Strategic Ideas

I am going to keep this page updated, and I think I should be able to keep the historical ideas in a viewable archive.  [Minor Update: I will be adding reasons for each of these views as time permits.]

As I have time, details will be added to each of the forecasts.  For prior forecasts, go here.

Core Observations 1.04.2011, with updates 5.10.2011 (Similar as 1.04.2011, modified euro, bonds):

  1. Euro: The Euro does not breakup in 2011.  Sovereign debts are purchased by the ECB in quantity and do not cause inflation.   The solution deal for the Euro has already been discussed by 12/20/2010 and is nearly complete.  Update 5/10/11: Rumors of a breakup are only rumors.  The euro continues its rally. The solution deal is nearly complete, but the politics are difficult.  2013 still appears to be the actual solution date.
  2. US government Bonds: Treasury Yields continue their trend lower, ending 2011 much lower. Update 5/10/11:  I now expect Yields test the crisis lows so the price movement is larger than I expected in Jan 2011.  Long bonds stage a rather large rally in H2 of 2011, due to cash for clunkers and Bill Gross covering in August and September.
  3. U.S. Stock Market: The stock market rallies in 2011.  Low rates plugged into the old fed model mean high P/Es, and high corporate profits keep the boom going.  Update 5/10/2011: Corporate profits higher than expected through entire second half of 2011.  Lower yields from Treasury rally provide upward push on P/E ratios.
  4. Japan: has a huge stock market rally in 2011  Update 5/10/11: Earthquake, Tsunami and Radiation – well, that wasn’t in the model.  Is the Japanese stock market the Chicago Cubs of the financial world?
  5. Other Stock Markets: All major stock markets rally – Germany, China
  6. U.S. Economy: The U.S. experiences a real recovery.  Hours worked creeps up to pre crisis levels, and hiring begins to excede minimum necessary 150,000/month.  Update 5/10/2011: We are seeing this unfold now.  250K jobs last month.
  7. China Meltdown: U.S. Growth allows China to avoid a meltdown.  Update 5/10/2011:  so far, so good. The meltdown looks more likely than it did in January.  Copper Collateral margining to real estate ponzi scheme is terrifying to world economy.  Still, a fall in commodities is a net positive for the economy.
  8. Banking: U.S. and European banks are insolvent.  The recognition of these insolvencies have little real world consequences.  Is anybody still lending against RMBS, anywhere in the world?
  9. Banking: U.S. Banks and the robo-signing scandal ends very badly for the banks.  Expect at least 1 full nationalization in 2011.  BoA is the obvious target, but JPM, Citi, and Wells all are suspect.
  10. Stock Market: Bears are caught in a conundrum thanks to the yield curve.  The worse they think it will get, the higher they push up long term yields. But the steeper the yield curve, the more bullish the interest rate environment becomes.  Update 5/10/2011:  So far so good.
  11. Real estate: falls another 20%, with some real chance of a 30% decline.  This decline takes roughly 18-24 months from January 2011.  The Bottom happens in 2012-2013 time frame. [Update 1-12-2011: Reasons for this bearish view on housing here.]  Update 5/10/11:  This analysis seemed so radical in January 2011, now it seems to be nearly conventional wisdom.
  1. Anon
    January 11, 2011 at 11:04 pm

    “Real estate falls another 20%, with some real chance of a 30% decline. This decline takes roughly 18-24 months from January 2011. The Bottom happens in 2012-2013 time frame.”

    Interesting, this is much, much more bearing than my company’s projection, which is one of the most bearish on the street (I presume you’re talking about residential, USA aggregate here and 20%-30% from today’s levels) . The time frame is about the same, though.

  2. Anon
    January 11, 2011 at 11:05 pm

    bearing=bearish in the above comment

    • TC
      January 12, 2011 at 11:19 am

      I am quite bearish. I look at these facts:

      1. Dr. Housing bubbles rental posts: Seems like much of California is still 50% overpriced compared to rentals
      2. Long term Housing prices from Schiller shows that the depression shaved 50% off home prices. A similar bust would take us down 20%
      3. Foreclosed properties are trading at a 25% discount right now.
      4. We have a huge shadow inventory of homes sitting out there, either not foreclosed or foreclosed and not on the market.
      5. We’re looking at 9% unemployment for the next 3 years, even with a moderate recovery.
      6. 22-25% of the market is already “underwater”, so I expect strategic defaults to increase starting Q3 2011. I’ve had 2 people ask me for advice about how to “give the house back to the bank” in the last 3 months, planning for next year.
      7. Standard market price overshooting during bad and good times
      8. Securitization process broken, loans are more difficult to get today
      9. Expectations that prices will be lower delays purchases

      All of this adds up to a 20% drop easily. I do not have a formal data model to suppor this contention.

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  1. December 27, 2010 at 12:15 pm
  2. August 23, 2011 at 3:13 pm

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