A few weeks ago we published the scorecard of our economic forecast and investment themes for 2010.
Now that the 2011 New Years celebrations and hangover clouds have cleared, it’s time to get back to business.
Gentlemen and ladies, adjust your asset allocation, start your performance monitoring software engines and get ready for another volatile year.
Here’s our thinking man’s list of what we believe will be the dominant “20 Investment Themes for 2011:”
- The US Economy Continues to Struggle! Strong Growth Proves Elusive. Policy makers maintain their “kick the can down the road” strategy which they can only hope buys more time to allow the struggling economy to heal and gain traction. As the Federal Reserve printing press continues to work overtime, policy makers continue their dangerous postponement of much needed entitlement reform and ignore nasty global trade imbalances. A tepid cyclical GDP rebound of 2.5% occurs by default…with a weaker first half followed by a stronger second…a reverse of 2010. Lousy growth comes with a heavy multi trillion dollar price tag and continued erosion of the US $’s coveted reserve currency status.
- Stocks Disappoint the Bulls! Risk investors, suffering from chronic “cyber brain sclerosis”, continue to be led around by the nose by the long term is lunch High Frequency Traders. Investors continue to drink the spiked reflation policy Kool-Aid and worship at the “Bernanke Put” altar. After another volatile year characterised as the “Agony and Ecstasy” market where stocks swing 10% on either side of the flat line…the S&P 500 closes up a miserly 8% on the year.
- The Bond Bears are Disappointed… Again! And why not? Core inflation continues to hover near the flat line and will not rear its ugly head again for sometime as the world’s consumer of last resport (that would be US!) continues to delever. The predominant “Triple D” theme of delevering/disinflation/deflation continues to keep interest rates locked in the range where they have resided for the past 10 years. With China et al continuing to export wage deflation pressures and maintaining huge surplus’s …look for the return of the “Bond Conundrum” theme in 2011! The bell weather 10 year Treasury has a trading range between 2.75 to 4.75% and with a bit better growth in the second half ends the year closer to the high side of the range.
- The Superficiality of the “IPad Economy” is Unmasked! After a stronger holiday retail season the thin growth veneer of the gadget buying US consumer fades revealing and re-emphasising the real structural challenges that the economy faces…ie a persistent unemployment rate of 9.5 to 10% and a double dipping real estate market.
- The Country Enters the Third Year of the Third Term of the Bush Administration! This is actually good news as President Obama continues his freshly minted pro business pivot! Hey…we are in the third year of the Presidential cycle and its time to think about re-election. So…it’s pivot time! Look for all kinds of pre-election goodies and handouts to the one sector in the economy that historically gives copious campaign donations…especially to beleaguered presidential incumbents who have suffered from bad policy syndrome! That sector would be the financials. Ignore the nasty rhetoric against the GOP…that’s merely deflection and geared to placating POTUS’s abandoned liberal base…and go buy the banks and brokers as they will be one of the best performing sectors of 2011.
- The Current US Ambassador to China, Jon Huntsman, a former two term GOP governor of Utah…resigns his post to seek the GOP’s nomination for President. The Mandarin speaking Ambassador and successful governor becomes the GOP front runner. Good news for the G2 economy.
- The Tea Party’s Bark Proves Worse Than Its’ Bite! After initial electoral success and big reform promises followed by big individual disappointments from pace setting RINO like MA Senator Scott Brown…political and economic reality sets in at their caucus meetings. Tea Partiers, while keeping the austerity rhetoric volume turned up, recognise (absent the political guts to implement real reform and lacking Senate and WH support) that the only thing separating the economy from the abyss is the Bernanke Put! And as a result Ron Paul’s Fed oversight hearings are terrific political theatre and great for CNBC’s ratings…but not much else.
- The GOP Led Push to Repeal Obamacare Falls Flat! The new GOP Congressional leadership will talk alot about withholding funding in the coming year but most of the law’s impact in 2011 will be via new rules requiring zero funding. The real political battle over healthcare comes in 2012. Regardless…the enormity of this new and extremely expensive entitlement program will begin to weigh on investor’s minds and negatively impact sentiment beginning in 2011. Avoid the drug stocks.
- Absent Global Leadership to Fix Distorted Trade Imbalances, by Default the US $ Maintains Reserve Currency Status. The dollar rallies early in the year and ends it modestly higher.
- Protectionism and Competitive Currency Devaluations Continue to Simmer!….but only in the background and they become less of a concern as the year comes to a close.
- The Eurozone Continues to Falter…No Big Surprise…but the fix will be one as a few of the PIIGS..Italy, Portugal, Ireland?…”temporarily” depart the EU to get their fiscal houses in order. Meanwhile the Eurocrats continue to punt the ball, ignoring the structural deficiencies of the grand EC/EU/ECB experiment and sit back comfortably in Brussels munching on their escargot washed down with some DP! Meanwhile..Rome continues to burn…literally.
- ICELAND…..back in the Spring of 2008, before the winds of economic turmoil hit later that year, we warned on CNBC that Iceland was the canary in the coal mine…an early warning of pending financial doom…it was. Now it has shed the canary status and is now more like a Phoenix rising from the ashes. It, unlike its hapless Euro neighbours, does have control over its economic destiny and fiscal sovereignty and after much austerity and repeated devaluations of the krona…they get their economic house in order and Iceland’s stock market becomes one of the best performing in 2011! Jean-Claude Trichet and the Eurocrats take note!
- South East Asia and Greater China Markets Outperform! Go for the growth! Contrary to the current consensus view that the US equity market will be the place to be and will outperform most global markets in 2011…fund flows will continue to favour those markets whose economies will grow faster than the US…these markets in SE Asia and Greater China will outperform most others. Buy a proxy basket of ETF’s in the region including EWS, EWM, EWH and EWT. And for those willing to add more beta…add Vietnam…VNM.
- Hong Kong’s Cheung Kong Holdings Offers the First Yuan valued IPO!…this is a very big deal on many fronts. Li ka-Shings flagship company begins the monetization process of its PRC land bank by offering a Yuan currency based REIT IPO. By itself the IPO is a big deal but the more significant element is the fact that this is the first Yuan IPO ever…the first of many more to come which continues the long march toward the liberalizing and opening up the Chinese capital account…a major overdue but welcome event!
- China Avoids a Hard Landing…Barely! And like policy makers here, despite the good news described above, the PBOC only succeeds in kicking the reform agenda can down the road and generally Peking policy makers fail to speed up the process and take the much needed steps to liberalize and rebalance their economy toward consumption….more questions emerge about the health of the PRC banks as NPL’s increase.
- China Challenges US Naval Dominance of Important Asian Sea Lanes! …with the launching of their own aircraft carrier (their first) and development of air craft carrier killing missile technology…the Chinese appear to be preparing for challenges to the long disputed and resource rich Spratly and Paracel Islands as well as a final resolution to the Taiwan question. The Chinese are apparently adopting the Teddy Roosevelt diplomatic and military strategy of “walking carefully, but carrying a big stick’!
- Oil Prices Continue to Rise and Moves Above $100…along with other commodities…as the Fed continues to print and exceeds the QE2 $600bil quota. This oil rise of course is self defeating as it only causes more disinflation pressure by choking off the nascent consumer resurgence. It could knock 1% off of alot of very bullish GDP forecasts out there currently.
- The Middle East…after a failed attempt to ally with Iraq..Iran experiences another internal citizen led revolt but this one is more successful in overturning the current regime and ultimately leads to one more democracy in the stormy region.
- Gold Losses its Glitter!…the “chicken little” catalysts for rising gold begin to slowly disappear in the second half of the year.
- The Best Performing Sector in the US in 2011!…the afore mentioned Financials…led by the banks and brokers followed by the asset managers…but wait for the correction in the first half!
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