Read my latest macro outlook for an in-depth view of how I formulated my market forecast. My previous financial market forecast can be found here. Please read the disclaimer to your right. Hope you enjoy the content.
Category: I. Economic Outlooks
Below is my updated thesis as of January 2012. Categories are in order of importance (i.e. the factors that lead the development of my thesis). For example, I believe that the most important factor for the U.S. economy and financial markets in general is what direction our global economy takes; therefore, this topic is first. Government Policy is the second most important factor towards shaping the trajectory of the US economy and financial markets; hence, it’s second on the list… and so on.
To keep tabs on how my thesis is progressing, check out my previous outlook. For a list of all my past outlooks, click here.
Want to cut straight to the chase and read my thoughts on the markets? Click here.
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Note that previously, my financial forecasts were on the same page as my macroeconomic outlook (all the way at the bottom). I decided to separate them into their own post in case readers want to escape all the analysis and go straight to the point, what my opinions are on the markets.
Below is my updated thesis as of mid-2011. The main points are in order of importance (ie the factors that lead the development of my thesis). For example, I believe that the most important factor for the US economy and financial markets currently stands in what our Federal Reserves decides to do with respect to QE3, therefore this topic is first. The global economy is the second most important factor towards shaping the trajectory of the US economy and financial markets (hence it’s second on the list)… and so on.
Don’t like all the analysis and what to get straight to my market opinion? (Click here)
To keep tabs on how my thesis is progressing, check out my previous outlooks.
Below is my updated thesis as of the beginning of 2011. The main points are in order of importance (ie the factors that lead the development of my thesis). For example, I believe that at the present time, the most important factor for the US economy currently stands in what direction our government is taking to address important economic issues, therefore this topic is first. The global economy is the second most important factor towards shaping the trajectory of the US economy (hence it’s second on the list)… and so on. View full article »
I’ll be posting bi-annual outlooks on this site from now on. Most of my blogging will take place on my tumblrlog. Please visit
Rational Capitalist Speculator
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Rodrigo
Below is my detailed thesis as of the end of Q2.
Housing:
—Main Thesis—: I still expect housing to double-dip in price terms. We are faced with a very large supply of homes and very little demand from households. We also cannot forget the large shadow inventory and continued foreclosures, which further reinforce the large supply situation. The recent plunge in housing metrics shows that a stimulus-based policy is not the correct prescription. Eventually it will not be politically acceptable to continue wasting taxpayers money in this endeavor. The simple fact is that we have a large structural imbalance coupled with high unemployment and meager job growth, all factors that will keep demand muted in the months or even years to come. View full article »
Below is my detailed thesis as of the end of Q1.
Housing:
—Main Thesis—: I still expect housing to double-dip in price terms. Simple supply/demand dynamics point to this view. Large amounts of shadow inventory along with continued foreclosures and weak demand make a market in which the buyer has pricing power as opposed to the seller. View full article »
I’m officially changing the way I present my thesis. Instead of focusing on time frames and expectations, I will begin focusing on the approach and completion of events. I began employing this format in my previous thesis update without officially noting the change. This in no way means that I’m changing my thesis, past or present. I continue to be confident that the growth that we are experiencing is nothing more than a giant reflation experiment which will end in failure. This growth is not sustainable. The situation does not lie in the accumulation of more debt plain and simple.
With regards to the new format, this is how I intend to use it.
—-An example: I expect consumption growth to weaken as home prices begin a second leg down. Wage growth will remain constrained as today’s source is primarily due to a falling savings rate (which is obviously unsustainable). When consumption will actually weaken is very difficult to nail down, which is why I’ll be focusing on on mini-events leading to the final call; a decrease in consumption growth. A large supply of homes, coupled with the withdrawal of important stimulus would create headwinds large enough to lead a second leg lower in prices. Since real estate continues to be a very important part of the economy, lower real estate prices would no doubt lead to added credit constraint (from the banking sector) and an overall increase in consumer uncertainty, at this point, we would begin to see weaker growth. I’ll be "Keeping an eye out" for certain pieces of the puzzle to fall in place, which would be more effective in sniffing out the trend.—-
In essence, I’ll be looking for headwinds and/or tailwinds that lends (or refutes) my thesis. I will not overlook clues that may refute it. My approach will be balanced as my skin is in the game.
The reason I’ve chosen this approach can be seen in the following example. Looking back on 2006/2007 when the crisis was beginning to bud, an investor who had a prepared thesis done with careful due diligence, would have begun looking for clues instead of trying to time the final event; things can stay irrational longer than you’d think. Lower mortgage applications as well as weakness in the home building sector in 2006 would have informed the alert investor that his or her thesis was on the right track. It was over one year after the peak in real estate that the stock market finally began to realize what the consequences were. Careful technical analysis leading up to the peak in 2007 would have yielded observations of decreasing breadth with a classic head and shoulders pattern to mark the top, not to mention a slew of other red flags. These would’ve been signs that the investor’s thesis was becoming realized. Using this approach, along with dollar cost averaging into your trade would have yielded incredible results.
I believe that employing this method will result in superior outlooks.
You know my nervousness that has developed over the past couple of months regarding Treasuries. Below, I am listing the Bullish and Bearish sides of the argument. As far as a change in my thesis, I will continue to monitor the situation, but am still on the bullish end.
Bullish Factors
+ US is the one-eyed king in the land of the blind. Sovereign debt problem are beginning to crop up and the list of potential problem countries is indeed extensive: Portugal, UK, Japan, Dubai, Spain, Greece, Ireland, Emerging Europe, the list goes on and on.
+ Renewed risk aversion: This ties in with my point above, any type of risk aversion (whether it be sovereign debt, possible double dip). We will still see investors coming into the #1 safe haven, the US.
+ US households’ financial allocation to treasuries is at historically very low levels. David Rosenberg writes
—-"Have a look at the household balance sheet:
• Households own $18.2 trillion of residential real estate, even after the value destruction of the past three years.
• Households own $18.1 trillion of equities, despite the vicious bear market.
• Households own a near-record $7.7 trillion of deposits and cash — earning next to nothing in yield.
• Households own $4.6 trillion of consumer durable goods.
• Households own $3.5 trillion of corporate bonds and municipal/agency paper.
What do households own in Treasury notes and bonds? Try $800 billion."——
Breaking this down into percentages, we have Real Estate comprising 34.4%, Equities 34.2%, Cash 7.7%, Consumer Durable Goods 4.6%, Corporate bond and Muni/Agency paper 6.6%, while monies allocated to Treasuries = 1.5%. A secular change towards income is taking shape as we continually see bond funds getting the beef of all this dry powder that financial pundits speak of.
+ The Japan Experience: Japan’s rates have been very low due to their experience with deflation, which I believe is very alive in the US.
+ Financial companies are masking substantial losses that have been fudged by the FASB rule. They know they are in trouble and given my outlook for the US economy, they will be a large force of buying power.
+ The US might be embarking on a more prudent fiscal path as Volker’s presence is an palpable sign of Obama’s change in strategy. Volker was always a champion of fighting inflation and has recently acknowledged that excess leverage is bad for the economy. Recently we have seen more Fed officials (Hoening) making statements regarding battling the deficit.
+ A large short covering rally as the long bonds have a hefty amount of short on them.
Bearish Factors
- Obama’s budget makes some very optimistic assumptions which could very well need to be revised. Structurally, the US is in a deep deficit which would diminish demand for US debt.
- Monetization of US debt would reduce demand
- Oncoming hyperinflation would force feds hand in raising interest rates which would kill Treasuries
- China wages Financial warfare with US by not buying their debt.
- If the US begins to bailout states? That would surely grab the headlines.
- A weakening dollar will move investors to seek commodities as this ties in with the hyperinflation outlook.
Notes to self
While longer term I am a bit more bearish in Treasuries, I still think we will have a large round of risk aversion as the global economy double dips or sovereign problems take center stage, thus causing the dollar and treasuries to become safe havens, I will be watching gold’s price action during any risk aversion trade that may result.
Perhaps a tipping point in my thesis would be if the US began employing EU style bailouts of its constituents, the states. If California gets a bailout, then moral hazard will have moved to the states and will pretty much put the taxpayer on the hook for everyone. In a sense, we would be come a socialist nation. At this point, I would probably flip to the bearish end.
But for the time being, I am monitoring the situation and still see a strong bullish case.
