Mid year check-up: How are the 2011 predictions coming along?
JULY 01, 2011
It's now a full six months into 2011. Time to take stock of how the predictions I made in January are shaping up. My original predictions are in italics.
Top global real estate stories:
1) Canadian real estate begins a protracted period of falling valuations. Sales remain weak. Listings gain steam throughout the year. I expect 10% off year-ago levels as a minimum.
Sales weak, yes. Listings gaining steam: mixed throughout the country, but certainly not true yet in Toronto and Vancouver.
2) Canadian mortgage rules will be tightened, though I don't think we'll see a change to amortization or down payment rules until after the next election.
3) US real estate continues to double dip. Prices will drop a further 5-10% off of already-slashed prices.
Check. The 5-10% remains to be seen, but the double dip is indeed intensifying.
4) House prices in Europe's big economies will double dip after the stimulus-induced bounce of 2010. All big European countries with the exception of Germany will see year-over-year price declines, led by the UK. Australia also sees modest price declines towards the end of the year with a bloodbath set for 2012.
Check to UK house declines. Check to Australia house declines.
5) As a result of recent attempts by the People's Bank of China to curb credit creation, house prices in most large Chinese cities will see year-over-year declines with the potential for some jaw-dropping declines.
House prices are up on the year, though the latest data suggest that this prediction may yet be validated.
Top commodity stories:
1) Gold and silver will continue their upwards march, though I expect increased volatility with the chance of some major pull-backs along the way. Gold and silver gain increasing media attention. 'Regular Joes' begin to add gold to their investment holdings. Gold and silver become water cooler talk by year end.
Check on the upwards march. Gold is up roughly 8% on the year. Silver is up 13% on the year, though, as predicted, the volatility has been intense, with silver suffering staggering losses (dropping nearly 40%) in late April and early May.
2) Global demand for non-monetary commodities will slow significantly. Baltic Dry Index will continue its fall, ending 2011 lower than today.
The BDI is indeed down on the year. Demand for non-monetary commodities has not slowed, though not as much as anticipated.
3) Industrial commodities will fall hard with copper as the worst performer.
Copper is down on the year. Industrial commodities are also down for the most part.
4) Natural gas will have a relatively stellar year and will be the best performing of all commodities. Perhaps this is just wishful thinking as the nat gas exposure in my portfolio continues to be the major laggard.
After impressive recent strength, nat gas has slumped and is now slightly lower on the year, much to my chagrin. However, this time of year tends to be weak for nat gas prices. I'd be surprised if there isn't a nice rebound later this summer and into the winter.
5) The end of global stimulus measures, a slowing Chinese economy, ongoing credit deflation in the Western world, and the unwinding of massive speculative positions in most commodities will likely leave the broad commodity market lower for the year. I'd be surprised to see the outsized gains across the board even with QE2,3,4, and 5 all on the way.
The CRB commodities index is up only slightly on the year, though down 11% since May. I'm quite confident that this prediction will play out.
Top Canadian economic stories:
1) Falling home prices and overextended consumers will choke off HELOC growth. Consumer spending will falter. Exports will remain depressed. I expect negative quarterly growth rates later in 2011 with a chance at an outright recession as early as Q3 or Q4. Total annual growth rate will be well below the 2.7% concensus...likely in the 1-1.5% range.
HELOC growth rate is still positive, though overall non-mortgage consumer credit growth has registered its slowest expansion in over 8 years. Exports have had a see-saw year. Q1 growth was quite strong, though Q2 looks to be in the 1% range, in line with my predictions. A recession in Q3 or Q4 seems like a slim possibility, though the rapidly slowing global economy seems to have caught most economists off guard and may yet exert more pressure on economic growth than most realize.
2) Bank of Canada holds the line on interest rates all year. 5 year bond prices remain even to slightly lower on the year.
Check so far. At the start of the year, most economists were predicting 3 rate hikes in 2011. Now the big banks seem to agree that the earliest rate hike will be October, with several stating that they now don't see a rate hike at all in 2011. Once again, the pace of recovery (or lack thereof) has caught most of them off guard.
3) Austerity begins to rear its ugly head at the municipal and provincial levels. The big federal austerity drive begins in earnest in 2012. Public sector unions remain clueless as tensions rise throughout the year. 2012 and beyond will see MAJOR union tension as the axe begins to fall.
4) Housing starts come in well below expectations....perhaps around 150K. Total unemployment rises slightly by year end, with job losses accelerating towards the end of the year.
Housing starts have indeed moderated, but are well above the 150K prediction. If the current pace is sustained, starts will finish the year closer to 175K. The unemployment rate started the year at 7.7% and is now at 7.6%. So far, this prediction has been a miss.
5) Despite pushing through parity and remaining there for the first part of the year, the Canadian dollar ends the year closer to 90 cents.
Also a miss so far, though I think we could see a flight to safety rally in the US dollar at some point. I don't consider this one dead yet, though 90 cents seems unlikely. I'd still be surprised to see us above parity early in 2012.
Top global economic stories:
1) China hits a wall. The Chinese government faces the unenviable task of reigning in inflation without causing a hard landing to the economy. I wouldn't be surprised to see the Chinese growth illusion come into question later in 2011.
It hasn't hit the wall yet, but have you noticed the increasing media attention on the China growth story of late? Inflation is still rising and bad loans seem to be surfacing. The slowdown may not happen in the next few months, though a reckoning day for China's economy at some point in the next few years seems all but assured.
2) European debt concerns spread to the core. Spain and Italy will see continued rise in bond spreads over German bunds. Collectively they are far too big to bail out. With that realization and the realization that large global banks have substantial exposure to Euro debt, expect bond yields to rise throughout Europe while European bank shares get whipped like a bad mule.
The Greek saga has taken centre stage. Indeed we've seen interest rates and rise in Spain and Italy while CDS on their debt has also risen, indicating increasing scrutiny of their finances. The potential exposure of Eurozone banks to bad debt, particularly out of Greece, has been a topic of much media coverage.
3) QE becomes the buzz word in Euroland. With bond yields rising, expect the EU to begin an aggressive campaign to monetizing its debt.
We're not there yet....at least formally. But with a new bailout package for Greece in the works, the question of just where all this money will come from has not yet been adequately answered in my mind.
4) The US ekes out some economic growth on the back of the extended tax cuts, though it will likely be well below the 2.5-3% concensus. US states and municipalities will come under the microscope. Bond yields will surge. QE 3 will be announced later in the year and will monetize municipal bonds. Expect a handful of municipalities to declare bankruptcy to escape the weight of outsized public sector entitlements.
US GDP has been stronger than expected through Q1 and Q2. Bond yields across the curve are flat to lower so far. But with the 5 year bond experiencing the greatest weekly yield spike ever, and with the end of QE2 and rising bond market uncertainty, I wouldn't count this one out just yet.
5) Austerity will begin to grip most Western nations.
A mixed bad. UK, yes! US, not yet. Europe, mixed.
Top social/political stories:
1) Civil unrest in many parts of the world will be the major story. China, Euro land, the UK, and US states all see increasing strikes and protest as economic reality of lower economic growth/austerity/unemployment becomes clear.
Greece is a basket case. That's no surprise to anyone. But did anyone see the revolutions in east Africa and parts of the middle east coming last year? I didn't foresee them specifically, though I think they are signs of the times. Watch for uprisings in China next.
2) The (un)sustainability of defined benefit pension plans becomes a major topic of media focus in Canada, the US, and Europe. Most big Canadian DB pensions will switch to defined contribution by 2015, though we'll see the seeds for that nasty conversion sown this year.
The strong gains in the plan assets have kept a lid on this discussion for now. It will be revisited.
3) An election is called in Canada for late 2011-early 2012. The conservative government forms a majority. The axe falls on the federal public sector in the next budget.
Yup. Called it. Got the timing of the election wrong, but not the results. I had no idea the NDP would get such a strong showing. Who did?
4) Obama will continue his fall from grace. The Tea Party movement gains steam.
Check. People will increasingly realize that Obama has been no better than Bush in his handling of the economy. Haven't heard too much from the Tea Baggers lately.
5) Young people throughout the Western world will begin to realize just how screwed they are. Jobs prospects will remain bleak with unemployment for the under 25 crowd above 20% in many countries. They'll begin to resent the necessary tax hikes to pay for entitlement promises that can not be funded and never should have been made. The stage is set for the rise of some extreme right wing parties led by generation X'ers and Y'ers throughout much of the West in 2012 and beyond.
Too early to call. We'll revisit this one at year end.
Not a bad start. Many calls seem to be shaping up. A couple seem dead in the water. We'll revisit this in December.
Cheers,
Ben
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2 Comments
Ben: I know you like charts and statistics, so I thought I'd pass along this Felix Salmon article entitled, "How The Mortgage Industry Lies With Statistics". The mortgage industry in the States is trying to make out that low down payments don't really increase default rates. Mr. Salmon was provided statistics (which did not include the magic years of 2006 and 2007 - I wonder why!) and puts together a graph of his own.
Just take a look at his graph and findings at the bottom of the article. It's a very good read.
http://blogs.reuters.com/felix-salmon/2011/06/23/how-the-mortgage-indust...
I came across a pretty cool webinar that seemed to have more information around gold and silver. It's an interesting time for this and I want to know if I should buy or not. Thoughts?
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