Into the Looking Glass:
No one knows what the future holds – but this is the time to ‘stick your neck’ out there – risk whatever ‘street cred’ you’ve built up over the previous decade and predict what will happen – so this letter will be no different. But where have we come from in 2010:
- We saw the first major eruptions in Europe as Greece and the other "PIIGS" nations had to admit to bankruptcy.
- Ben Bernanke did QE1, QE2 and the continued buying of toxic MBA's.
- Ben Bernanke admitted he was supporting assets so people would feel the wealth effect.
- 157 banks went under in 2010 (more than the 140 failures in 2009).
- Hundreds of lawsuits were filed against financial institutions as pension funds, cities, and insurance companies decided to fight back after Wall Street sold them toxic assets, and described them as AAA rated.
- Unemployment continued to be a major problem, despite the Government’s attempts via "seasonal adjustments" and the "birth/death" model. Even now they are changing how they calculate the unemployed. “Citing ‘an unprecedented rise’ in long-term unemployment, the Federal Bureau of Labor Statistics (beginning Saturday) will raise from 2 years to 5 years the upper limit on how long someone can be listed as having been jobless.”
- In terms of ‘inflation’ – “Consumer prices in Germany rose by more in December of 2010, than in the previous eight months combined” - Federal Statistics Office, Destatis.
- In terms of ‘deft’ – the U.S. Treasury reported that the U.S. Government has accumulated more new debt ($3.22 trillion ($3,220,103,625,307.29)) – during the tenure of the 111th Congress than it did during the first 100 Congresses combined.
- Since it is mathematically impossible for the US to pay its debts, we simply need to look ‘south’ in terms of next steps: “CARACAS – Venezuela will devalue its ‘strong bolívar’ currency on New Year's Day. News of the devaluation came just after the central bank said the oil-rich Venezuelan economy contracted 1.9% in 2010.”
- On the housing front: prices continue to fall and foreclosure motions continue across the nation – increasing 34% in the 4th Quarter if 2010. Foreclosures in process increased to $1.2 Trillion, up 10.1% year-on-year. Housing is not bottoming, and the bottom will not occur for another couple of years – and when it does – do not expect rapid price increases.
- On the municipal front: Meredith Whitney exposed how the next big problem is going to be bankrupt townships and municipalities. As municipalities struggle to keep the roads cleared, they'll continue to reduce their employee counts, effectively offsetting what little hiring there is in the private sector. Services will be cut, and more towns will try and work out deals with neighboring townships to "share" expenses.
- Ben Bernanke has no choice but to continue to inflate. If he stops – the economy crashes. Therefore the dollar will continue to fall in 2011.
- Food and energy inflation will continue, and I think we'll see $3.50 regular gasoline this summer. On the food side, it's not just the printing of fiat dollars but also the increase in the global population.
- China will continue to grow between 8 and 11% in 2011 – with most of the Chinese still living below the poverty line. ‘Yes’ - there are half a dozen Chinese cities built, where no one lives. ‘Yes’ - banks are being ‘propped-up’ by the Government. BUT – China builds everything and pays for everything in ‘cash’ / ‘real money’ – vs the US where ‘debt’ is the currency.
- Gold and especially silver will continue to go "up" in 2011 because they are being looked at as money. I believe silver will hit $50 and possibly $70 per ounce (currently $30) while gold will threaten the $1,850 to $1,950 an ounce (currently $1,420).
- Because of worthless dollars flooding the market – hard commodities will continue to rise.
- But WHAT ABOUT STOCKS?
Ah the real question and by far the hardest to predict because of the government’s policies. If not for Bernanke's POMO money, his buying of toxic MBA's and all the associated programs – we would be sub-7K on the DOW - instead of 11,500. The big question is: Can the buying by the Central Bank offset the normal actions of the market?
Currently we are overbought. All of the technical indicators are screaming “we're overpriced” and we’ve had 2 Hindenburg Omens this year, the last one still "working" until about the April time frame. The problem is – these indicators have been in place for 2 months and we’ve continued to go up. We’ve gone up because Bernanke funnels money into the market via the primary dealers selling Treasuries for profit. Can this continue? Frankly I don't know, but I don't think so. I think we're looking at a massive plunge coming, one that takes most people by surprise.
Consider for a minute – back on Dec 15th many corporate CEO’s tried to convince Obama to offer up a tax amnesty period where Uncle Sam would allow them to bring in ‘off-shore profits’ at a 5% tax rate – rather than the current 35% tax rate – in exchange for job creation. Now, what I think will happen with the $2 Trillion corporate wind-fall (if Obama agrees) is that a little bit of hiring will occur, but a LOT of stock buy-backs of executive’s stock – and the beginning of the ‘fleecing’ of John Q. Public.
Now, a likely scenario is that we come into the New Year and see a sell off. It will look bad at first, but it won't be, and we'll recover most of the dip, as everyone trained to "buy the dip" rushes for the big bargains. Then, sometime around the Aril/May area the real rug pull comes and we plunge hard.
So, for 2011:
- Municipal bonds are an absolute No-No as municipalities go bankrupt.
- Gold and silver assets will continue to move higher.
- Interest rates very well could continue higher, and thus the 25-year run in treasury bonds is done.
- I am looking for a dramatic pull down in 2011. If you don't know how to utilize put options, or go "short" I think you'd be quite wise to learn. Some of the biggest returns we've ever personally had were being short in 2008.
So that's what we're seeing. Remember, no matter what happens to the economy, there is always a way to make money, and if you've got your health, you can do wonders. Most don't know this, but the largest expansion of millionaires EVER, took place during and after the Great Depression.
We come into 2011 with some gold/silver stocks, and not much else – honestly. One stock that I’ve played numerous times over the past two years, ANR we got into last week at and gained $5 in just 4 days – go figure. I think the first couple of days of trading may be okay this week – as they try and keep us up a bit, but as the week goes on, I think we're going to see those folks that wanted to sell (but held off because they didn't want to pay taxes) will put some pressure on the market.
Our Long Term Holds look like:
SLV at 25.81, NG at 6.825, AAU at 3.02, DNN at 2.71, AVARF at 4.00 and USSIF at 0.61
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a 4 months or so ago now:
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Until next week – be safe.