Economic and Market Predictions for 2010 By Daryl Montgomery   Dec 31, 2009 Copyright 2009, All Rights Reserved (Reproduced with permission from the author) You can view the entire article on Daryl's site: http:///investing.meetup.com/21   How to Think About the Contents of this Talk • Our views for the economy and the market in 2010 should not be characterized as either positive or negative. • They indicate a series of risks and opportunities. • Your goal is to minimize the risks you face and maximize the opportunities. Those who took this approach in 2009 made lots of money. • The bigger the crisis, the bigger the opportunity. Our Predictions for 2009 - Economy • U.S. Recession turns into Depression. • Banks, brokers, insurance continue their collapse; big increase in small and medium bank failures; more major failures; many hedge funds go under. • Bankruptcies in Retail (major increase), Auto related, Home Builders, small businesses, and individuals. • Available Consumer credit shrinks substantially; credit card defaults rise rapidly. • Real estate: residential drop continues, commercial becomes big problem. • Unemployment heads to double digits. • Asset price deflation in beginning of year; consumer price inflation bigger worry at end. What Happened in 2009 – Economy? • Government claims recession ended in Q3, Japan made similar claims multiple times in the 1990s. • U.S. Banks failures so far are this year 130 versus 26 in 2008. Includes Colonial Banc Group, Bank United and Guaranty Bank (6th,10th and 11th largest failures in U.S. history) • GM declared bankruptcy. As of end of Q3, there was a 30% increase in U.S. bankruptcies year over year. • Consumer credit down 6% yearly in Q3, 7.25% Q2. • U.S. commercial real estate defaults up to 3.4% in Q3 2009 from 1.6% in Q4 2008. Defaults on CMBS’s up 504% since 2008; Dubai default. • Unemployment hit 10.0% in October. • CPI should become positive in November and be higher in December. 2009 Predictions – Government Reaction • Fed institutes ZIRP – (close to) zero interest rate policy. • Budget deficit/National Debt explodes. • Financial companies all require more funding. MS, GS, BAC, and GE will need help; TARP proves to have been ineffective. • GM, F and Chrysler will collapse without bailouts; propping them up will have to be done multiple times. • A number of states and municipalities need Fed bailout; municipal bonds in trouble. • Money market funds have to be supported again. • An Exchange (Comex?) may need to be bailed out. • Bailout efforts shift toward individuals, away from corporations. What Happened in 2009 – Government Reaction • ZIRP started in December and still in effect. • Budget deficit 1.42 trillion, national debt increased by $1.9 trillion and is now over $12 trillion. • More bailout money for mortgage companies, Fannie Mae, Freddie Mac, transfer of problems to FHA. FDIC broke. • GM and Chrysler failed. • California using IOUs, 20 states in trouble. • Money market funds hold up. • No Exchanges default. • Programs to reschedule mortgages. Unemployment benefits extended to 99 weeks. Predictions for 2010 - Economy • ‘Return’ of the recession or recognition that it never went away. GDP negative at least one quarter. • First hints of inflation. • Unemployment hits peak around 11%, then stabilizes. • Fed hints at raising rates and withdrawing liquidity; may be ‘forced’ to raise rates; most likely in 2nd half. Super easy money and continues nevertheless. • Commercial real estate problem gets worse until 2011. • Some states finally have to be bailed out; FHA by 2011, FDIC by 2011. • Failures, collapses, bankruptcies (watch retail) ease; bailouts continue becoming episodic. Derivatives problem can reappear. 2010 Predictions - Markets • U.S. dollar will test low of 71.50 and possibly break it. Countertrend rally follows. • Gold, silver peak between March and May, secondary peak in July possible.Spring gold peak around $1500, silver around $25. Higher gold possible at end of year. • Oil breaks $100, but doesn’t hit a new high. Uranium and solar stocks rally. • Stocks have significant drop. Biggest threat is withdrawal of liquidity. • Treasury interest rates start rising at long-end of curve. Junk bonds weaken.