Todd Harrison: 10 Themes for 2010
Courtesy of Minyanville’s Todd Harrison
“A year has passed since I wrote my note. I should have known this right from the start.” –The Police
2009 will forever be remembered as a tale of two tapes, a bipolar stroller that tickled the depths of despair and the height of hope.
Following a gut-wrenching decline that threatened the very survival of free-market capitalism, the government unleashed its liquidity spigot, changed the rules of engagement and manufactured the single greatest upside reversal in financial history.
As we edge into this twelve-month stretch, pundits have furiously offered fresh predictions, price targets and prophecies. While Minyanville prides itself on adapting rather than conforming, we’re happy to gaze across the financial horizon and toss our hat in that ring.
We recently asked fifteen of our resident professors for forward-looking prognostications and their foresight provoked a plethora of insightful and actionable ideas. (See Dawn of the Decade)
In addition to those observations, I humbly submit ten themes that could bear fruit by the time 2011 arrives:
The Man Behind the Curtain
The stock market is the world’s largest thermometer and the single biggest proxy of our collective financial health. In a finance-based economy laden with debt and mired in derivatives, the only “solution” to the financial crisis was to push risk out along the time continuum with hopes that a legitimate recovery will take root.
While policymakers have accomplished the first half of that directive, the only difference between intervention and manipulation is communication. Minyanville pointed to the unnatural bid in the marketplace for many years and offered that a proactive invisible hand was in play. We were considered conspiracy theorists until Hank Paulson fingered The Working Group on Financial Markets as a central policy tool.
Last year, we introduced the notion that the government was actually buying equities and/or S&P futures. Following massive bailouts in the financial, housing, and automotive industries — not to mention the curious absence of traditional sources of demand — this redistribution of risk may emerge as a modern day Ponzi scheme. Look for further evidence of this dynamic, or the perception thereof, to evolve in the year ahead. (See Strange Days)
Adapt, Don’t conform
While credit markets suggest further equity strength is not only possible — it’s probable — the disconnect between stock prices and the underlying economy, or the chasm between perception and reality, continues to widen.
Markets moves in three stages: denial, migration and panic. That pendulum of psychology has swung from “fetal position fear” last March to abject optimism today, albeit not yet at the euphoric levels typically associated with previous bubbles.
Conventional wisdom dictates that equities will enjoy further upside before facing headwinds later this year, akin almost to the mirror image of 2009. Respect — but don’t defer to — these choppy waves of optimism. When caught in a riptide, the surest path to survival is to swim parallel to the shore until the dangerous current passes.
The Tricky Tri-Fecta
In 2007, we previewed the deterioration of the middle class and the friction between the “have’s” and “have not’s.” In 2008, we forecast percolating societal acrimony. Last year, we spoke of the migration towards social unrest and geopolitical conflict.
As this dynamic evolves, real risk remains across the spectrum of social strife. While this assumes many shapes and forms — populous uprising, the rejection of wealth and an emerging class war — we should remember that global conflicts have been historically triggered by financial hardship.
An Israeli strike on Iran remains a top-line concern, as are uprisings in South America (Venezuela), protectionist policies in China (isolationism is the death knell of globalization), and saber rattling in Russia.
The State of the States
The Center on Budget and Policy Priorities recently offered that state budget shortfalls could reach a whopping $180 billion for the coming fiscal year.
States across the union — particularly those that benefited from the housing bubble and the taxable income associated with it — are now experiencing a massive reversal of those golden years. The decline is so swift that it will take several years for the real estate reset to flush its way through municipal budgets. Additionally, The US public pension system — one of our 2009 themes — faces a higher-than-expected shortfall of $2 trillion that will increase pressure on strained finances and further crimp economic growth, according to the chairman of New Jersey’s pension fund, as quoted in the Financial Times.
This evolution should lead to a comprehensive Federal bailout package in 2010. TARP money returned to the government will likely be funneled back to the states, including but not limited to Arizona, California, and New York, as taxpayers shoulder the load and bear the burden of our outsized societal largesse.
It’s a Walk-Off!
Expect housing foreclosures to increase in scope and size. While the wealth effect — contingent on continued strength in equities — and another bailout plan could moderate this dynamic, baby boomers have experienced three crashes during the last decade and many have said “no mas” to the stock market volatility.
As courts continue to rule on lending practices — many are demanding proof that lenders have a legal right to the underlying property and in some cases, they’ve wiped away mortgage debt and invalidated foreclosure proceedings — the judicial process will influence how rapidly this dynamic unfolds.
Look for underwater consumers to migrate away from big-ticket obligations, such as homes, and migrate down the debt food chain to credit card obligations, which will eventually lead to higher delinquencies rates.
The World According to TARP
When Franklin Delano Roosevelt was inaugurated in March 1933, his first act was to declare a national “bank holiday,” closing banks for a three-day cooling off period. It was during this time that he famously declared, “The only thing we have to fear is fear itself.”
It’s worth noting that this occurred four years after the crash. While the rush to repay TARP dominated recent headlines, the causal elements of the modern day financial crisis remain very much in place, corporate debt obligations notwithstanding.
Richard Suttmeier of ValueEngine.com estimates the FDIC will have to tap its $500 billion line of credit by the end of this year and 800 banks could close by 2013 as Alt-A mortgages reset and unemployment pulls prime mortgages into default. (See his Top Ten Predictions for 2010)
Bracket Buster
According to Sports Illustrated, if you invested $25 in a US treasury EE bond on January 1, 2000, it would now be worth $36.10. If you plunked that money in the S&P, it would be worth $22.45. Had you invested in an index fund that tracked the value of professional sports franchises, it would have doubled or tripled.
As the Age of Austerity permeates, look for attendance at sporting events to decline as consumers curtail discretionary spending. This should manifest through regional blackouts (when local teams fail to sell-out the stadium) and the contraction of major league franchises, particularly the NHL.
While there will be relative winners — soccer should benefit with the arrival of the 2010 FIFA World Cup — we’ll likely see “status backlash” against high profile professional athletes. Ironically, that could add millions of dollars to the bottom line of traditional endorsers such as Nike (NKE).
European Disunion
The European Union is committed to the regional and economic integration of 27 member states, with sixteen countries sharing a common currency. That was a fine idea when it was first founded but the economic fallout of the financial crisis will put loyalties to the test.
Look for the Union to adopt more stringent guidelines in the coming year, including but not limited to distancing itself from the weaker links such as Greece and Ireland. Sovereign defaults, as a whole, should jockey for mind-share. This could conceivably spark a rally in the US Dollar, which could have ominous implications for the crowded carry trade.
Hot Pockets
Over the last ten years, the cumulative imbalances in the marketplace compressed volatility in an array of asset classes until it unwound with great vengeance and furious anger. That caused a multitude of bubbles and busts throughout the financial spectrum, including technology, housing, China and crude oil. (See A Decade of Decadence)
While “fat tail” (outlier) events are by definition rare — and we’ve experienced more than our fair share the last few years — the confluence of technology and artificial market influences will manifest with sharp spates of market volatility surrounded by stretches of quietude.
While the speed of information has quickened the ebb and flow of the synthetic business cycle, investors will once again learn that when it comes to a healthy and natural progression, it’s never wise to mess with Mother Nature.
The Rising
Minyanville professor Peter Atwater, CEO of Financial Insyghts and the former Treasurer of Bank One, offered that the battle between the faced vs. the faceless — populous reforms at the expense of big business — would emerge as a prevalent theme this year. (See 2010: The Robin Hood Economy)
Profitable corporations such as Exxon Mobil (XOM), Goldman Sachs (GS), Wal-Mart (WMT) and JP Morgan (JPM) don’t exactly pull on the heartstrings of the average American. In fact, most of them generate outright hostility and a searing sense of betrayal.
Peter aptly reminds us of the adage, “Those to whom much has been given, much is expected.” The lifestyles of the rich vs. a struggle to exist will continue to play out in 2010. That may manifest through a transaction tax — traders are perceived as an acceptable casualty of war in Main Street America — or, more moderately, though new and different approaches to conducting business.
This is, in many ways, a frightening juncture in world history but it’s no time to be a shrinking violet. If the greatest opportunities are bred from the most profound obstacles, lucidity, awareness, and proactive preparedness will be our staunchest allies as we together find our way.
R.P.
Join Todd in real-time each trading day on Buzz & Banter as he shares his trading ideas and see how these themes evolve in 2010. Start with a 14 day FREE trial.
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