My 2010 Financial Predictions

Not that anyone should care what I think, but I’m still bearish.  I wish I could wake up one morning, review the data and become bullish, but I can’t.  History tells us that true bull markets never start from valuations this high and that investor confidence is never restored until an effort has been made to clean up the fraud from the previous crisis.  It hasn’t.  Current stock market valuations are insanely high and the government is doing nothing to stop the rampant accounting fraud.   The current financial reform bill is flawed and investors know it.  Therefore my thesis remains bearish.

My general investing advice remains ultra conservative.

1. Get out of DEBT.
2. If you are out of debt, build your savings.
3. Don’t invest in the stock market until honesty is restored and valuations have returned to sanity.
4. Don’t buy a house yet.  Rents are still falling and there is a huge shadow inventory that will get dumped on the market at some point.
5. Go long skills and friendships.  Develop skills that allow you to become more self sufficient and then share those skills with like minded friends.

You will not make money following that advice.  It is a defensive strategy.  There is too much over capacity and debt in the system.  And I don’t see any driver for employment in 2010.   The Baby Boomers are now past peak spending years and taxes/fees will rise.  The best way to win is not to lose.

With that general thesis behind me, here are some financial predictions for 2010.

Recovery or Double Dip Recession – There is still too much debt in the system and no driver for job growth.  It will be clear by mid year that all this talk of recovery is premature.  Double Dip Recession.

Unemployment Rate – Because of the way the government calculates unemployment, I expect the rates to stay somewhat flat, with a slight increase bias.  U3 unemployment will end the year at 10.5%.  U6 unemployment will jump to 18.5%.

30 Year Treasury Rate – China stopped buying our debt in October and Treasury is going to need to finance $5 Trillion this year ($2 Trillion for the deficit and $3 Trillion in roll-overs).  How are we going to get buyers for all this debt?  Two ways come to mind.  The first is higher interest rates.  The second is a stock market crash that scares investors into Treasuries, which would lower interest  rates.  My guess is the 30 year yield will rise to 5.5% and then fall to 3.5% if and when the market tanks.

S&P 500 – If I were basing this prediction strictly off valuations and macro-economics, I’d say we were going to test the 666 low.  But, I must take in account that the government will continue to allow banks to play shenanigans with accounting and they will backstop failure.  Therefore my 2010 target low for the S&P 500 is 777.

Real Estate – Holding foreclosed real estate on your books makes financial sense if you think you can get more for it at a later date.  This is why banks have been building massive amounts of shadow inventory.  They have also been reluctant to foreclose on many delinquent home-owners (actually home owers).  But unlike a stock, holding real estate has costs.  Property taxes, upkeep and HOA fees continue to pile up for every property in the shadow inventory.  At some point banks will concede that home values will not return to the 2005-2007 levels for many years and start dumping properties.  I think 2010 is the year that happens and will see a big leg down in home prices in 2010.  Perhaps as high as 20%.  Rents will keep falling and commercial real estate which has somehow avoided the laws of physics (so far) will tumble hard as well.

Oil – The current price of oil is $80/bbl.  It is based off a weak US dollar and a belief in an economic recovery.   I think the recovery isn’t going to happen and the US Dollar rises from here.  Therefore, I’ll put a $40/bbl price target on oil for sometime in 2010.

Gold – Gold had a tremendous run in 2009 and although it wouldn’t surprise me if it kept rising, I still remain a contrarian.  Too many people are on the gold side now.  When the average man on the street is rooting for an investment class like a sports team, be it tech stocks, real estate or gold, that often indicates a top and reversal.   The same people that believed real state could only go up in price are now so-called experts in fiat currency history and are worshiping at the alter of Gold.  Not me.  Gold is at $1092/oz now.  I’ll say it drops to $850/oz sometime in 2010.  Before you gold nuts start slamming me with hate comments, please note that I was dead wrong last year.  I could be dead wrong this year.

US Dollar – Trashing America’s financial woes was the meme for 2009.  In 2010, I think the focus will go overseas.  Yes our financial path is dreadful, but we are not alone.  The dollar index will rise to 83 as we get at least one sovereign debt default and the cracks in the China “miracle” economy begin to show.

I do have a favor for all you that are eager to attack my predictions.  Please include a link to your predictions (or post in the comments below).  Comments with more than one link can take longer to post.  If you don’t have a website, you can set one up in minutes at Tumblr.com with absolutely no coding knowledge.