The Mad Hedge Fund Trader’s Top Ten Surprises for 2010
Courtesy of madhedgefundtrader
My friend and former Morgan Stanley colleague, Byron Wien, now luxuriating in a cushy job as vice chairman of Stephen Schwarzman’s Blackstone Group (BX), initiated this concept a few decades ago, which I always find a useful intellectual exercise. The goal is to list events which investors and the markets believe are either highly unlikely or impossible, but which have a higher probability of occurring than they think.
To a hedge fund manager, this generates a risk/reward imbalance, which always piques my interest, and can present great trading opportunities. Often you can see this in option pricing, with “puts” on securities managers see as “sure things” being tossed away for pennies. I liken them to Einstein’s “thought experiments.”
Here is my own list for 2010.
1) A dramatic decline in the unemployment rate enables the Democrats to gain seats in the House and the Senate in the November midterm elections. Obama’s popularity soars.
2) A “Goldilocks” economy of huge corporate profits with no inflation gives the stock market boom another year of life, taking the Dow to a new all time high of 15,000.
3) Strong economic growth cutting the government’s borrowing needs, and continuing deflationary concerns, keep interest rates on 30 year Treasuries and home mortgages near century lows.
4) Reviving American economic prospects and an early Fed move to raise interest rates cause the dollar to soar to parity against the Euro. Differential growth and deficit spending rates then cause the European currency to fly apart. Deutschmarks, French francs, and lira make a comeback as member countries revert to their original constituent currencies. Talks of dollar reserve alternatives die out.
5) The surge in Afghanistan succeeds through a combination of drone attacks and intimate, on the ground, presence in the villages, and the war winds down to a dribble of sporadic suicide bombers. Osama bin Laden is captured in the mountains of Pakistan and put on trial in New York.
6) An American victory in the Middle East triggers the collapse of the fundamentalist regime in Iran. A new reformist government promptly shuts down its nuclear program and establishes diplomatic relations with the US. Obama signs a trade agreement that paves the way for US companies to make a killing rebuilding Iran’s aging energy infrastructure.
7) Continued low subsidized interest rates and renewed first time buyer tax credits at both the state and federal level trigger a buyers’ panic in the real estate market. Banks start competing aggressively for market share.
The global commodity boom ends as China’s stimulus spending program runs out of money. Gold, silver, and platinum crash. Burgeoning stockpiles of everything from copper, to crude, to natural gas finally overwhelm real demand, and prices crater.
9) Huge new offshore discoveries, great strides in alternative energy, and enormous efficiency gains made possible by a smarter grid trigger a collapse in oil prices to $20/barrel. All exploration and development grinds to a halt, and several oil independents go under.
10) Tiger Woods admits to a sex addiction in a “tell all” episode of Oprah, and goes on to win every major golf tournament. He refuses to take back the sponsors who baled on him last year, replacing AT & T and Gatorade with Viagra and Flomax.
For more iconoclastic and out of consensus analysis, please visit me at www.madhedgefundtrader.com .
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