2010 - Economic Predictions

Well, it needs to be prefaced that nobody knows the future. So what follows is my guesses at what might happen in 2010 in the world and to a lesser extent the Australian economy. I do this having studied the situation for the last few years in my spare time with a keen interest. So, for what it's worth - what do I think will happen in 2010?

1. Double dip recession by mid year
Sorry guys, but I don't think we are out of the woods and blue sky's upon us. Instead, all major problems have been deferred rather than being faced head on. This has delayed the day of reckoning, but not for long, and it will be a doosy. I believe new lows in the stock markets, new lows in sentiment, new highs in unemployment figures. I expect this to be in March - June timeframe, but of course it could be sooner or later by a few months. This time Australia will not escape the fallout so readily, and will start to get some serious unemployment strain. The problem with this leg down is that all the tricks they pulled to get us out of the last nose dive won't work this time. Volatility will come back too - big up and down days. More people will get scared this time as the realise that the powers that be have lost control. Comparisons the to the 1930's will be everywhere, and people will be talking "Depression".

2. There will be trouble with US treasuries
The US needs to refinance mountains of debt. This is not paying off any principal you understand, just refinancing old debt plus taking on new debt. Obamas plans are fantasy land stuff. The problem is that the world is very suspicious debt, and with low interest rates it's not worth taking the risk. One temporary solution would be a major correction in the stock market to drive scared cash into T bills, but even that might not be enough. It seems the Fed is backed into a corner and is about to lose control. Interest rates will almost certainly rise, in the US, probably by a lot once they get going. This will kill any stability in the housing market, which will start the spiral anew. Watch what happens to California, bank failures and bid-to-cover ratios on auctions (although these are fudged).

3. Geopolitics will become more unstable
There are so many possible black swans here it looks like a black cloud. Take your pick from Iran/Israel, India/Pakistan, Yemen, Eastern Block Country collapse, Russians testing an over-extended US force, Social collapse in China etc, etc. There may even come something right out of left field that nobody is even talking about now. Instability will start to rise, along with tensions, and some things will snap. Genuine terrorism may also come again, as could assassinations. There is a lot of bad mojo out there. Watch the oil/gas, as energy is the key.

4. Gold/Silver will have a rough ride
I like gold, I really do, but I can see some trouble ahead. Firstly, some of the recent rise is due to commodity speculation fueled by near-free money handed out in the US. When (if?) Quantitative Easing ends, in March as stated now, the punch bowl will be taken away. Similarly, if the stock markets become rough people may liquidate gold investments to cover other poorer performing assets. If you need money, you sell what you can. If interest rates go up then money may chase this. The gold market, like all markets, is manipulated these days. Don't think it's trading on fundamentals, if it was then gold would be well over $2K by now. There is no doubt that gold is a good long term investment and it will go up, but in 2010 it may go down a fair bit before heading that way. It may bounce around quite violently too - if you have the stomach for it you can make (or lose) a lot of money along the way. Try and pick the bottom and get into this, if you can, in physical form. Watch to see if there are any obvious games at Comex.

5. The US dollar will have a rough ride too
This is kind of the inverse picture to gold. I expect the long term picture to be a depressed dollar value (to other currencies, or to gold), but the short term picture may surprise many with a strong dollar. I think it will end the year below the current value. There is an outside chance of a full blown dollar crisis this year, but I suspect this will be put off for a 2011 or 2012. If there is, then that will turn all the trends up to "11".

6. Inflation? Deflation?
This is a hard one. I think you can answer this by saying - whatever is worse. Deflation on the things you own or don't need (luxury goods), inflation on the things you need (food, energy). Actually, in some cases there is a third option - shortages. You may not be able to buy things at any price. This may come in unexpected areas as the globalisation story becomes unhinged. If the financial markets fall apart (and despite the happy talk from Ben I believe it can still happen) then international trade will be even slower than it is now. Not many people consider this option, surprisingly.

That is the top 6, let's see how I do in Jan 2011.