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Themes and Predictions for 2010

Below are my “Themes and Predictions for the New Year” originally published on 12/23/09 on the T3Live Blog.

In the waning days of 2009, with year-end and 2010 prediction posts in vogue, I would like to highlight some themes for the coming year and to offer ten predictions. With New Years marking the end of the decade, many financial pontificaters like to throw around the “lost decade” label about the 2000s. While in some respects, economic and quality of life growth did stagnate over the ten year period, the arbitrariness of assessing progress based on round numbers in the Christian calendar provides a sense of false confirmation in that fact. In order to avoid this popular trap, I would like to focus more on emerging themes, rather than purely yes/no statements moving forward.

The meltdown of the financial industry certainly dwarfs all other themes over the past year. The words “credit crisis” combined to dominate conversations in social circles far beyond the hedge fund and trading universe. Too big to fail, bailouts and stimulus all entered our vernacular in 2009. New York taxi drivers were once again talking stocks, and this time it was rather different than a conversation circa 1999. Cash-for-clunkers, cash-for-gold and a parabolic breakout in the precious metal captured our attention. In technology, we saw the emergence of “social networking” as a dominant theme in shaping how people interact with each other and how businesses market their products and services. Phones no longer can merely be phones, they must now also be “smart”–the iPhone delivered on disrupting the traditional cell phone model.

I view themes as the topics and ideas most central to discourse, conversation and investment over the coming year. These themes collectively compose a narrative of stories that will dominate finance, economics and trading in 2010.

  • Sovereign debt–sovereign credit default swaps in heavily indebted nations and government stimulus spending are both on the rise. I believe we will see a bifurcated world when it comes to sovereign debt–those in debt denominated in their own currencies and those denominated in other currencies.
  • International trade imbalances–this cuts right at the heart of the U.S. vs. China story. China’s manipulation in FOREX markets will play a prominent role in the policy world.
  • Regulating the financial industry–is too big to fail here to stay? Will Glass-Steagall make a comeback? The inevitable passing of the Financial Regulatory Reform Bill will not stop this theme from dominating 2010. Over the course of the next year we will learn the landscape through which the financial sector will operate until the next crisis…
  • Cloud computing/network infrastructure growth–online storage and network capacity available on demand, anywhere the Internet can reach will take some attention away from the social networking buzz.

Predictions:

As a trader, I view myself as both a predictor and reactor–I must anticipate many possible scenarios and systematically implement a response to them. Many critique traders for changing their minds far too often. That is not inherently a bad quality. One of the keys to success as a trader is to be more right when right than wrong when you are wrong. Should just one of these predictions come true, I will be in good position for a trade in the market in 2010 (and when out drinking with my friends and coworkers, perhaps more importantly, in position to say “I told you so” and back that up with a link).  In many respects, these lists themselves are absurd, as most years are defined by those events which were least expected.  More likely than not, the most talked about events will not have crossed any of our minds before it happens. Such is the nature of the “Black Swan.” Here is my first New Year prediction list so come December 31, 2010 please feel free to call me out on any wrongs or praise me for any rights (then again, if I turn out right about everything…that would definitely qualify as incredibly awesome and far from absurd).

  1. We are in a period of heightened volatility–the VIX will hold consistently above 20 throughout the year. Investor fear levels remain high in the wake of the financial crisis, to the point where even a small catalyst can spark rampant fear.
  2. Carrierless phones will become the norm in the cell phone industry–the new Google phone, sold independent of a carrier will transform the entire industry. This Apple/Verizon could be a waste of time…with univeral phones around the corner in 2010.
  3. The U.S. dollar will end the year worth comfortably more than it is now due to further deterioration in the Euro-zone, central bank interventions in export-based economies to compete with the pegged Yuan in China, and…(keep reading onto #4)
  4. …persistent deflation throughout 2010 in the U.S. economy. As unemployment continues to rise and wage levels decline, the price levels nationwide will continue to drop. The private sector must repair their balance sheets before actual deflation in the broader economy turns into potential inflation, as defaults, foreclosures and write-downs continue to haunt us throughout 2010.
  5. Another major financial institution will fail (I use institution broadly here…this prediction encompasses all banking, investment, lending and insurance firms). The stress tests merely tested the viability of financial institutions with a maximum of 8.9% unemployment. Whether that failed firm is ultimately bailed out remains to be seen; however, with populist sentiment lining up in opposition to “bailout politics” the next failure will further darken social mood regardless of whether that firm is allowed to fail.
  6. Biotechnology will take a major step forward–Dendreon (DNDN) is a game-changer in cancer treatment, stem cell research will receive attention from large investors, and big pharma will deploy more of their cash to young, start-up biotech in an effort to improve their pipelines.
  7. The unemployment situation will continue to deteriorate and the government will respond by becoming an “employer of last resort.” Many jobs lost in the Great Recession will not come back in the immediate future. In order to stem the tide of rising public anger, the government will have to respond.
  8. Oil prices continue to drop as excess supplies, a weak economy and advances in alternative energy lead to sluggish demand.
  9. A world reserve currency will be substantially closer to reality by year-end. The creation of a monetary union in the OPEC nations and continued concerns over growing global trade imbalances will yield way to a new international monetary paradigm.
  10. U.S. government debt, while a major hot button topic throughout the year, will be a non-issue in the marketplace (i.e. Treasury yields will not rise dramatically). However, look out for rates to dip negative yet again as a deflationary spiral takes hold.
  11. **And for a bonus prediction: the U.S. will finish in the top 4 at the FIFA World Cup

There you have it. Everything you need to know for 2010, plus a bonus. Please view this half in jest. With my predictions, I am largely anticipating and developing “if/then” scenarios for the coming year. Some of these predictions are interrelated and will trigger each other; however, if there is one thing we learned over the past year it is that historically direct or inverse relationships may no longer apply. I look forward to growing this blog during the next year and look forward to hearing responses from my readers both new and old.

Have a happy and a healthy New Year!

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