Good News For 2011
“This time last year,” writes Overseas Retirement Planning Guru Paul Terhorst, “I predicted stock markets up, oil prices flat, airfares flat, high U.S. unemployment, strong natural resource prices, a new health insurance bill, and flat housing prices.
“All these predictions were right on.
“Airfares on some routes started to rise, but most remained the same. Housing prices in some markets continued to fall, but overall they were flat. The new health insurance bill looked to be dead when Ted Kennedy died and Massachusetts elected a senator who opposed it, but, then, President Obama, Harry Reid in the Senate, and Nancy Pelosi in the House rammed the bill through.
“I also predicted that the U.S. dollar would rise and break the link with the stock market. I pointed out that the dollar and stocks generally move in opposite directions: dollar up, markets down. I predicted that this tight, inverse link would be severed in 2010. I was partly right.
“During some periods this past year, the markets and the U.S. dollar moved together. Still, at this writing, the inverse link appears fairly strong, especially on big days. You can almost bet that if you see markets up sharply on a given day, the dollar will fall.
“Finally, I predicted that China would do well and India would struggle. Again, I was only partly right. Both India and China did quite well.
“Vicki and I revisited India in 2010 and learned more about how this country works. I no longer believe, as I wrote this time last year, that ‘India’s growth is temporary, China’s growth more permanent.’ Going forward I think both India and China will continue to do well. If you agree, consider buying country ETFs. The symbol for the India ETF is PIN, for China it’s FXI, among others.
“Before I offer specific predictions for 2011, I want to give you a framework perspective.
“Overall, I’m optimistic about the world economy and stock markets in the New Year. I think recovery in the United States will continue and that Europe will save the euro and pay its bonds.
“I have one caveat: This will be a jobless recovery. I see the U.S. unemployment rate at about 8% or 9% for the next several years.
“For one thing, the government punishes those who hire. Congress and the courts, federal agencies, states, even cities work to discourage hiring. We have discrimination laws, minimum wages, employer taxes, lawsuits, and threats. The new health-insurance bill will hurt hiring even more.
“Wal-Mart has become one of the nation’s largest employers. The company has dozens of lawyers pouring over labor laws, trying to figure out what they can and cannot do. Even so, Wal-Mart seems to lose lawsuits and to settle claims on a regular basis. For businesses, hiring people is a lose/lose.
“So companies look to new technologies to get the job done without hiring more people. Rather than adding employees, they improve systems and equipment. Remember that the U.S. produces very little stuff. The U.S. economy has little need for factory workers. Rather, the U.S. has become a service economy. More and more, the service economy runs on the backs of computers, cell phones, e-mail, and the like.
“My friend Harry runs a small parts company with one assistant and an office manager. Harry has been in business for more than 30 years, and, in that time, he has more than tripled his volume. Yet he’s managed to avoid hiring because a central database has allowed him and his tiny, educated staff to work more and more efficiently.
“Back to the point…and the predictions for 2011:
“With better systems and little new hiring, corporate earnings should improve in 2011. That’s why I think stock markets will continue up. Note, too, that years before election years in the United States tend to be better than average. Generally, we should be suspicious of relying too much on this kind of past performance as an indicator. In this case, though, the fact that 2011 is a pre-election year just bolsters my generally bullish position.
“Remember to diversify and to make sure you have plenty of money in reserve. If I’m wrong, and the market crashes, you want to be able to muddle through.
“I think unemployment will remain high, as I’ve explained.
“I think housing prices have run the cycle, completing five years of decline. By the end of 2011, housing prices should stabilize and perhaps start moving up. Some parts of California, Nevada, and Florida will continue to have problems, but, overall, I see a more stable market.
“I see private banks getting back into the lending business, perhaps by the end of the year.
“I think the deflation types will be proven wrong. Retail prices should go up modestly. Wholesale prices will rise a bit less. While I see a huge inflation risk further out, perhaps beginning in late 2012, I think we’ll have little inflation in 2011.
“If I’m wrong on this–if deflation takes root in 2011–we could be in for serious money trouble. When prices start to fall, people postpone purchases, thereby making the problem worse. Let’s hope deflation never happens.
“I think energy costs will rise in 2011 and beyond, for the next decade or so, until new investment brings new supply on line. Huge producers such as Iraq, Venezuela, Mexico, and Iran have postponed making improvements in their oil fields. Instead of making needed investment, those countries have spent the oil money on social programs. Production has declined and will continue to decline until these countries commit to new investment in the fields. Brazil has recently announced new discoveries, but production remains a long way off.
“I think the dollar will go up against the euro, yen, pound, and Swiss franc. But in the rest of the world, in China and Thailand, in Mexico and Peru, in Turkey, Russia, India, and Indonesia, I expect the dollar will remain the same or fall. As formerly poor countries like Russia and India get their economies moving, their currencies will rise.
“Bottom line, I’m predicting a solid, up year for 2011. Let’s hope I’m right.”