Karl Denningers Economic predictions from Market ticker
Source: http://market-ticker.org/archives/1793-Where-We-Are,-Where-Were-Heading-2010.html ------------
So with all this said, here's what I believe we're looking at for 2010... ready or not, here it comes!
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No, this is not a new Bull Market; the market will be lower on December 31st than it is on January 4th, quite possibly by a a hell of a lot. We may not break the March 2009 lows - but I also don't believe for a second we're going back to 1576 on the SPX. Not without the leverage - and we can't get the leverage. I believe we will end the year down from where we begin on January 1st. McHugh calls it "Wave 3 Down"; I call it "aw crap." Either way "irrational exuberance" is back for now but cash flow always wins in the end. I'll be a "generational buyer" of stocks when dividend yields are over 5% and P/Es are in single digits. We didn't get there last year and yet those are the historical metrics that mark true Bear Market bottoms. With that said, I would not be surprised if we hit 1220 on the SPX some time earlier in the year - but it is by no means a lock, contrary to what virtually everyone in the "pundit community" expects (most of which are looking for 1350 or more!)
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The Long end of the Bond Curve is going to move higher on yields. We have completed a long-term (multi-year) inverted Head and Shoulders pattern. The probability of the targets set by that pattern being achieved is extremely high. The target? 6.9% on the 30 year "long bond" - a rate that puts 30 year mortgage money at least to 7%. This prediction assumes that we do not get a panic-style sell-off in the Stock Market - if we do get one (and I think it's 50/50 on that) then I withdraw this prediction.
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House prices will fall another ~20% - whether as a consequence of the rate back-up or utter destruction in the markets generally. Sorry folks, the housing mess is not over. The math on this is simple; a $200,000 principal loan at 4.75% for 30 years produces a P&I of $1039.18. That same payment with a rate of 7% produces a principal financed of $157,107.95. If, for whatever reason (engineered or not) the stock market collapses then you get your housing price crash anyway.
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Banks will "give up" on holding their real estate as rates start to backup and will dump their foreclosure inventories. Why? Because the regulators may let them to play games with alleged "values" when people can get mortgages at 4%, but at 7% there's just no way the numbers work and the fraud becomes too difficult to countenance. There are rumors of major banks dumping hundreds of thousands of homes on the market next year - this is likely the backstory on "why."
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Credit will not ease for "ordinary people." All the exhortations about "lending more" have been going on now for more than two years yet have gone nowhere. The jawboning will continue but the results will not come, simply because there is no more good collateral left against which to lend. This will in turn lead to.
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A massive second wave of small business bankruptcies will sweep the nation. We've seen the first part of it. The second will be worse - far worse. With long rates backing up and the 30% credit card sweeping the land those who have relied on credit to operate in the small and mid-sized business world will get relentlessly squeezed. Many will fall.
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Unemployment will appear to be stabilizing - for a while - but that will prove illusory. We finish 2010 over 10% - no material improvement. If things get real bad we might see 12-14%. Yes, U-3. I won't stick my neck out that far as a prediction but I believe ending the year at or above 10% is a lock.
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The "revolting" call for last year was early - but not wrong. There will be at least one major coup or other violent overthrow of a government in 2010 tied to economic instability - either directly or via a war it spawns.
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The states will go to the government well for handouts, they will probably get them, but it won't matter. They'll get some assistance at least, but in the grand scheme of things it doesn't make any difference in a world where long rates are rising precipitously. California and Arizona are in the biggest trouble, with Michigan, New Jersey and New York right behind. The public employee unions will have a kitten but again, it won't matter - that which isn't there isn't there, whether you want it to be or not.
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A "double dip" will be recognized by the end of the year. Between taxes and rising rates - or an intentionally-detonated stock market to stop the long end of the bond curve going bananas - you can bet on it.
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China will lose control of their property and plant bubble - with horrible consequences. They're good at the game, but that which can't go on forever won't. I bet it blows up before the end of the year. If so, Australia's property market better watch out - they're levitating on the strength of China's commodity demand and pricing there is California-style.
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The Canadian Real Estate Market will show signs of cracking - especially in places like Vancouver. They may have another year before it all goes to hell, but the time approaches. Beware.
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The Fed's games will "leak" and credibility will be shaken severely. There's too much pressure. Something will give, somewhere. Washington DC is too hostile a place for the "hold hands and head for the cliff together" game to work with an election coming up......
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The Democrats lose big in the House. Time is probably too short for a viable third party to emerge for the midterm elections, and I don't expect the Democrats to lose House control. However, I do expect them to lose their filibuster-proof majority in the Senate, and to lose enough seats in The House to trash their "steamroller" approach to legislation. This might be bullish for the markets late in the year and into 2011 - maybe (divided government is generally good for the markets.)
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Congress continues to try to spend its way out of the recession - and runs head on into rising rates. Watch the TBAC reports. Those will be your "tell" along with the TIC data.
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One or more of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) either defaults technically or is forced into austerity by the ECB. Further, Eastern Europe becomes dangerous destabilized. There is a real possibility of outright hostilities in that part of the world next year. Let's hope not. The ECB has a nasty problem on their hands; I have said for quite some time that the Euro is likely to trade at PAR down the road. This year is probably not the year for it, but the cracks in the dam that ultimately could destroy the European Union should become very apparent in 2010.
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Contrary to virtually EVERY "investment pundit" on the street today return OF capital will once again assert itself as the primary consideration. Sentiment indicators as of 12/31, along with 52-week highs, all are at levels that have been associated with tops on a historical basis. Treasury has to issue $2.5 trillion this year, while we all cheered when they issued $1.5 trillion last year - and got away with it. China has housing trading at 80x average incomes, Australia and parts of Canada have housing markets at 10x or more average incomes and the banksters and "investors" alike appear to have learned nothing, with "reaching for yield" coming back in force. Ponzi ponzi ponzi! Add to this geopolitical event risk and things get interesting. That which can't continue forever won't - we merely argue over timing, not outcome. I'll lay the marker on one or more of these timers reaching zero in 2010.
Note: Subject to minor edits/revisions and perhaps an addition or two until the end of January 1st, as usual.
wars will become a reality.
