William Cohan on Psychopaths and the Financial Crisis

Thursday, January 5th, 2012

Source: Bloomberg, Jan­u­ary 4, 2012.

Jan. 3 (Bloomberg) — William Cohan, author of "Money and Power: How Gold­man Sachs Came to Rule the World" and a Bloomberg View colum­nist, talks about Clive Boddy's arti­cle in a recent Jour­nal of Busi­ness Ethics that blames the finan­cial cri­sis on cor­po­rate psy­chopaths at the helm of finan­cial insti­tu­tions. Cohan speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "Insid­e­Track. (Cohan is a Bloomberg View colum­nist. The opin­ions expressed are his own.)

Tags: Bloomberg Television, Boddy, Cohan, Columnist, Corporate Psychopaths, Financial Crisis, Financial Institutions, Goldman Sachs, Helm, Insidetrack, January 4, Journal Of Business, Journal Of Business Ethics, Money And Power, Ruhle, Stephanie
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Dow Rings in 2012 With a "Golden Cross"

Thursday, January 5th, 2012

I often refer to the 50– and 200-day mov­ing aver­ages in my com­men­tary as indi­ca­tors of the inter­me­di­ate and pri­mary trends respec­tively. In a per­fectly bull­ish sce­nario the price series should trade above both the 50– and 200-day lines, with both these lines ris­ing, and also with the 50 DMA trad­ing above the 200 DMA.

In the case of the Dow Jones Indus­trial Index, the 50 DMA has just breached its 200 DMA, thereby form­ing a so-called golden cross. This is the first time the 50-day line trades above the 200-day line since August 2011. How­ever, as always with chart­ing sig­nals, it is wise to wait a few days in order to guard against a false break.

The Dow has expe­ri­enced 20 golden crosses over the last 50 years. Although his­tor­i­cally the Dow traded in pos­i­tive ter­ri­tory after six months in 65% of the instances fol­low­ing a golden cross, the aver­age return of 2.9% is not all that excit­ing as it lags the 3.5% aver­age of all six-month peri­ods (research via Bespoke Invest­ment Group).

As far as the S&P 500 Index, the Nas­daq Com­pos­ite Index and the Rus­sell 2000 Index is con­cerned, the 50 DMAs were still trad­ing below the 200DMAs by 1.56%, 1.69% and 4.34% respec­tively as of yesterday’s close.

Source: Arthur Hill, StockCharts, Jan­u­ary 4, 2012.

Tags: Amp, Arthur Hill, Crosses, Dma, Dmas, Dow Index, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Few Days, Golden Cross, Instances, Investment Group, January 4, Moving Averages, Nasdaq Composite Index, Russell 2000 Index, Signals, Six Months, Stockcharts, Stocks
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James Paulsen: Investment Outlook (January 2012) — "Beware of Rising Confidence!"

Thursday, January 5th, 2012

Investor Alert — Beware of Ris­ing Confidence!

For the first time in this recov­ery, gen­eral eco­nomic con­fi­dence seems poised to improve sig­nif­i­cantly— a trend which will likely dom­i­nate major invest­ment themes through­out 2012. Investors should there­fore con­sider the poten­tial rewards and risks asso­ci­ated with a mean­ing­ful improve­ment in confidence.

Ris­ing Con­fi­dence… Why Now?

While not a per­fect rela­tion­ship, Exhibit 1 shows change in the unem­ploy­ment rate is a very impor­tant deter­mi­nant of con­fi­dence. It over­lays the Con­sumer Con­fi­dence Index (solid line) with the U.S. unem­ploy­ment rate (dot­ted line, shown on an inverted scale). Con­fi­dence has not yet improved much in this recov­ery mostly because the unem­ploy­ment rate remains stub­bornly high.

This may finally be chang­ing. Although still dis­ap­point­ingly slow, the pace of job cre­ation is now suf­fi­cient to slowly but steadily lessen the unem­ploy­ment rate. In 2010, pri­vate monthly job gains aver­aged slightly less than 100 thou­sand whereas in 2011 (through Novem­ber) monthly job gains improved to 155 thou­sand. Fol­low­ing this slow pro­gres­sion, pri­vate monthly job gains dur­ing 2012 seem poised to aver­age more than 200 thousand.

For the unem­ploy­ment rate, some­thing mag­i­cal hap­pens once job gains per­sist in the 150 to 200 thou­sand range—labor demand exceeds labor force growth pro­duc­ing a slow but steady fall in the unem­ploy­ment rate. This may already be under­way. In recent months, the unem­ploy­ment rate has declined to its low­est level of the recov­ery at 8.6 per­cent. We expect the unem­ploy­ment rate to decline fur­ther to between 7.5 and 8.0 per­cent by the end of this year. Using Exhibit 1 as a ref­er­ence, such improve­ment in the labor mar­ket would be con­sis­tent with a Con­sumer Con­fi­dence Index (cur­rently at about 65) of about 85!

If eco­nomic con­fi­dence in the U.S. recov­ery does finally embark on a slow but steady rise, what are the impli­ca­tions for investors in 2012? Specif­i­cally, what would a revival in con­fi­dence imply for bond, com­mod­ity, and equity investors?

Con­fi­dence and Trea­sury Yields?

Exhibit 2 over­lays the Con­sumer Con­fi­dence Index with the “real” 10-year Trea­sury bond yield (10-year yield less the annual core con­sumer price infla­tion rate). Sim­i­lar to the after­math of the dot-com cri­sis, “fear” has proved the bond market’s best friend since 2007. In the last recov­ery between 2003 and 2007, the real Trea­sury bond yield oscil­lated between 2 and 3 per­cent. How­ever, as con­fi­dence col­lapsed to record lows in early 2009, the real bond yield declined briefly below 0.5 per­cent. Real bond yields were quick to recover, how­ever, once con­fi­dence bounced from its record low reached dur­ing the dark­est days of the cri­sis in March 2009. Indeed, even though con­fi­dence improved only mar­gin­ally, by early 2010, the 10-year real bond yield surged higher by almost 2.5 per­cent! In 2011, the U.S. eco­nomic slow­down and esca­lat­ing Euro­pean con­ta­gion con­cerns pro­duced another “fear-based” col­lapse in the real 10– year Trea­sury bond yield. As we begin 2012, the dom­i­nance of fear is cur­rently illus­trated by Trea­sury investors will­ingly accept­ing a “neg­a­tive” real 10-year Trea­sury yield.

Exhibit 2 high­lights a grow­ing poten­tial risk for Trea­sury investors. Even though the real bond yield remains at its low­est level since the cri­sis began, con­fi­dence has bounced again in recent months. Some­thing seems likely to give in the next few months. Either renewed con­fi­dence in the eco­nomic recov­ery is about to fade or Trea­sury yields are likely to suf­fer a sig­nif­i­cant rise.

Should eco­nomic con­fi­dence improve this year, the bond mar­ket is at risk for two reasons—decaying calamity fears and ris­ing infla­tion fears. If a con­sen­sus agrees the U.S. eco­nomic recov­ery is sus­tain­able and risk of an immi­nent calamity has dimin­ished, Trea­sury investors would likely reestab­lish a nor­mal 2 per­cent real bond yield (and with a cur­rent core infla­tion rate of about 2 per­cent, a 2 per­cent real bond yield implies a 4 per­cent 10-year Trea­sury yield—ouch!). How­ever, if the eco­nomic recov­ery is per­ceived as sus­tain­able, because both mon­e­tary and fis­cal poli­cies have been too accom­moda­tive in recent years, calamity fears would likely be quickly replaced by inten­si­fy­ing “infla­tion fears.” For these rea­sons, high-quality bond investors should be par­tic­u­larly con­cerned with the like­li­hood of a steady rise in eco­nomic con­fi­dence this year.

Con­fi­dence and Gold Investors?

Ris­ing eco­nomic con­fi­dence would cer­tainly be good for com­mod­ity investors. A sus­tain­able eco­nomic recov­ery would raise com­mod­ity price prospects and also heighten infla­tion expec­ta­tions. How­ever, as sug­gested by Exhibit 3, gold may lag other com­mod­ity invest­ments (note, the rel­a­tive price of gold is shown on an inverted scale).

Tags: Consumer Confidence Index, Determinant, Dotted Line, Economic Confidence, Investment Outlook, Investment Themes, Investor, Investors, Job Creation, Meaningful Improvement, Pace, Relationship, Rewards, Slow Progression, Unemployment Rate
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What's Up With the Chinese Economy?

Thursday, January 5th, 2012

The GDP-weighted Com­pos­ite CFLP PMI that I cal­cu­late for China rebounded strongly to 52.6 in Decem­ber from 49.3 in Novem­ber. Much of the rebound can be attrib­uted to sea­sonal fac­tors, though.

While Novem­ber is nor­mally a weak month from a sea­sonal point of view the recent extreme weak­ness is note­wor­thy and cast seri­ous doubt on the health of the Chi­nese econ­omy. The strong rebound in December’s seasonally-adjusted Com­pos­ite PMI (my cal­cu­la­tion) to 52.4 from 49.5 in Novem­ber allayed some of my fears of a pos­si­ble fur­ther deep­en­ing of the growth reces­sion in China.

Much of the rebound in the Com­pos­ite PMI can be attrib­uted to a surge in the CFLP Non-manufacturing PMI to 56.0 from 49.7 in November.

After adjust­ing for sea­son­al­ity the CFLP Non-manufacturing PMI jumped to 55.2 from an extremely weak 51.4 in November.

The slump in the seasonally-adjusted non-manufacturing PMI in Novem­ber was an exten­sion of the weak­ness that set in since March 2010. The slump in con­sumer con­fi­dence was prob­a­bly the main dri­ving fac­tor behind the weak­ness in November.

The strong show­ing of the non-manufacturing PMI in Decem­ber may indi­cate that con­sumer con­fi­dence improved some­what in Decem­ber, but with the seasonally-adjusted PMI only at October’s lev­els con­sumer con­fi­dence is likely to remain at his­tor­i­cally low lev­els. On top of the Eurozone’s malaise, the slump in con­sumer con­fi­dence prob­a­bly also had an impact on the unsea­sonal slump in the seasonally-adjusted CFLP Man­u­fac­tur­ing PMI in Novem­ber. That obvi­ously affected Japan’s man­u­fac­tur­ing sec­tor too.

Tags: Chinese Economy, Consumer Confidence, Crisis Levels, Eurozone, Extreme Weakness, Fears, Fourth Quarter, GDP, GDP Growth, Inventories, Malaise, Manufacturing Sector, Pmi, Point Of View, Rebound, Recession, Seasonal Factors, Seasonality, Serious Doubt, Slump
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“New Normal” is Morphing into “Paranormal,” argues Gross

Thursday, January 5th, 2012

In his lat­est edi­tion of his monthly newslet­ter, Bill Gross waves good­bye to the “New Nor­mal” and adopts the “Paranormal”.

The fol­low­ing are a few excerpts from the report:

The New Nor­mal, pre­vi­ously believed to be bell-shaped and thin-tailed in its depic­tion of growth prob­a­bil­ity and finan­cial mar­ket out­comes, appears to be mor­ph­ing into a world of fat-tailed, almost bimodal outcomes.

A new dual­ity – credit and zero-bound inter­est rate risk – char­ac­ter­izes the finan­cial mar­kets of 2012, offer­ing the fat left-tailed pos­si­bil­ity of unfore­seen pol­icy delev­er­ing or the fat right-tailed pos­si­bil­ity of cen­tral bank infla­tion­ary expansion.

The crit­i­cal ques­tion of course is whether efforts by the ECB, BOE, and Fed will work. Can they rein­vig­o­rate ani­mal spir­its in the face of “credit” and “zero bound money” risk? We shall see. An investor how­ever should hedge his/her bets until the out­come becomes more obvious.

Bond Mar­kets

1. Dura­tions and aver­age matu­ri­ties should be at their max­i­mum per­mis­si­ble lim­its. Even if refla­tion is suc­cess­ful it will only be because the Fed and other cen­tral banks keep pol­icy rates low for an “extended period of time.” Finan­cial repres­sion depends on neg­a­tive real yields and until infla­tion moves higher for a period of at least sev­eral years, cen­tral banks will hiber­nate at the zero bound

2. The bulk of sov­er­eign bond hold­ings should be in the U.S. as long as Euroland credit implo­sion is pos­si­ble investors should grav­i­tate to the “clean­est dirty shirt” sov­er­eigns with the least encum­bered bal­ance sheets. Any­thing short of a 5-year matu­rity how­ever yields rel­a­tively noth­ing and pro­vides min­i­mal roll­down. Focus on 5–9 year Trea­sury matu­ri­ties to guard against infla­tion which cre­ate oppor­tu­ni­ties to take advan­tage of roll­down cap­i­tal gains.

3. Long Trea­sury matu­ri­ties should be held in TIPS form.  If infla­tion really is com­ing, then an investor will want assets that offer inflation-protection.

4. Cor­po­rate credit pur­chases should be in higher-rated   A and AA paper. Senior as opposed to sub­or­di­nated hold­ings in finance/bank debt should be con­sid­ered as well. Hair­cuts ahead?

5. U.S. munic­i­pals rep­re­sent an oppor­tu­nity from the stand point of val­u­a­tion. Their yields of 5–6% are near his­tor­i­cally high ratios to Trea­suries. They do, how­ever, entail risk – not only volatil­ity but occa­sional default risk. This is not a Mered­ith Whit­ney echo but sim­ply a recog­ni­tion that you usu­ally get what you pay for in this world and noth­ing comes for free. Be selec­tive and avoid states/municipalities with pen­sion and fund­ing problems.

6. Con­tinue to avoid Venus fly trap periph­eral Euroland paper. Ital­ian bonds at 7% for instance are entic­ing but have trap door pos­si­bil­i­ties that could see fur­ther “price” defaults in 2012.

Stocks and commodities

1. Stocks yield more than bonds and will tend to do bet­ter in any­thing but a delev­er­ing fat left tail. That, how­ever, is what wor­ries us. Equity allo­ca­tions, there­fore should favor higher yield­ing com­pa­nies in sec­tors with rel­a­tively sta­ble cash flows: Elec­tric util­i­ties (yes they appear over­bought), big pharma and multi­na­tion­als should head your shop­ping list.

2. Com­modi­ties could go either way depend­ing on the tails but scarcity and geopo­lit­i­cal con­sid­er­a­tions (Iran) favor a pos­i­tive tilt. Gold at $1,550 seems pricey but it has upward legs if QEs continue.

Cur­ren­cies

The dol­lar is king with a left-tailed delev­er­ing sce­nario – pau­per in a right-tailed global refla­tion­ary expansion.

Sum­mary

For 2012, in the face of a delev­er­ing zero-bound inter­est rate world, investors must lower return expec­ta­tions. 2–5% for stocks, bonds and com­modi­ties are expected long term returns for global finan­cial mar­kets that have been pushed to the zero bound, a world where sub­stan­tial real price appre­ci­a­tion is get­ting close to math­e­mat­i­cally improb­a­ble. Adjust your expec­ta­tions, pre­pare for bimodal out­comes. It is dif­fer­ent this time and will con­tinue to be for a num­ber of years. The New Nor­mal is “Sub,” “Ab,” “Para” and then some. The finan­cial mar­kets and global economies are at great risk.

Click here for the full article.

Bill also shared his views in the fol­low­ing inter­view with The Wall Street Journal:

Source: Bill Gross, PIMCO – Invest­ment Out­look, Jan­u­ary, 2011 and The Wall Street Jour­nal, Jan­u­ary 4, 2012.

Tags: Animal Spirits, Balance Sheets, Bimodal, Bond Holdings, Bond Markets, Capital Gains, Central Banks, Critical Question, Depiction, Dirty Shirt, ECB, Financial Repression, Implosion, Inflationary Expansion, Interest Rate Risk, Market Outcomes, Maturities, New Duality, Permissible Limits, Sovereigns
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It’s Great to Be a Big U.S. Corporation – Profits at All Time Highs, Taxes Almost 50% Lower Than in 2007

Thursday, January 5th, 2012

By now many of you have read such infa­mous pieces as the NYT essay on how Gen­eral Elec­tric has recently paid lit­tle to no U.S. fed­eral gov­ern­ment taxes.  One won­ders why the GOP, angry at 47% (53%?) of Amer­i­cans who don’t pay fed­eral taxes, does not get mad at our mega cor­po­ra­tions for the same behav­ior…. after all, per the Supreme Court, cor­po­ra­tions are peo­ple too.  But I digress – I know the counter-argument – any tax on cor­po­ra­tions just gets passed on to con­sumers.  Plus U.S. cor­po­ra­tions are already unfairly taxed at 35% 29% 26% 23% 19%… at least those with the cor­rect lob­by­ists, mega account­ing depart­ments, and off­shore havens span­ning from Ire­land, the Nether­lands, Switzer­land, or the Cayman’s.  (or prefer­ably all of the above plus more)  Even com­pa­nies that promise to do “no harm” (along with those doing “God’s work”) par­take – and why should they not?  That is the sys­tem they have paid for the politi­cians have weaved.  Indeed, when poli­cies were floated last sum­mer for a flat cor­po­rate tax rate of 25% rather than the “oner­ous, job killing” 35% (which mostly only small busi­ness pays) lob­by­ist groups were formed (by the mega busi­ness com­mu­nity) to fight those ideas off.  Lit­er­ally laugh out loud stuff….

As many read­ers know by now, prof­its devoted to cap­i­tal own­ers ver­sus labor is at all time highs – which in my opin­ion is caus­ing some (not all, not even most) of the stress (OWS, Tea Party) by the worker class of the coun­try.  But even with that mega terend of global labor arbi­trage, the cap­i­tal class is pay­ing a far lower amount in taxes on said prof­its than pre-recession.  Indeed, the dif­fer­ence is stag­ger­ing.  While prof­its have regained pre-recession highs, taxed paid on these prof­its are almost 50% lower! That’s impressive!

The WSJ reports:

• Here is one thing for deficit hawks to watch in 2012: cor­po­rate tax receipts. Although U.S. cor­po­rate prof­its have rebounded smartly since the finan­cial cri­sis, the same can’t be said for the tax take.  After plum­met­ing from 2007 through 2009, U.S. cor­po­rate prof­its regained their pre­cri­sis peak in early 2010, accord­ing to the Bureau of Eco­nomic Analy­sis. The lat­est, revised data released just before Christ­mas showed cor­po­rate prof­its before tax rose to a record $1.97 tril­lion in the third quar­ter of 2011.
• But cor­po­rate tax receipts, as reported by the Trea­sury Depart­ment, remain lack­lus­ter. Although they have trended higher in recent months, cor­po­rate taxes mea­sured on a 12-month basis were still under $200 bil­lion in Novem­ber. That is well below a pre­cri­sis peak of about $380 bil­lion and still far below the government’s fis­cal 2012 tar­get of $332 billion.

• Why cor­po­rate receipts have grown so slowly is “really puz­zling,” notes Ed Yardeni, chief econ­o­mist at Yardeni Research. (Not really Ed: check K-Street for some clues)  One big, pos­si­ble fac­tor: com­pa­nies keep­ing more of their prof­its in over­seas sub­sidiaries; they don’t pay U.S. taxes on them until they are repa­tri­ated.   There is also a poten­tial impact from spe­cial U.S. stim­u­lus mea­sures such as the 100% depre­ci­a­tion allowed in 2011 for some cap­i­tal invest­ment. This break, which expired at the end of Decem­ber, allowed com­pa­nies to take all the expense of an invest­ment at once, low­er­ing tax­able profit, as opposed to spread­ing it over a num­ber of years.  A tech­ni­cal issue may also be at play. The BEA mea­sures cor­po­rate profit on an oper­at­ing basis. So this doesn’t reflect things like apply­ing the ben­e­fit of losses racked up dur­ing the cri­sis to cur­rent profit, which would affect the Trea­sury data and could espe­cially be an issue at finan­cial companies.

There are other rea­sons aside from these – some very obvi­ous which any casual reader of finan­cial news knows about, and some quite awe­some loop­holes.  I will bring along a story on the awe­some tax games played with option expens­ing in the near future, as one of the thou­sands of cor­po­rate wel­fare we give to these “citizens”.

Dis­clo­sure Notice

Any secu­ri­ties men­tioned on this page are not held by the author in his per­sonal port­fo­lio. Secu­ri­ties men­tioned may or may not be held by the author in the mutual fund he man­ages, the Pal­adin Long Short Fund (PALFX). For a list of the afore­men­tioned fund's hold­ings at the end of the prior quar­ter, visit the Pal­adin Funds web­site at http://www.paladinfunds.com/holdings/blog

Tags: All Time Highs, Arbitrage, Business Community, Corporate Tax Rate, Deficit Hawks, Federal Taxes, General Electric, Gop, Government Taxes, Hawks, Lobbyist Groups, Lobbyists, Nyt, Offshore Havens, Recession, S Corporation, S Corporations, Tax Receipts, Tea Party, Wsj Reports
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Bremmer: Top Risks to Watch for in 2012

Thursday, January 5th, 2012

Investors will be watch­ing closely what politi­cians’ moves will be this year, says Ian Brem­mer, pres­i­dent of the Eura­sia Group and author of the “Top Risks for 2012″ report. He added that despite the fact that the num­bers will be bet­ter in 2012, a flood of liq­uid­ity will still not be com­ing in.

Source: CNBC, Jan­u­ary 4, 2012.

Tags: Cnbc, Eurasia Group, Flood, Ian Bremmer, Investors, January 4, liquidity, Politicians
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Byron Wien's "Ten Surprises for 2012"

Thursday, January 5th, 2012

Byron Wien, Vice Chair­man of Black­stone (BX 14.25 ↓-1.45%) Advi­sory Part­ners, today issued his list of “The Ten Sur­prises for 2012″. This is the 27th year Byron has given his pre­dic­tions of a num­ber of eco­nomic, finan­cial mar­ket and polit­i­cal sur­prises for the com­ing year. Byron defines a “sur­prise” as an event which the aver­age investor would only assign a one out of three chance of tak­ing place but which he believes is “prob­a­ble”, hav­ing a bet­ter than 50% like­li­hood of happening.

Byron started the tra­di­tion in 1986 when he was the Chief U.S. Invest­ment Strate­gist at Mor­gan Stan­ley. He joined the Black­stone Group in Sep­tem­ber 2009.

Firstly, how did he fare last year? In short, he hit bulls-eye with three items, was partly cor­rect with five, and got it wrong with three. Here is a short sum­mary, cour­tesy of Busi­ness Insider:

Right:

• Gold tops $1,600 an ounce.
• Oil tops $115 a bar­rel as demand surges in emerg­ing markets.
• Angela Merkel works to reform Europe, pro­vides sub­stan­tial financ­ing, but can­not solve long-term problems.

Wrong:

• The S&P 500 rises to 1,500 level.
• The yield on the 10-year Trea­sury Note tops 5%.

Partly right:

• China’s GDP slows on cur­rency inter­ven­tion. The U.S. dol­lar will become a less cen­tral currency.
• Pres­i­dent Obama removes troops from Afghanistan, even against a vio­lent backdrop.
• Hous­ing sit­u­a­tion improves as over­sup­ply declines, hous­ing starts exceed 600,000.
• Agri­cul­ture prices swell as global demand ramps higher.
• Unem­ploy­ment falls below 9% while GDP growth hits 5%.

Sur­prises for 2012

1. The extrac­tion of oil and gas from shale and rock begins to be a game changer. The price of oil drifts back to $85 a bar­rel and the United States becomes less depen­dent on Mid­dle East sup­ply. Deposits in Poland, Ukraine and else­where prove promis­ing as well. Increased pro­duc­tion from Libya and Iraq and reduced demand result­ing from the slow­down in world-wide eco­nomic activ­ity con­tribute to the price decline.

2. Earn­ings for Amer­i­can cor­po­ra­tions con­tinue to move higher dri­ving the Stan­dard & Poor’s 500 above 1400. Raw mate­r­ial prices con­tinue soft and busi­ness lead­ers suc­cess­fully adjust to slower eco­nomic growth by using tech­nol­ogy to reduce the labor and logis­ti­cal com­po­nent of goods and ser­vices sold; profit mar­gins stay high.

3. The U.S. econ­omy gets its sec­ond wind. Real growth exceeds 3% and the unem­ploy­ment rate drops below 8%. Reces­sion fears and even “the new nor­mal” view of pro­longed slow growth are called into ques­tion. Cap­i­tal spend­ing, exports and the con­sumer drive the econ­omy, over­com­ing fis­cal drag. The drop in the price of oil and the rise in the stock mar­ket improve both con­sumer con­fi­dence and spend­ing patterns.

4. The recov­er­ing econ­omy and the declin­ing unem­ploy­ment rate help Pres­i­dent Obama con­vince the vot­ers that he didn’t do such a bad job in his first term after all. He is viewed as a good speaker but a poor leader who is run­ning against Mitt Rom­ney, viewed as unin­spired and whose posi­tions on many issues are unclear. Democ­rats take back the House of Rep­re­sen­ta­tives but lose the Sen­ate in an anti-incumbent wave.

5. Europe finally devel­ops a broad plan to deal with its sov­er­eign debt prob­lem and moves closer to fis­cal cohe­sion. The Euro­pean Cen­tral Bank, the Inter­na­tional Mon­e­tary Fund, the Euro­pean Finan­cial Sta­bil­ity Facil­ity and the Euro­pean Union band together to keep all the coun­tries within the Union and to con­tinue the euro as the Continent’s cur­rency. Greece has a major restruc­tur­ing of its debt; Spain and Ire­land strengthen their finances dur­ing the year, but Italy suf­fers a “vol­un­tary” restruc­tur­ing. A melt­down of the banks is avoided, but imposed aus­ter­ity causes Europe to suf­fer a recession.

6. The com­puter replaces con­ven­tional arma­ments as the prin­ci­pal weapon of ter­ror­ists and geopo­lit­i­cal adver­saries. East­ern Euro­pean and Asian hack­ers invade the data banks of major inter­na­tional finan­cial insti­tu­tions caus­ing tem­po­rary bank clo­sures. An alarmed G-20 meets to address the problem.

7. Con­cerned over rapid money sup­ply growth in the devel­oped world, investors buy the cur­ren­cies of coun­tries that seem to be man­ag­ing their economies sen­si­bly. Scan­di­na­vian cur­ren­cies, the Aus­tralian and Sin­ga­pore dol­lar and the Korean won benefit.

8. Con­gress decides its dys­func­tion­al­ity is harm­ful to both par­ties and acts before the Novem­ber elec­tion to deal with the fail­ure of the Super Com­mit­tee to develop a pro­gram to reduce the U.S. bud­get deficit by $1.2 tril­lion over ten years. Both defense and Medicare are cut sig­nif­i­cantly; sub­si­dies for agri­cul­ture are reduced and tax deduc­tions for oil, gas and real estate part­ner­ships are mod­i­fied. Obama pledges to let some aspects of the Bush tax cut pro­gram con­tinue if he is reelected.

9. The Arab Spring finally over­comes Bashar al-Assad and his family’s rule over Syria ends. While Assad’s fall might have been inevitable, it has impor­tant rip­ple effects through­out the region weak­en­ing Hamas, Hezbol­lah and fur­ther iso­lat­ing Iran.

10. After two years of poor stock mar­ket per­for­mance while their economies came through with high single-digit real growth the emerg­ing mar­kets finally have a good year. Growth slows some­what but favor­able val­u­a­tions enable China, India and Brazil indexes to appre­ci­ate 15–20%.

“Also Rans”

11. Hous­ing starts to pick up sig­nif­i­cantly. The strength in the econ­omy cou­pled with record afford­abil­ity encour­ages the con­sumer to come back into the mar­ket and make long term com­mit­ments. The over­hang of vacant homes begins to be absorbed.

12. The yield on the 10-year U.S. Trea­sury Note rises to 4% as China con­tin­ues to invest heav­ily in hard assets and raw mate­ri­als and pulls back from putting reserves into the bonds of devel­oped nations.

13. After cor­rect­ing sharply toward the end of 2011, gold rebounds to $1,800 dur­ing the year. Accommodative mon­e­tary poli­cies through­out the devel­oped world cause a renewed migra­tion to hard assets by indi­vid­ual investors and sov­er­eign wealth funds. Silver ben­e­fits also, ris­ing to $40.

14. Fis­cal dis­ci­pline at the state and local level allows the drop in yields for munic­i­pal bonds to continue.

Byron also shared his “sur­prises” in the CNBC inter­view below.

Sources: Black­stone and CNBC, Jan­u­ary 4, 2011.

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