Friday, December 31, 2010


As briefly as possible I want to transition from 2010 to 2011.  I will keep this year-end review separate from the outlook for 2011 because I want to make this post shorter and more manageable.  I know I can ramble and go down a few bunny trails so I'll just reflect on what I thought might happen and evaluate how we did.

In the Outlook from the Mountain Top for 2010 I made quite a few projections ranging from where gold and oil might trade to world geopolitical events to domestic policy outcomes. In total there are about 16 or 17 concrete ideas we can evaluate in the post found here - OUTLOOK FROM THE MOUNTAIN TOP FOR 2010.

In total, I believe that I was 8 out of 14.  Some of the projections I will concede that I was wrong because I laid down hard and fast numbers, but were directionally correct (3 of them) - but..... I don't want to give myself credit cause a miss is a miss (remember, I'm old school where not every kid gets a trophy just for playing...only winners get trophies). 

So, let's look at the major issues.

INTEREST RATES - (MISS) - timing was off, but it is coming!
Complete miss here - Interest rates on the 10 year treasury started the year at 3.85%.  As our Federal Reserve invoked the power of QE I we saw the power of their printing press and the ability to use those proceeds to impact the bond market.  10 year treasury rates dropped throughout the year to a low of 2.41% as of October 6th.  Interestingly though, since October 6, rates have jumped to a rate of 3.38%.  So, as I look at this projection, it appears as though I under estimated the appetite of the FED to attempt to become the bond market by buying the amount of bonds they have (they almost own $1 Trillion of treasuries and MBS) and also under estimated the insanity of the Federal Reserve to take on this kind of interest rate risk.  Consider that if interest rates move 1 basis point against the FED (up) they will lose $2 billion in a market to market of their position.  Thank goodness that the government doesn't make anyone mark to market!

Since 10/6 the market seems to have decided that it will call the FED's bluff and see exactly how much and how deep their commitment is to purchase this trash.  The 2 month move in yields isn't troublesome yet in a historical perspective, but I would be worrying if I were Uncle Ben if rates get over 2010's 3.85%.

I'll write more in the next post about 2011 to discuss exactly why rates are doing what they are doing and how this actually may be part of the Fed's plan rather than what many have described as Uncle Ben fiddling as the US burns.

I nailed this one.  Housing has double dipped and is a mess and getting more messy.  If interest rates go any higher you can forget about the promised housing recovery.  In my book, it is done.

Yes, this too was correct and we'll see many more as emerging countries cannot deal with the pressure that the US is putting on them.  By attempting to devalue ourselves andcreating inflation here, we are exporting deflation there and these countries absolutely need to keep a relative position to us in trade.  They will want to combat that and they have done it by cutting the value of their currency.  Now other emerging countries are attempting to stifle rampant inflation like India and China by raising interest rates.

Yes, these are a disaster and they have been the dumping ground for all the bank trash.  This is a ticking time bomb that will deliver a massive body blow to the budget and economy of the US.  The good old banks got us again.  Good thing the taxpayer has a bottomless pocket to absorb all of these losses.  Thanks CONgress.

Yes, and it isn't through.  The Euro's decline is a symptom of the sickness in the Eurozone.  We will continue to see this plummet.

Lending actually has picked up.  This is a miss.

Because I projected a year-end level of $1,200 on gold, this is a miss.  Directionally this is correct, but I didn't anticipate that gold would really become that ANTI-CURRENCY thing that it has become.  When people do not want to risk holding any paper or anything, they have bought gold and it has now become its own asset class.  Each time we see a tremor in Europe that reveals that Greece, Italy, Spain, or some other country is on the ropes, gold launches higher.  In my estimation we will not see an abatement to this trend as there is no fix to the Eurozone crisis unless leaders there man up and kick these countries out of the EU and force bond holders to eat losses.  Of course they don't want to do that because that will cause all of their banks to implode.  So back up the truck and buy more physical on any pullback.

I projected that stocks would be up around 5% this year, they pounded out returns of near 12%.  Clearly my understatement of the Fed's approach to QE was a major factor in missing here.

I suggested that there would be an attack on Iran, and there was one, yet it wasn't the type of physical attack that I suspected.  Because I missed it, I'll call this an official miss, but it wasn't.  In recent months we have learned that someone (Israel is suspected) uploaded a virus into the nuclear systems computers at several sites globally.  What is amazing though is that this virus seems to have been extremely targeted.  It looked for specific types of equipment and operations components and had the capability to turn on and off specific processes that would damage components.  This sophisticated attack seems to have delayed and destroyed the capabilities of Iran to push forward in its campaign to develop nuclear "power".... errr weapons by 1 or 2 years.  If you want more information on this compelling attack simply google Stuxnet.  While I completely support this, it is very scary to think that a government or group of cyber programmers could do this.  Clearly this means that our electrical grid and anything else in the United States is subject to the same attack.  I am not naive enough to believe that this same technology won't be used by another government or terrorist group in the future.

When I project that oil would hit $100 a barrel it was at $72.00.  Today we closed around $92.00  Again, because I put a specific level I'll call that a miss, but directionally it was dead on and would have been a great gain if you went in that direction.  Energy will be one of the big winners in 2011.

All three of my projections hit home here.

Yes, our national security apparatus continues to erode personal liberties in the name of protecting us.  Government does not self-limit and continues to desire to grab and obtain more of an individual's right to success and failure.

There you have it.  Decent, but missed on a few.  The year was volatile and was one that in my opinion is a set up to a really difficult year in 2011.  Most of the CNBC gurus are projecting a great 2011 and I just don't see how it happens.  There are storms brewing and each of these guys continue to act like we can pretend that the storms won't actually come ashore.  The year will be marked by how Europe and it's bankers... (the FED and IMF) handle the problems in Spain, Portugal, and the other broke countries.  Additionally, the emerging markets trades that have been so supported here on this blog will become trickier as higher commodity prices will suppress growth in those countries and will possibly crush domestic US consumerism. 

Unfortunately, this is a time when those that are awake are asking where the leaders are, but in the US we don't have any that are worth their salt.  The US is led by an economic captain that is super clever, absolutely insane, or acting on behalf of those that have interests that are not in line with the US and its citizens.  Our political captain is an amateur that is driven by big ideas that have no real value or substance outside of dope smoking academic dream worlds.  We see this in his approach to health care, economics, energy policy, and foreign policy.

In summary, 2010 was sort of like a dream year where it defies logic and reality and simply progresses on a path of inertia fueled by the Fed's electronic printing presses.  2011 seems to me to be the year when reality shakes us from our dream-like state and unfortunately reveals that we have real issues that should have been dealt with previously.  America once was a country that was made up of rugged individuals that had a moral compass and would rather do the right thing than the quick and easy thing.  I am afraid that while many of us are still cut from that cloth a substantial portion of us have become soft and more concerned with today than tomorrow.  The need for instant gratification and the belief that someone in government can solve problems and should solve them has transformed many into something less than the proud Americans we once were.  It is without a doubt that even if a majority of US citizens are independent and strong we have elected leadership that doesn't adhere to our same principles.

Thanks for making 2010 a great year.  May your family be blessed.  Email me with questions or post comments, I relish knowing that someone actually reads this thing!  On that note, I'm excited to see that the blog is getting around 1700 visits a month now.  This isn't much compared to many of the big blogs I read like Slope of Hope and Mish's site, but 1700 is a ton as we started this thing with zero readership!

I'll post the 2011 Outlook soon.