Todd Harrison: 10 Themes for 2010
This post is by Todd Harrison at Minyanville.
“A year has passed since I wrote my note. I should have known this right from the start.” –The Police
2009 will forever be remembered as a tale of two tapes, a bipolar stroller that tickled the depths of despair and the height of hope.
Following a gut-wrenching decline that threatened the very survival of free-market capitalism, the government unleashed its liquidity spigot, changed the rules of engagement and manufactured the single greatest upside reversal in financial history.
As we edge into this twelve-month stretch, pundits have furiously offered fresh predictions, price targets and prophecies. While Minyanville prides itself on adapting rather than conforming, we’re happy to gaze across the financial horizon and toss our hat in that ring.
We recently asked fifteen of our resident professors for forward-looking prognostications and their foresight provoked a plethora of insightful and actionable ideas. (See Dawn of the Decade)
In addition to those observations, I humbly submit ten themes that could bear fruit by the time 2011 arrives:
The Man Behind the Curtain
The stock market is the world’s largest thermometer and the single biggest proxy of our collective financial health. In a finance-based economy laden with debt and mired in derivatives, the only “solution” to the financial crisis was to push risk out along the time continuum with hopes that a legitimate recovery will take root.
While policymakers have accomplished the first half of that directive, the only difference between intervention and manipulation is communication. Minyanville pointed to the unnatural bid in the marketplace for many years and offered that a proactive invisible hand was in play. We were considered conspiracy theorists until Hank Paulson fingered The Working Group on Financial Markets as a central policy tool. (See Unusual Suspects)
Last year, we introduced the notion that the government was actually buying equities and/or S&P futures. Following massive bailouts in the financial, housing, and automotive industries — not to mention the curious absence of traditional sources of demand — this redistribution of risk may emerge as a modern day Ponzi scheme. Look for further evidence of this dynamic, or the perception thereof, to evolve in the year ahead. (See Strange Days)
Adapt, Don’t conform
While credit markets suggest further equity strength is not only possible — it’s probable — the disconnect between stock prices and the underlying economy, or the chasm between perception and reality, continues to widen.
Markets moves in three stages: denial, migration and panic. That pendulum of psychology has swung from “fetal position fear” last March to abject optimism today, albeit not yet at the euphoric levels typically associated with previous bubbles.
Conventional wisdom dictates that equities will enjoy further upside before facing headwinds later this year, akin almost to the mirror image of 2009. Respect — but don’t defer to — these choppy waves of optimism. When caught in a riptide, the surest path to survival is to swim parallel to the shore until the dangerous current passes.
The Tricky Tri-Fecta
In 2007, we previewed the deterioration of the middle class and the friction between the “have’s” and “have not’s.” In 2008, we forecast percolating societal acrimony. Last year, we spoke of the migration towards social unrest and geopolitical conflict.
As this dynamic evolves, real risk remains across the spectrum of social strife. While this assumes many shapes and forms — populous uprising, the rejection of wealth and an emerging class war — we should remember that global conflicts have been historically triggered by financial hardship.
An Israeli strike on Iran remains a top-line concern, as are uprisings in South America (Venezuela), protectionist policies in China (isolationism is the death knell of globalization), and saber rattling in Russia.
The State of the States
The Center on Budget and Policy Priorities recently offered that state budget shortfalls could reach a whopping $180 billion for the coming fiscal year.
States across the union — particularly those that benefited from the housing bubble and the taxable income associated with it — are now experiencing a massive reversal of those golden years. The decline is so swift that it will take several years for the real estate reset to flush its way through municipal budgets.