Byron Wien, Pequot Capital Chief Investment Strategist, publishes an annual Ten Surprises for the year to come. Last year he correctly predicted Obama’s election (over Mitt Romney). Not perfect, but usually has a grain of truth and more than a bit of entertainment.
Thanks to reader Ralph Segall, who provides insight in all things financial.
1. The S&P 500 rises to 1200. In anticipation of a second-half recovery in the U.S., the market improves from a base of investor despondency and hedge/mutual fund withdrawals. The mantra changes from “fortunes have been lost” to “fortunes can still be made.” Higher quality corporate bonds, leveraged loans and mortgages lead the way.
2. Gold rises to $1,200 per ounce. Heavy buying by Middle Eastern investors and a worldwide disenchantment with paper currencies drive the price of precious metals higher.
3. The price of oil returns to $80 per barrel. Production disappointments and rising Asian demand create an unfavorable supply/demand balance. Other commodities also rise, some doubling from their 2008 lows. Natural gas goes to $9 per mcf.
4. Low Treasury interest rates coupled with huge borrowing by the Treasury send the dollar into a serious slide. Overseas investors grow concerned. The yen goes to 75 and the euro to 1.65.
5. The 10-year U.S. Treasury yield climbs to 4%. Later in the year, as the economy shows signs of recovery, economists and investors shift their mood from concern about deflation to worries about inflation, spurred by a weak dollar, rapid growth in money supply and +$1 trillion deficits.
6. China’s growth exceeds 7% and its stock market revives. World leaders credit China’s authoritarian government for its thoughtful stimulus policies and effective execution. The Chinese consumer begins to spend more and save less.
7. Falling tax revenues from the financial sector cause New York State to threaten bankruptcy; other states and municipalities follow. The Federal government is forced to provide substantial assistance.
8. Housing starts reach bottom ahead of schedule in the fall, and house prices stabilize after dropping 15% from year-end 2008 levels. The Obama stimulus program proves effective and a slow growth recovery begins before year-end. Third and fourth quarter real gross domestic product numbers are positive.
9. The savings rate in the United States fails to improve beyond 3%. The concept of thrift seems to have vanished from American culture. Job insecurity and negative growth drive increased savings early in the year, but spending resumes as the economic growth turns positive in the second half, making Christmas 2009 the best ever.
10. Citing concerns about Iraq’s fragile, democratically-elected government and the danger of a Taliban-controlled Afghanistan, Barack Obama slows his plan for troop withdrawal in the former and meaningfully increases U.S. military presence in the latter. In a hawkish speech he states that the threat of terrorism forces the United States to maintain a strong military force in this strategic area.