hoping things return to normal and they can deal with things more calmly in 2013. The markets will not wait. Expect a new Parliament in Ireland to want to renegotiate whatever horrendous deal Prime Minister Brian Cowen agrees to. Portugal and Spain will need bailouts. The surprise play in Europe will be Italy, a country not on anyone's front burner. Italy will come under intense credit market pressure, and when it does the whole Eurozone comes unglued. Europe's banks are insolvent and ECB president Jean-Claude Trichet will have a choice, haircuts or massive printing.

    3. Cutbacks in US Cities and States

    With Republican governors holding a majority of governorships, with Republicans holding a majority in the House, and with a far more conservative Senate, there is going to be little enthusiasm for increasing aid to states. There will be some aid to states of course, but nowhere near as much as needed to prevent cutbacks. Expect to see a huge number of layoffs and/or cutbacks in services. Cutbacks in cities and states will be a good thing, but that will counteract other gains in employment. The unemployment rate will stay stubbornly high.

    4. Public Unions Under Intense Attack

    Public unions will face increasing hostility, not only in the US but also the Eurozone and UK. Look for Congress to consider legislation to kill collective bargaining. If it passes, the president would veto it. The problem however will not go away. Cities and states in distress will increasingly outsource every contract they can.

    5. China Overheats, Multiple Rate Hikes Coming

    China, everyone's favorite promised land, has a hard landing. China will grow at perhaps 5-6% but that is nowhere near as much as China wants, or the world expects. Tightening in China will crack its property bubble and more importantly pressure commodities. The longer China holds off in tightening, the harder the landing.

    6. Property Bubble Bursts Wide Open in Australia and Canada

    Australia, having largely avoided the global recession runs out of luck this time around. Look for the Australian economy to fall into outright recession. Look for Canada to slow dramatically as its property bubble pops. The US property bubble is much further progressed, by years, than Australia, Canada, and China. This matters immensely.

    7. US Avoids Double Dip

    The tax cut extensions and the payroll tax decrease will keep the US out of recession. However, growth estimates are still too high. The tax cut extensions do nothing more than maintain the status quo while the payroll tax deduction is just for a year. Most will use it to pay down bills. Look for GDP at 2.0-2.5%. That is the stall rate.

    8. Year That Something Matters

    For the global equity markets, this will be the year that something matters. Certainly nothing mattered in 2010, and optimism for equities is at extreme levels. I have no targets other than a suggestion this is an extremely poor time to invest in darn near anything.

    9. Decoupling in Reverse

    I do not think any countries decouple in 2011, including China. However, on a relative basis, the US could. Europe is a basket case, China is overheating, Australia is headed for recession, the UK is going nowhere, and 2.0-2.5% growth in the US just might look damn good compared to anything else. Bear in mind far more than 2.0-2.5% US growth is priced in, but on a relative basis that is likely to smash the performance of the Eurozone, Australia, and Canada. China may grow 5.0-6.0% but with 10% priced in, overweight China, the emerging markets and the commodity producing countries is a serious mistake. Actually, equities are a mistake in general and so are commodities. Finally, falling commodity prices would be US dollar supportive and supportive of a decreasing US trade deficit as well, especially if grain prices stay high while oil sinks. Should grains stay firm while other commodities sink, it would help boost US GDP.

    10. US Dollar to Strengthen

    Look for the US dollar to strengthen because of the net effect of all the above issues.

    Relative Performance Examples

    On a relative but not absolute basis I like the US. On a currency adjusted basis I especially like Japan. Here is a hypothetical example: Should foreign equities drop 20% and the US dollar strengthen 10% the loss to US investors would be 30%. Should Foreign investors buy US equities and face a loss of 20% and a 10% rise in the dollar, they would see a 10% loss. US investors of course would see the full 20% loss. Japan looks attractive in nominal terms but strengthening of the dollar compared to the Yen could negate some if not all of that. Equities in general, with the possible exception of Japan do not look attractive."(snip)


    with many thanks to MiSh, who IMHO has a very good 'nose' for future trends, as well as for separating hype from what's truly important.

    I'm particularly intrigued by MiSh's opinion that the US dollar will actually gain value against other currencies next year. I concede this is possible based on the 'turd pile that stinks the least' theory ... which is how I interpret the 'relative but not absolute basis' comment !

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    Default Re: 10 Economic & Investment Themes for 2011 - Mike Shedlock

    With a new tidal wave of forclosures ( robo signed and ARM resets), increasing national debt, inflation will start to rise (mortgage rates have already started heading up this week), and fed printing more money ..... I find out hard to believe the dollar will end up the lesser of all evils in 2011.
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: 10 Economic & Investment Themes for 2011 - Mike Shedlock

    ^^^ yup, I was thinking along similar lines based on QE2, rising US dollar denominated commodity prices, etc. Either MiSh is reading a whole lot of positives into the 'Bust Tax Cut Extension', or Europe, China and developing countries are headed for a TON of trouble relative to the US.

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    Default Re: 10 Economic & Investment Themes for 2011 - Mike Shedlock

    Yes but one thing it seems he hasn't factored in is the Federal Reserves reponse to the rest of the world. If the Fed continues to try to prop up Europe and other countries as they have, even if we have a better year then most, we still end up behind the bigger bullet.
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: 10 Economic & Investment Themes for 2011 - Mike Shedlock

    ^^^ well, that's why a fair portion of my assets will remain in Swiss Francs !!!

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