Bubble-onomics: 10 Predictions for 2010

Dec.31.09 | About: SPDR S&P (SPY)

This analysis has got nothing to do with the much loved but now sometimes tarnished financial//economic theories that were so popular until mid-2008.

Just some weird ideas for how market bubbles work; with roots somewhere between Entomology and International Valuation Standards. Some of the ideas were looked at by George Soros in his book on “Reflexivity” published in 1987 and in Bob Farrell’s “10 Market Laws” published in 1992.

The first “hard” prediction that used this approach was made in January 2009 (“S&P 500 will turn at 675”), followed by one in February 2009 (“When it hits 675 Jump In!”), since then the approach has been used with varying degrees of success to predict the inflection points for oil, gold, treasuries, toxic assets, housing, and the Shanghai Index.

The markets covered in this summary are markets that either had a bubble, or a bust, or are suspected of getting ready to have one; references to articles that explain the logic are at the bottom:

1: S&P 500

Won’t go above 1,300 in 2010 but it won’t go down much until hits at least 1,200 at which point it risks a 15% to 20% reversal which will be relatively short-lived. The money to be made is finding something good and buy and hold (stay away from banks). You can’t just buy the index like in March 2009.

2: Oil

Will drift sideways between $65 and $85 unless there is an “event” of which the most likely is a war of some sort and the least likely is a repeat of 2008 when hedge funds caused a bubble, won’t go down below $60.

3: Gold

Currently miles above the “fundamental” which explains 74% of price movements since 1970 (by that marker it “ought to be $800 now), so in that sense it was 60% overvalued when it peaked a couple of weeks ago and so it could be a bubble.

BUT (a) there isn’t a lot of evidence of either market manipulation or naked credit-fuelled speculation (you generally need at least one of those for bubbles), and (b) it looks like ETF may have changed the bowling by giving access to retail investors. That says the market is struggling to understand value and the path ahead is therefore likely to be choppy, great for traders to show off their surfing prowess, perhaps a bit risky for “buy and hold”.

4: U.S. House Prices

In spite of the recent “bounce” there is more to go down as soon as the desperate measures by the administration to prop up prices runs out of ammo. S&P Case-Shiller 20 City Index will drop 10% from where it was in October 2009 before the end of 2010.

Outside of the “fundamentals” of entomology, part of the logic there is that there is no reason to suspect that the 85,000 per month final stage foreclosure rate will slow down any-time-soon (there are three stages, the third-final stage is when they kick you out onto the street); that adds up to about one million more in 2010. Fairy tales are nice but it looks as if that “Charlie Foxtrot” legacy of moron-banker-fueled mis-investment plus government brokered stupidity won’t just go away with the waving of a magic wand.

5: U.K. House Prices

One more leg down to come, possibly to beat the previous bottom on the Nationwide Index, but this could be delayed by Labour artificially pumping up the economy (by borrowing) so that they can have a good showing at the election and leave behind a burnt-out shell for the “toffs” to try and clean up, a bit like trashing your home the day before it becomes “bank-owned”.

6: U.S. 10-Year and 30-Year Treasury Yields.

I predicted on 31st September 2009 that there would be a change in direction (hit the inflection bang on the button); most people say yields are going up, even PIMCO, who had them going down a few months back, Merrill Lynch and BNP say the 10-Year could reach 5.5% by the end of 2010.

But there again demand for the debt the Treasury will be trying to sell will be helped by the fact that U.S.-style securitization is unlikely to re-start in 2010 (if it ever does), and pensions funds and insurance companies have a legal obligation to hold so much AAA paper, so although the foreigners will probably duck, some of the slack will be taken up domestically. So let’s say by this time next year the 10-Year yield will be at least 5% and the 30-Year will be at least 6%.

7: U.S. Commercial Property

Bottoming, will bottom in 2010 and the Moody’s index will be up end 2010 on end 2009.

8: Hong Kong Housing

Not a bubble, and in any case it looks like the very competent Hong Kong Administration nipped the potential for one in the bud (obviously a lot smarter than the geniuses who supposedly “managed” the U.S. economy who still say they couldn’t spot a bubble if it hit them in the mouth. But remember if you want to play that pond you are competing with big pockets full of cash sneaking out of China.

9: Dubai Freehold

It’s hard to find anything decent to buy because so much ego-driven-impractical-rubbish got built, also for a lot of developments the “service charges” are an open-ended mechanism, for incompetent developers to claw back some of their losses.

But if you can find something Dubai property is a reasonably good investment now (if you like that sort of thing). It bottomed in about March; the preceding bubble was quite short, now you can make 6% gross (by renting) plus 10% to 20% capital appreciation in 2010…if you are careful. Plenty of pitfalls though, the legal system is let’s say, “Rudimentary”; and be careful about writing Post-Dated-Cheques unless you hold two passports (under different names).

10: Shanghai Stock Market

Not a bubble, it will hit 4,000 before the end of 2010 (up 25% on end 2009), but it could be choppy.

References:

1: S&P 500: I, II, III, IV

2: Oil: I, II

3: Gold: I, II

4: U.S. House Prices: I, II

5: UK House Prices: I

6: Treasuries: I, II

8: Hong Kong: I

9: Dubai Freehold: I

10: Shanghai: I

Disclosure: Positions in FXI