Happy New Year! What might 2011 hold?

Happy New Year to all!  As we begin another year, it’s always fun to contemplate just what the next 365 days might hold.  Below are a few ‘top 5’ lists covering a range of finance and economic topics.

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.

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.

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.

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.

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.

2)  Global demand for non-monetary commodities will slow significantly.  Baltic Dry Index will continue its fall, ending 2011 lower than today.

3)  Industrial commodities will fall hard with copper as the worst performer.

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.

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.

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.

2)  Bank of Canada holds the line on interest rates all year.  5 year bond prices remain even to slightly lower on the year.

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.

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.

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.

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.

3)  QE becomes the buzz word in Euroland.  With bond yields rising, expect the EU to begin an aggressive campaign to monetizing its debt.

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.

5)  Austerity will begin to grip most Western nations.

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.

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.

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.

4)  Obama will continue his fall from grace.  The Tea Party movement gains steam.

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.

There you have it.  Some ‘out there’, contrarian predictions for sure.  We’ll revisit this in late 2011 and see how things look.  My bet is that Canada and the rest of the world is a VERY different place by that time.  The ‘economic recovery’ illusion will likely be long gone by year-end.


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15 Responses to Happy New Year! What might 2011 hold?

  1. Leith says:

    Nice one Ben. Love your work. Remember also that the first of the baby boomers turns 65 this year. So 2011 marks the end of the ‘demographic sweet spot’ whereby, for the past 25 years, dependency ratios have been held low in most western countries. Now western countries’ dependency ratios will rise year-on-year as the baby boomers gradually exit the workforce. This will squeeze consumption, growth and asset prices going forward.

  2. Alex says:

    Ben I’ve been following your posts ever since someone posted a link on Garth Turners website (which unfortunately I think has run it’s course). You have the gift of clarity and speak to more than the constant commentary on the housing collapse like Turner. I share many of your concerns and worry most about the impact of all these attempts at saving the Boomers from themselves on future generations. The greatest generation didn’t teach their children the meaning of sacrifice it had to be forced on them. They are in power now and to protect their own they’ll tax until they can’t tax no more. They’ll tax to protect the illusory lifestyle of unsustainable consumption the feel is their right, never realizing that in this belief were sewn the seeds of their own demise. The hippies finally grew up, just a little to late and with not enough cab fare to get them home and true to form their thumbs are out for a free ride.

  3. Lumpen says:

    A good set of predictions – I thought I’d see if you have any catalysts you’d be willing to share to go along with the ones that require a trend reversal. e.g., US RE is currently on a downtrend, and with mortgage rates rising, has a continuing tailwind in that direction. Do you have a catalyst for Canadian housing prices?

    I’m certainly not disagreeing with you on the overvaluation, just wondering what makes 2011 “the year”? The cascade of the Canadian economy forecasts could, but what starts them?

    I suppose I’m asking what your key trigger event or events are that underlie the forecast.

    • Hi Lumpen

      As I’ve often said, I don’t think real estate needs a trigger to begin its downward march. Often we go looking for a trigger after the trainwreck. In this case, it may be as simple as debt fatigue and satiated demand. Weakening sales, potential mortgage changes, and increasing weakness in the US and Europe should all play into it as well.


      • Lumpen says:

        Thanks for that, and also for your ongoing posts.

        One of the reasons I spend a lot of time looking for triggers is that without them, trends generally continue. We may look backward for them, but they’re also generally pretty exciting when they occur.

        Many asset classes are overvalued on a fundamental basis, but I learned (painfully) years ago not to fight the trend, and rather to be patient, even if it does take years. Actual enforced changes to CMHC guidelines would be a good one, as would a rate spike.

        But consumer debt weariness – to me, that’s the feeling that results from the wealth effect going backward, not a cause of anything. US and Europe (ex-Germany) have been weak for the last two years, and specifically to Cdn RE, don’t buy in any significant number. Could Cdn exports to those countries continue to decline – sure, but those effects will be felt more in Windsor, Oshawa and other ‘burbs rather than the big cities.

        Unless Canada’s correction is going to play out over a decade or more, there’s going to be an exciting event somewhere along the line. It’s been four years in the US and three in the peripheral European countries, with huge fireworks along the way, and their corrections still aren’t done yet.

      • buff_butler says:

        I would submit the idea that the bust may not happen until a commodity bust which would be ~2012. Currently their not eating up enough of a percent of household and corporate expendatures.

  4. Josh says:

    Great Post Ben! Always look forward to reading your posts. What are your biggest natural gas holdings right now?

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  6. Sam says:

    1. Canadian home prices continue to boom
    2. Loonie breaks .90c
    3. Rules change, but interest rates go LOWER
    4. SP500 closes on year high
    5. Oil reaches 125-135 $
    6. Africa takes limelight and becomes the hot EM market
    7. Fort Mc fires up taking nufee’s from the East
    8. Northern Alberta fires up on Gas plays
    9. American marry Canadians for health care

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  9. Pingback: Revisiting predictions: Commodities still hanging tough, public sector unions under fire, European debt crisis intensifies, interest rate predictions | Financial Insights

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