Forecast for 2011: T-Bonds Outperform

Stocks could rise solely due to a bubble and not because of fundamentals, but don’t buy them because when the truth comes out stocks will drop faster and further than you may be able to get the courage to sell. Don’t bother buying a bubble stock using the greater fool theory because when everyone panics and runs for the fire exit you could get trampled. Buy only things with a fundamental value above the current price. The 10 year P.E. is 22, should be 15, so that means stocks need to drop 33%, but because of temporary stimulus they may go up more, then people will panic and sell and the market will plummet to the capitulation phase where P. E.’s are 8, 9, or 10 and then SP will trade at 500.

Best performing asset: U.S. Treasuries. U.S. Treasury Bond yields will go down. The long bond has had an average “real” yield of 2% over 100 years and the real yield is now at 3%. We are in the worst recession since the 1930’s with a 17% unemployment rate when discouraged workers are counted. The world needs a safe haven since Euro’s are unreliable and China’s Renminbei is not investible for foreigners. China’s economy could soften leading to global synchronized recession.

U.S. inflation remains close to zero

Renewed foreclosures and more inventory brought to market by desperate sellers and a further drop in home prices

U.S. economy growth rate slows down

U.S. joblessness remains the same

China’s economy slows down. They have a negative real rate of -2% so they need to tighten the money supply by raising rates which will create a slowdown.

Euro area debt crisis continues and results in a bond haircut. The Euro system mistakenly allowed “B” paper countries to become part of an “A” paper world, much like when rating agencies allowed B paper mortgages in the U.S. to be rated AAA because they were in a “wrapper” of Mortgage Backed Securities. These B paper countries need to devalue by 30% but can’t, so the only solution is to take an Argentine style bond haircut where creditors reduce the principal loan balance. Later the Euro will still need to break up or else shrink to only a few strong countries like Germany, Holland, Austria, and Finland.

About the author

Don Martin, CFP®

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