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Mark's Market Blog

1-1-10: Mark's Fearless Predictions for 2010

By Mark Lawrence

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The market's glass ceiling has become a glass floor, but on light trading. I expect the market to continue up for at least a short while.


S&P 500 September 30 2009 to December 31 2009


Mark's Fearless Predictions for 2010

If you're looking for rosy pictures, stop reading now. In 2009 we managed to stabilize our financial structures a bit, however huge problems remain. Any external shock and we're going down.

•The Republicans take control of the house of representatives, winning over 40 seats from democrats. The democrats retain a slim lead in the Senate. Late in 2010 the elections will come at a particularly poor time for the Democrats as unemployment will be high, an unpopular health care reform will be their greatest achievement, and the deficit continues out of control. The democrats will take a huge hit in the House, losing their majority status, and will lose their 60 seat filibuster-proof majority in the Senate. Their one saving grace will be a complete absence of a coherent and positive message from the Republicans, who will continue to be intellectually bankrupt.

•Unemployment raises from the current 10% level, and stays above 10% all year long. As the baby boom retires, their consumption drops off. The obvious intent of the various governments is to replace this consumption and income tax with immigrants. However, immigrants generally have a much lower level of education and produce lower earnings and consumption. The changeover in the economy will expose that there is a large over supply of production capability, showing up right now in automobiles and soon in other factories near you. This over supply is only exacerbated by the building of more factories in Asia where labor and other supplies are much cheaper. This is why unemployment will be persistently high for years: we don't have the consumers to justify the factories scaling up, and there is serious competition from Asia in those areas where consumption does resume.

•Several states will have their credit rating reduced to junk or near-junk. Rising unemployment will put continued and increased pressure on all the governments as tax revenues continue to decline, benefit pay outs continue to rise, and deficits continue to rise. Unemployment will also add to the real estate and credit card problems. We will start to hear about how several states are technically bankrupt, and those state's bonds will have their ratings lowered to junk. California will be one of the first.

•There will be inflation in foods and commodities, and deflation in manufactured goods. In the 50's and 60's as we were recovering nicely from the Great Depression and two world wars, economists started putting together their theories of what happened. One of the things they decided was that an economy could not have inflation and unemployment at the same time, you could always buy more employment with more inflation. In the 70's this relationship broke down and we invented a new word, "stagflation," for the state of having high inflation and high unemployment at the same time. It's the nature of crises that you get something for which you are totally unprepared; in the worst case something you think impossible. After all, if you were prepared it wouldn't be a crisis. Today it's well known that you can't have deflation and inflation at the same time, it has to be one or the other. Our entire monetary system is set up to fight either inflation or deflation: if you were to somehow have both, Bernanke would find himself trying to step on the throttle and the brakes at the same time. Because of this, I am predicting that for the next few years we will have deflation and inflation at the same time. Deflation will be in electronics, jewelry, cars, clothing. Inflation will be in stocks, Asian real estate, foods, metals.

The inflation will be caused by the loose monetary policies of the world's central banks, and the fact that our financial systems are locked up and that money is not finding its way down to consumers. This means the banks will have huge amounts of money to play with, and play they will: stocks, bonds, real estate will fluctuate wildly and have inflationary bubbles in parts of the world. Oil and commodities will also fluctuate wildly and have inflated prices in much of the world. As China's population enters the middle class, they are eating less rice and more meat. Some poor nations in Africa and the Pacific Islands will find themselves priced out of the food market almost entirely. This is the year that Malthus starts to prove correct. This effect will only get worse.

The deflation will be caused by cheap third world labor, persistent unemployment and bankruptcies. Parts of the world will be awash with foreclosed real estate that no one can afford at any price and consumer markets that are mortally wounded. This will prove a systemic problem: high paying low skill jobs (read union jobs) are permanently leaving N.America for low paid highly motivated third world workers. These jobs will not come back for over a generation. Unemployment will be high in N.America for most of the coming decade as workers try to learn new skills and adjust to a reality where $35 / hour jobs for unskilled and semi-skilled workers prove a thing of the past.

•Housing prices will decline another 5% to 10%. Foreclosures will increase. I expect between 3m and 5m houses will be foreclosed in 2010. This would lead to a complete crash in house prices but for the banks holding onto these properties instead of trying to liquidate them immediately. Fannie Mae and Freddie Mac will continue to suck up federal bailout funds, roughly $100 billion on the year between them. Turning home ownership from a goal to an entitlement, as our government attempted to do in the 90s, will continue to cost the taxpayers hundreds of billions of dollars.

Commercial real estate will become a big issue. Already commercial real estate prices have declined by over 40%, nearly a third more than house price declines. Vacancy rates and price declines will lead to insolvent landlords. The banks will be loath to foreclose on commercial properties - this is opening up a battle on a second front for them - and unlike houses there are no ready buyers when prices drop. None the less it will start.

•Banks will fail at the rate of about five per week, about 250 in the year. The FDIC will run out of money early, but will not require a federal bailout immediately - the FDIC is requiring member banks to pay their premiums three years in advance, and the FDIC has a huge line of credit with the Treasury. The result of this is that while the FDIC will be technically bankrupt, this fact will not pop out from under the rug in 2010. Bank of America and Citi will flirt with bankruptcy, but in the end will get bailed out yet again.

•There will be a major external financial shock, such as Greece or Spain defaulting on their debt. The stock markets will have a major leg down. This decline will be lead by the financial sector.

The first cracks in government retirement programs will appear: many such programs will start to prove under funded and require a bailout, and this will pop them onto the public radar. People will become aware that all over the US police and firemen retire at 85% or better of full pay while still in their 40s, then go get another job. This issue will not be addressed in 2010, but you're going to start to hear about it. In the next five years this will become a hot button issue as bankrupt governments continue to provide pay and benefit packages for their unionized bureaucrats that far exceed anything available in the private sector. When asked recently why his city was bankrupt, the Mayor of Vacaville CA responded, "Well, for one thing I'm paying for three police forces: one on disability, one that's retired, and one that's patrolling the streets."

Today, approximately 5 million workers, who have annual salaries totaling roughly $132.5 billion, remain outside the Social Security program. Those workers have government retirement programs. Individuals in those programs work in a variety of government jobs; among the largest groups are teachers and law enforcement officials. While such plans exist throughout the country, 75 percent of the income earned by individuals exempt from Social Security taxes can be found in seven states: California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas. As the governments slowly go bankrupt, this will more and more become an issue.

I roughly estimate that about $1,000,000 has been spend in the last decade by Muslim terrorists attacking the US in various places - 911, bombs on airplanes, bombs on the side of the road in Iraq, bombs in military bases. In response, the US has spent about $1 trillion in the last decade on invading Iraq and Afghanistan, on making our airports places of abject humiliation, on converting driver's licenses to national ID cards, on building the Department of Homeland Security. In other words, every time the terrorists spend a dollar, the US government spends about a million dollars. In the next couple of years it will be more and more apparent that the terrorists are winning. This will not stop the attack on the bill of rights - to the contrary, the US will more and more come to be a police state, with constant public address warnings in the cities to be suspicious of everyone else and report everything to the authorities. The red states will mostly not participate in this, the blue states will be positively Orwellian.

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