Seven for Eleven*: A set of macro thoughts for the year 2011
Two major themes play out in 2011:
1) Volatility – Due to new price structures and a lack of certainty markets routinely find 2% ranges. This is already happening in Bonds and Equities tend to follow.
2) The emergence of a permanent low-growth developed world – Due to recognition of extreme debt levels and unsustainable spending in both public and private realms.
1) Global Equities
Global Equity markets trade in a 20% range and finish up 4% for the year. Question is how many times do we go up and down? We believe that markets will look like a large sine wave. An early January extension of the year-end rally to be followed by the further emergence of trouble and confusion in Europe will, as it did in 2010, be the first leg down in global equity markets that are currently priced for perfection.
Global central banks will, once again, step into the lurch and bail out the private sector in the all-too-familiar storyline of good money after bad. We believe markets will test central banks later in the year as it becomes clear that the world is not returning to pre-Lehman growth levels (mostly due to labour cost issues).
The world will recognise the emergence of developed economies that show signs of Stagflation, Inflation and Deflation all at the same time. This poses serious issues for market participants as well as policy makers in terms of how to invest, position, and react throughout the year to the myriad of countervailing forces that will emerge. For instance – commodity price inflation is clear but it’s not being driven by wages… so if you raise interest rates does that really tamp down demand? or does it kill the
consumer? Inquiring minds want to know!
3) Geopolitical / Energy
Russia faces renewed internal strife and lashes out at its neighbours in an effort to re-assert itself in the global power game, post China, moderating a successful conclusion to the 6 party talks. The perfect storm of Vladimir Putin eyeing his way back into power and Russia’s continued irrelevance (outside the energy supply to Western Europe) will combine to present the world with a more aggressive and unwelcome Russian assertiveness in the world arena.
These moves will end up unfolding as hurdles for the US and Europe recovery stories as Russia faces both East and West and looks to make trouble in both regions. Russia’s malfeasance puts upward pressure on the Energy complex, from Natural Gas to Crude. We see $125 oil but not $150.
4) US Debt
US Debt gets a bid in the middle of 2011 pushing rates back to 2% on the US 10 Year. This is followed by a Boycotted or Failed Auction in US late in 2011. Fixed income will flummox investors in 2011 as markets will try to anticipate a rate hike from the US Federal Reserve. We hope the Fed has bee doing their flexibility exercises as they will certainly need them in the coming year. If there is any hope of resuscitating the housing market they will need to keep rates artificially low for a longer period of time.
We believe that publicly traded markets are running out of patience with the Zero Interest Rate Policy and that ultimately the “don’t fight the Fed” mantra turns into a fisticuffs with hedge funds and banks a-like joining in… a great big thank you for saving the financial system.
5) Emerging Markets
Emerging Market bonds and stocks have an awful 2011 as “hot money” rushes to “stability” in Canada and Australia. This has the further effect of raising these two currencies to new highs along with the balance of the BRIC countries.
Commodity markets repeat 2008 – Up and then down…Global liquidity and supply constraints combine to form a perfect storm in the first half of 2011. Tight supplies from Copper to Corn and Sugar to Soybeans will see prices skyrocket ultimately throttling demand and tamping down on growth.
By the middle of 2011 Toto will pull back the curtain on China’s “Wizard” to reveal much slower growth and much weaker demand than anticipated. This sends commodity prices plummeting over the course of the second half of 2011.
Global GDP surprises to the down side with massive 2011 second half slump. Again, interest rate hikes in Emerging Markets and lack of final demand in developed world combines for deadly one two punch. Global GDP currently close to 4% will be revised down to 3% with the developed economies barely hitting 2% and the Emerging economies slowing to a combined 5.8%
Hold on to your hats 2011 is going to be wild.
*The Seven for Eleven name is borrowed with permission from Jay Pelosky, former head
of Global Asset allocation at Morgan Stanley now a private investor.
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