What to expect in the first half of 2011

[TPS]

wildly optimistic GDP unless inflation is not counted.

 

My predictions for the the first half of 2011

1) People will finally start to understand that they have been robbed and that neither Bush or Obama stopped a financial crisis they merely postponed it and at the same time transfered huge amounts of money from Mainstreet to Wallstreet the bailout was a tiny part of the robbery, Fed action through buying bad assets at full value, near zero credit to bond arbitrage , and QE transfered much more wealth. The next wealth transfer will be from the upcoming stock bubble and the carry trade. Oh and don't feel picked on, they are trying to rob the whole world not just Joe working slob American.

 

2) People will be shocked by the combination of high inflation and low interest return- money will be moved from bonds into stocks and most will be crushed when the bubble bursts

get in before mid January at the latest and out before late March - the in the know money has been in for 9 weeks already.

 

not an investment guy but depending on how much you got I'd say invest in lowering your energy usage if you can get off grid get off grid, buy physical silver, start exchanging US currency for Canadian currency and buy farm land.

This sounds familiar....

 

I went "all-in" a couple months ago, but it's because of what I saw wrt the $s impact on exports (My portfolio is mainly in EM, then small cap, global resources, and real return--with magox's buddies @pimco... ) I didn't think of it as "smart money" though.

 

As for a Canadian account, I started one 5 years ago because I expected a long term decline in the $ as a consequence of its slow decline as international reserve currency.

 

I am taking your last suggestion, my wife and I are looking at a nice piece of land near Aleghany near a lake...however, my reasons are a bit different.

Edited November 10, 2010 by TPS

[Peace]

I am taking your last suggestion, my wife and I are looking at a nice piece of land near Aleghany near a lake...however, my reasons are a bit different.

 

You mean you're not buying that land to build a bunker stocked with spam and silver bullets (dual use as currency!.

 

Anybody here insulted by the term quantitative easing? I hope some savvy Tea Party types trumpet QE for the next two years for what it really is. That could and should piss people off.

[TPS]

You mean you're not buying that land to build a bunker stocked with spam and silver bullets (dual use as currency!.

 

Anybody here insulted by the term quantitative easing? I hope some savvy Tea Party types trumpet QE for the next two years for what it really is. That could and should piss people off.

Ok, I didn't want to do this, but here's my take on QE2. I owe credit to PPP (currently magox in particular), as the discussions here help flesh out the ideas. I seem to attract some wackos too....

QE2

[Magox]

Ok, I didn't want to do this, but here's my take on QE2. I owe credit to PPP (currently magox in particular), as the discussions here help flesh out the ideas. I seem to attract some wackos too....

QE2

I saved your blog, and it was a good read.

 

QE is causing investors to move away from longer-dated bonds. That money is simply being partially replaced by Helicopter Ben, but the outflows are outpacing the inflows as evidenced in the rising 30 year rates. Which is why I said a couple weeks ago on this site that one of my core holdings right now is TBT. Check out it's performance since I made the call....

 

Money will look for places to park. A lot of it will go to stocks, commodities, other currencies, EM bonds and corporate bonds, specially those companies that have strong balance sheets. If you are a US treasury bond investor and now the Fed is telling you that they will boost inflation, then you may decide to look into other bonds such as corporate bonds that offer more attractive returns. Look at this.

 

Nov. 5 (Bloomberg) -- Corporate bond sales surged to $15.9 billion, the busiest day in almost two months, as the Federal Reserve’s move to stimulate the economy ignited a rush of issuers tapping credit markets at record-low interest rates.

 

Coca-Cola Co., the world’s largest soft-drink maker, raised $4.5 billion in its biggest offering, according to data compiled by Bloomberg. The securities include $1.25 billion of three-year notes at a coupon of 0.75 percent, tying the Atlanta-based company with Wal-Mart Stores Inc. for the lowest rate for that maturity.

 

Dow Chemical Co. and Harvard University also took advantage of investment-grade borrowing costs at unprecedented lows after an election divided Congress and the Fed announced a second round of quantitative easing, a plan to buy $600 billion of Treasuries in an effort to slash unemployment and avert deflation. Companies are competing to issue at the cheapest rates, said Didi Weinblatt of USAA Investment Management.

 

“If I were a corporate treasurer, I’d be issuing everything I need in the next ‘God knows how many years,’” said Weinblatt, vice president of mutual fund portfolios, who helps oversee about $45 billion at USAA in San Antonio. “Companies may think rates are going to get even lower.”

 

It's causing corporate bonds yields to go down, this will be stimulative, corporations are able to tap into cheap money and they will put that money to work somewhere. Whether it's through share buybacks, M&A, expansion projects, hiring, buying new equipment, increased dividends or other investment purposes. So the QE effect isn't just about lowering mortgage rates, or the "Wealth Effect" of stocks, or getting commercial banks to lend more, but it is also having an effect on the corporate bond markets.

 

My point all along TPS is that there are many more avenues of how money printing can have an inflationary impact, it isn't just about bank lending. When you print more money, that money pushes money out of other areas and goes into other areas.

 

So in reality, it is as simple as saying that if you have more dollars out there chasing after the same amount of products, it is only rational to believe that the value of those products will most likely increase. Of course it is more technical and complicated than that (which I believe is the part that drives you crazy), but I think you see that my explanations of this occurence is detailed and more technical in nature. But to put it in simplistic terms, if you increase the supply of money on a sustained basis, the value of most other assets will increase.

Edited November 10, 2010 by Magox

[TPS]

My point all along TPS is that there are many more avenues of how money printing can have an inflationary impact, it isn't just about bank lending. When you print more money, that money pushes money out of other areas and goes into other areas.

 

So in reality, it is as simple as saying that if you have more dollars out there chasing after the same amount of products, it is only rational to believe that the value of those products will most likely increase. Of course it is more technical and complicated than that (which I believe is the part that drives you crazy), but I think you see that my explanations of this occurence is detailed and more technical in nature. But to put it in simplistic terms, if you increase the supply of money on a sustained basis, the value of most other assets will increase.

And my point all along: most of QE1 has not impacted the supply of money--the monetary base is higher though because of bank reserves. I posted a link to the fed's data on excess reserves--almost $1 trillion. QE2 is a different animal, as stated in my piece. By the way, you seem to think that commodities don't influence the CPI. They do, via changing producer prices, which are inputs into consumer prices. The Fed also looks at the PPI.

 

I agree with your last point completely, as long as you mean M1, M2, or some broader measure of credit. The monetary base (bank reserves) can increase on a sustainable basis if banks choose not to lend. And, bank reserves can be withdrawn from they system when the fed wants to by selling treasuries.

[Magox]

And my point all along: most of QE1 has not impacted the supply of money--the monetary base is higher though because of bank reserves. I posted a link to the fed's data on excess reserves--almost $1 trillion. QE2 is a different animal, as stated in my piece. By the way, you seem to think that commodities don't influence the CPI. They do, via changing producer prices, which are inputs into consumer prices. The Fed also looks at the PPI.

 

I agree with your last point completely, as long as you mean M1, M2, or some broader measure of credit. The monetary base (bank reserves) can increase on a sustainable basis if banks choose not to lend. And, bank reserves can be withdrawn from they system when the fed wants to by selling treasuries.

To your first point, I do believe Commodities have an impact on the CPI, but only when the costs are passed down to the consumer, and you and I both know that this can take some time. But once it sticks, the effect on inflation is quite insidious. Bernanke is basically banking on companies not passing down the costs on consumers because of the slack in the economy. It's quite obvious that his mindset is one of an academic as opposed to a business owner. If he were to step out of his world of academia and put on his business hat (which he doesn't own) he would realize that at some point the higher input costs for corporations will end up squeezing margins, which of course has a negative effect on future hiring.

 

I am bullish over the next 6 months or so (maybe a little shorter or longer time period), but there will be a tipping point for both consumers and corporations. Even though according to the Core CPI readings, it is very likely over the next 6 months that this won't move up significantly, the bottom line is that for lower to middle income earners, they will see their, heating, gasoline and food prices go up. Just on a sidenote, I see that Starbucks is raising prices and GAP is doing the same because of record Cotton prices.

 

 

And to your second point. I don't think it is quite that easy TPS. The number one thing the FED wants to have is CREDIBILITY. If they sell those treasuries, will they be selling it at a loss or at a profit? The value of those bonds WILL be decreasing, you can take that to the bank. So its a question of how and when they do it. This is one very important aspect to consider.

[TPS]

To your first point, I do believe Commodities have an impact on the CPI, but only when the costs are passed down to the consumer, and you and I both know that this can take some time. But once it sticks, the effect on inflation is quite insidious. Bernanke is basically banking on companies not passing down the costs on consumers because of the slack in the economy. It's quite obvious that his mindset is one of an academic as opposed to a business owner. If he were to step out of his world of academia and put on his business hat (which he doesn't own) he would realize that at some point the higher input costs for corporations will end up squeezing margins, which of course has a negative effect on future hiring.

Interestingly Bernanke said last week that he is not worried about commodity prices because he doesn't think firms have the pricing power to pass the costs along...

I am bullish over the next 6 months or so (maybe a little shorter or longer time period), but there will be a tipping point for both consumers and corporations. Even though according to the Core CPI readings, it is very likely over the next 6 months that this won't move up significantly, the bottom line is that for lower to middle income earners, they will see their, heating, gasoline and food prices go up. Just on a sidenote, I see that Starbucks is raising prices and GAP is doing the same because of record Cotton prices.

Guess we'll see if B is right or wrong--if those price increases hold.

 

And to your second point. I don't think it is quite that easy TPS. The number one thing the FED wants to have is CREDIBILITY. If they sell those treasuries, will they be selling it at a loss or at a profit? The value of those bonds WILL be decreasing, you can take that to the bank. So its a question of how and when they do it. This is one very important aspect to consider.

You raise an issue that I tried to tell---crap! getting old--mr.end-of-the-world(what was his handle?), when he said something like "the fed will run out of jack." In a fiat currency world, the fed is never out of jack. It buys assets by issuing its own liability! If only I had that power or a printing press! i could buy up the world...assuming people accept my dollars.... But we do have to accept the fed's dollars because that's what government requires us to use when we pay taxes.

 

The Fed balance sheet is not relevant in terms of the fed as "an on-going concern." The fed can hold assets forever if it wants, and they never have to mark-2-market. The only expenses of the fed are some buildings and people. They earn income via interest on their treasury holdings, AND they give any excess interest back to the Treasury. They will never run out of liabilities to issue in order to buy assets. It is possible for them to run out of assets to sell back into markets when they begin contractionary policy. But they don't care if they take losses because they are not a profit-making business. They work for the public good, or more accurately the banking good....

 

[....lybob]

...assuming people accept my dollars....

 

 

 

 

I guess my question would be are we getting close to a tipping point- it seems there are a lot of countries that would like to get out of U.S treasuries, out of the dollar - none of them want to start a panic but they are all easing towards the exit- the tipping point is when they stop easing and start sprinting.

[Magox]

I guess my question would be are we getting close to a tipping point- it seems there are a lot of countries that would like to get out of U.S treasuries, out of the dollar - none of them want to start a panic but they are all easing towards the exit- the tipping point is when they stop easing and start sprinting.

It's one big symbiotic family.... We all depend on each other, and it isn't to anyone's benefit to begin "sprinting" out of US Treasuries. The best thing they could do is slowly diversify away from the US dollar.

[....lybob]

It's one big symbiotic family.... We all depend on each other, and it isn't to anyone's everyone's benefit to begin "sprinting" out of US Treasuries. The best thing they could do is slowly diversify away from the US dollar.

 

What does game theory predict?

[DC Tom]

What does game theory predict?

 

China sinks our battleship while Japan rolls Yahtzee and Russia puts a hotel on Virginia Ave.

 

 

 

 

 

 

(Sorry, couldn't resist).

[Magox]

What does game theory predict?

Hard to tell, but I would venture to guess that a major restructuring of debt is a definite possibility.

[Magox]

I see Goldman Sachs just upgraded their forecast for GDP growth for 2011 this morning and that they raised their forecast for oil to average $100 a barrel in 2011.

 

What took them so long?

[/dev/null]

I see Goldman Sachs just upgraded their forecast for GDP growth for 2011 this morning and that they raised their forecast for oil to average $100 a barrel in 2011.

 

What took them so long?

 

Haven't you heard? The Obama Recovery is Underway

[pBills]

You mean the jobs that were created over the past 6 months or so?

 

 

And the jobs created over the next two years.

[erynthered]

And the Government jobs created over the next two years.

 

 

fixed

[Magox]

Now that the midterm elections are over with and it appears that the Federal Reserve will be throwing in the kitchen sink in attempt to stimulate the economy, I expect that economy is going to gain some traction in the first half of next year.

 

 

 

2) Jobs. I expect that we will be creating 150,000 - 250,000 jobs a month during this period. The climate for jobs is more favorable now that there is more of a push for the president to move to the center. I expect that the Bush Tax cuts will be extended and that Obama will soon make a proposal that conservatives have been asking for which is to either reduce Corporate taxes or maybe some sort of Payroll tax holiday. He understands that he needs to move more to the middle and extending an olive branch to the business sector will help bring out the "Animal spirits" that have been sorely lacking through out his presidency so far. Corporations are flushed with cash, and there is a lot of potential stimulus that the private sector can unleash if the president decides to be more "business friendly". I fully expect him to.

 

 

4) GDP Growth rate will most likely be above 3.5%

 

5) Trade deficit will most likely not increase too much from here, and very well may decrease. The value of the dollar will serve as a boon for our exporters and this will help in closing the trade gap.

 

6) Talk of inflation will heat up. Oil I believe will be somewhere in between $90-$105 a barrel. It will be interesting to find out at what level oil prices will have to reach before it begins to be a negative for the economy. My guess is somewhere around $100 a barrel.

 

7) China and the rest of the EM markets will begin to overheat and I expect them to desperately try to slow down their overheating economies through higher rates, additional taxes on capital inflows and higher banking reserves.

 

 

Well, it looks like they will go with the Payroll tax holiday I was talking about.

 

Trade Deficit is narrowing according to today's report.

 

The U.S. trade deficit narrowed much more than expected in October, as exports rose a robust 3.2 percent and imports declined slightly in the face of slackening demand for industrial and petroleum products, a Commerce Department report showed on Friday.

 

The trade gap totaled $38.7 billion, down from a revised estimate of $44.6 billion for September.

 

Goldman Sachs raised their GDP forecast for next year and so did PIMCO

 

Pimco Thursday raised its growth outlook to 3 to 3.5 percent for next year, from 2 to 2.5 percent, because of the hefty stimulus push, according to Chief Executive Mohamed El-Erian.

 

JP Morgan also raised their forecast to 3.5%

 

And, since this was written, China has already increased their reserve ratios for their banks twice and MAY do it again over this weekend. They have their inflation data coming out.

 

In regards to Oil. We touched $90 already. Pretty likely it will be in the range I was talking about $90-$105

 

 

So, the forecast I had, which was contingent based on Obama moving to the middle, seems to be in line with Goldman, PIMCO and JP Morgan.

 

We'll see what happens.

[Magox]

 

 

I will give him credit if he does extend the Bush Tax cuts for everyone (although I disagree with it), and I will give him credit if he moves more to the center and allows a corporate tax rate cut or a payroll tax deduction. THis would most likely bring in a flurry of hiring over the next 6-9 months.

 

His policies have created uncertainty over the past 18 months, which is A reason why corporations have been sitting on tons of cash on the sidelines. As I pointed earlier, if he can tack more to the center, which I believe he will, then he can help unleash the "Animal Spirits" of our free enterprise system, which will lead to more growth.

 

 

Beneath the surface of Wednesday’s White House summit with corporate America lies an increasingly pointed dispute about how to unlock the record high $1.9 trillion in cash that businesses have piled up recently.

 

Business leaders blame uncertainty over the Obama administration’s economic policy for the hesitation to use the money to expand and hire workers.

 

For months, President Barack Obama and his aides have rejected this explanation, insisting that overall weakness in the economy is the main reason businesses are holding onto so much cash — the most, as a percentage of assets, since 1959. It’s an argument that helps make the case for the kind of short-term economic stimulus that Obama has been fighting for in his tax-cut deal with congressional Republicans.

 

If the deal is approved by Congress, both sides will get a measure of what they were calling for to unlock the $1.9 trillion, according to Martin Baily, a senior fellow at the Brookings Institution and former chairman of the Council of Economic Advisers in the Clinton White House.

 

Business will get certainty about tax rates for the next two years, Baily noted, and Obama will get the new economic stimulus he’s been looking for, in a deal that effectively cuts taxes for individuals and businesses by $300 billion over the next two years.

 

But that isn’t likely to end the dispute, and the White House is highlighting the cash hoard as the starting point for conversations with business about how to get it spent. Mark Zandi, an economist often consulted by the White House on economic policy decisions, said a number of policy issues on the summit table could help encourage businesses to invest, including more free-trade deals and overhauling the tax code.

 

Zandi urged the White House, in the meantime, to take another look at an issue that the president has alternately pushed and abandoned over the past two years: a temporary reduction in corporate taxes to induce companies to repatriate earnings now parked abroad, where much of the $1.9 trillion is sitting.

 

It appears that Obama may continue to tack to the center with Conservative ideas of reducing payroll and corporate taxes which is something that I thought he would do back in the beginning of November after the elections.

 

 

Verizon Communications CEO Ivan Seidenberg said Tuesday the two-year tax deal pending in Congress helps reduce business uncertainty and would help encourage businesses to invest. But Seidenberg, chairman of the 200 CEOs who make up the Business Roundtable, said that most CEOs are looking for longer-term changes that extend beyond taxes to include business regulation.

 

“Unless we are creating some permanency about international taxation and regulation,” the short-term stimulus of the tax deal could abate, he told reporters in a conference call.

 

In another thread, this is a point that I argued, that in order to get a more sustaining recovery, we need more long-term certainty, and reducing corporate tax rates on a permanent basis would do just the trick.

 

 

Baily, Zandi and most other economists believe that it will probably take a self-sustaining acceleration in economic growth to convince businesses that it’s safe to invest their cash reserves. And Zandi thinks that may be at hand.

 

“I suspect businesses will begin to deploy their mounting cash pile more aggressively in coming months, even without any additional policy help,” said Zandi, chief economist for Moody’s Economy.com. “As the nightmare of the past several years fades and businesses gain clarity with regard to all the recent policy changes, they will slowly gain the confidence needed to invest and hire more aggressively.”

Zandi explained that businesses have made all of the productivity gains they can from cutting jobs and expenses and will have to hire and invest to grow their profits.

 

Still, Baily said there would be considerable business uncertainty, even after the tax deal is approved, because of the size of the federal budget deficit and questions about whether government will tackle it quickly enough to fend off fears in the financial markets of a stalemate in Washington.

 

While it may not get a lot of attention from Obama and the CEOs on Wednesday, one the biggest things that government can do to boost the confidence of business is for Obama to signal that he’ll be committed to a bipartisan deal to cut the deficit and rein in mounting federal debt, Baily said.

 

And then of course there is the national debt. Tough for businesses to expand in a meaningful way if they believe it is quite possible that the U.S is at risk of the ire of the bond vigilantes.

 

 

 

 

 

 

Read more: http://www.politico.com/news/stories/1210/46389.html#ixzz18BzxtZ51