Market predictions for the year ahead are a bit like assholes in that everyone has one and they generally stink. But in the history of offering guesses for what lies in store, I am not sure anyone has ever failed as badly Byron Wien is failing right now.
By my calculation, Wien, who used to call plays for Morgan Stanley before moving over to Blackstone, is working on o’fer as we hit the half-mile mark and by year-end, he stands only a slight shot at converting on two of his 10 pre-season predictions. Let’s take a look.
1) The continuation of the Bush tax cuts coupled with the extension of unemployment benefits has put all working Americans in a better mood. Real Gross Domestic Product rises close to 5% in 2011 driven by improved trade and capital spending in addition to stronger retail sales. Unemployment drops below 9%. First off; unemployment has crept back over 9.0% and figures to move higher through the summer. Meanwhile “real” GDP growth, once you adjust for wildly under-reported inflation, looks no better than flat and is perhaps negative. Technically, Byron had unemployment right for a couple of months but he has been so far off on GDP that this still qualifies as a strikeout.
2) The prospect of increasing Federal budget deficits and rising government debt finally begins to weigh on the bond market. The yield on the 10-year U.S. Treasury approaches 5% as foreign investors become more demanding. Byron has six months to pick up 200 basis points but the last time I checked, the ten year was trading 2.98%. This one looks like a loser.
3) Encouraged by renewed economic momentum the Standard & Poor’s 500 rises close to its old high of 1500. A broad range of sectors participate, but telecommunications and utilities lag. With earnings improving, valuations seem low and individual investors return to equities for the first time since the financial crisis. Merger and acquisition activity becomes intense and the market reaches a blow-off euphoria. Oh boy. The market currently stands at 1265 and I am willing to bet you can’t produce a single trader who thinks the next 235 point move is up. Moreover, if individual investors haven’t been in equities, who pushed the S&P from 700 to 1300?
4) Although inflation remains benign, the price of gold rises above $1600 as investors across the world place more of their assets in something they consider “real. Inflation remains benign? Byron, you want to take a look at this morning’s CPI? Not so benign.
5) Worried about inflation and excessive growth, the Chinese decide to use their currency as a policy tool. They manage the value of the renminbi aggressively to keep the growth of the economy below 10% and to prevent consumer prices from increasing above the 4%–5% range. I can’t speak to whether the Chinese have been aggressive on this front but if they were, they didn’t succeed as consumer prices have risen over 5.0% in March, April and May.
6) Rising standards of living in the developing world seriously increase the demand for agricultural commodities. The price of corn rises to $8.00, wheat to $10.00 and soybeans to $16.00. Commodities have run but is that because of rising living standards of living or ridiculously loose fed policy? I think the latter and besides, corn traded $8 for all of seven minutes. Wheat topped out at $9.50 and now trades $7.20. And soybeans have fallen since hitting $14.75. Byron wasn’t too far off on this one but his thesis was bogus so we can’t give him much credit for getting the answer nearly right.
7) The housing situation improves. Although the inventory of unsold homes remains high, the oversupply is drawn down substantially, contrasting with an increase in 2010. The Case-Shiller gradually heads higher and housing starts exceed 600,000. The CIA had a better read on the Russian Economy in 1987 than Byron had on the 2011 housing market.
8) Continuing demand from the developing world and a failure to bring onstream new supply causes the price of oil to rise to $115 per barrel. Crude did tick $115 for three minutes back at the start of May but that had much more to do with a weak dollar and wild speculation than any sort of surge in demand. Byron would surely argue for a point here but if he is standing on first, it is only because he got hit by the pitch.
9) President Obama concludes that whenever American troops return home, Afghanistan will once again become a tribal state ruled by warlords. He accelerates the withdrawal of most military personnel to the end of 2011. Wishful thinking but wildly incorrect.
10) Under duress Angela Merkel leads the way in European financial reform. The weaker countries, having pledged to cut their budget deficits in half by 2014, are provided additional transitional aid by the European Union (with Germany’s backing) and the International Monetary Fund as long as they implement their austerity programs. Nope, not even close.
And here are some more Byron gems just in case the first ten weren’t enough ….
Rising interest rates and a strong economy allow the dollar to strengthen against the euro and the yen. The $ is currently at 1.42 v the Euro and 80 v the Yen. If the dollar gets any weaker it will need to be resuscitated with paddles.
With the economy improving the prospect of a second term for Obama becomes more likely. You think Obama would be in NC and FL this week if he thought his re-election was “likely?”
A major state fails to pay interest on a municipal bond issue because of a lack of funds, causing havoc in the municipal bond market. Did Meredith Whitney consult on this list?
Tip to ZeroHedge for the assist on this post.
