It’s that time again when pundits, gurus, and assorted wannabes try to predict what’s going to happen in the coming year.
It’s a thankless exercise, of course: People tend to remember your bad calls and forget your good ones.
But what the heck? Most people don’t keep New Year’s resolutions, either. So, here’s my take on what could happen in the year ahead, mostly in the economy and the markets, though I’ll also wade into politics and international relations. These days, everything is so intertwined they have to be part of the equation, too.
Here are my six predictions for 2010 and beyond.
1. The economic recovery will be surprisingly strong. Economists are predicting gross domestic product growth of 2.7% in 2010, but I think it will be much stronger. Tight inventories, growing confidence, a weak dollar, and strong demand in emerging markets should push GDP growth up by 4% or more this year.
If it weren’t for lingering unemployment, strapped consumers and a weak housing market, growth would be a lot higher—near 7%, as some “V”-shaped recovery advocates are projecting. Also, unemployment will slowly begin to recede, though I expect it to remain above 9% by the end of the year.
2. The Federal Reserve will start raising short-term rates again in the second half. Once Ben Bernanke has been safely reconfirmed as Fed chairman by the US Senate, the Fed will begin to slowly withdraw some of the extraordinary measures it took to combat the financial crisis. That will happen in the second quarter.
Then, when there are clear signs employment has begun to improve, the Fed will actually start raising the federal funds rate, most likely in the third quarter. Its moves will be slow at first, but will pick up steam after the midterm elections in November.
3. There will be a financial mini-crisis or two that re-ignite investors’ fears. The acute phase of the financial crisis is over, and so is the Great Recession—technically, at least. But the system is still so vulnerable that it’s hard to predict where more flare-ups might occur. Who anticipated Dubai World’s default?
For me, one of the most likely weak links is the sovereign debt of the PIGS nations (Portugal, Ireland, Greece, and Spain)—perhaps Italy, too. Several central and eastern European nations also are in fragile financial shape—Hungary, Romania, Bulgaria, Ukraine. An actual default, or the threat of one, from any of them could start a chain reaction that would threaten (mostly) European banks.
The other potential flash point I see is the US mortgage market, which is being propped up by money from the Fed. The Fed has pledged to wind down its mortgage purchases by March, but it could let the deadline slip.
Trouble is, there’s no one to take its place. Banks and other private buyers certainly aren’t ready to step in, and Fannie Mae and Freddie Mac remain completely dependent on the government for life support. That’s why early withdrawal by the Fed from this market could cause a double-dip housing recession and stoke the fear fires again.
Another possibility: A crash in China’s overheated real estate market that would have ripple effects on stocks in Shanghai and Hong Kong.
These mini-crises may turn out to be worse than Dubai, but nowhere near as bad as the fall of Lehman Brothers. The sell-offs they trigger would be more like corrections than a second bear market, so for bullish investors they could be buying opportunities.
4. More prominent government-supported companies will get off the dole. General Motors will complete a public offering this year, helping taxpayers recoup some of the $50 billion the government pumped in to save the struggling auto maker.
Meanwhile, AIG (NYSE: AIG) will begin to repay the government some time this year, and all the banks should be out from under the Troubled Asset Relief Program by the end of 2010. I expect Chrysler to have an initial public offering in 2011, and AIG may be ready to go out on its own by the end of next year, too.
That will leave one huge basket case, or should I say, two? Fannie Mae and Freddie Mac clearly did not cause the housing bubble and crash (both entities were late to the subprime game and bought only around 20% of the troubled mortgages), but they may be the crisis’s biggest, most lingering casualties. And Congress, which is largely responsible for their failure, shows little appetite for finding a permanent fix that might step on some toes or go against their cherished ideas.
5. Democrats will lose seats in the midterm elections, but not their majority. If the economic scenario I laid out above comes true—and all my other predictions hinge on it—we should see unemployment decline somewhat. That and the passage of even the worst health care reform bill (a real likelihood) will help stabilize President Obama’s poll numbers.
Republicans are energized but locked in divisive primary battles. President Obama’s liberal supporters are disillusioned and likely to stay home. To me, that adds up to a loss of about half the 14 Senate seats and 52 seats in the House of Representatives the Democrats have won since 2006, leaving the Dems with a very narrow majority in both houses.
That would be good for the markets. As Knight Kiplinger wrote here, you can forget about big initiatives like “cap and trade” legislation. A narrowly divided Congress—even with a slight Democratic majority—might even focus on deficit reduction as the White House and Congress did in the mid-1990s.
6. The dispute with Iran will come to a head. President Obama’s end-of-the-year deadline passed with no concessions from Iran’s beleaguered regime, which seems determined to forge ahead on its nuclear program. The president now looks ready to push for strong sanctions.
But who knows if he can get Russia and China on board? Meanwhile, Israel stands ready to attack Iran before it can deploy nuclear-armed missiles, which Iran, of course, denies it’s seeking.
This is likely to cause a major international crisis this year. Sanctions or an Israeli military action could lead to Iranian attempts to block shipping lanes in the Strait of Hormuz; missile barrages against Israel by Iranian allies Hezbollah in southern Lebanon and Hamas in Gaza, and attacks against US interests by Iranian-sponsored terrorist cells here and abroad. In that case, oil and gold prices would soar temporarily and markets could sell off big.
But here’s my biggest, boldest prediction of the year. The growing popular uprising against the Iranian government will overthrow the mullahs, replacing them with a more democratic Islamic state. Unfortunately, it will not be like the fall of communism, which was largely bloodless; too many brave Iranians will lose their lives, but they will get their country back.
The goal of spreading democracy has suffered some body blows over the last few years, but people’s desire to be free remains strong. That message, I think and hope, will ring clear this year, bringing at least some light to a world that has been very, very dark for very, very long.
Have a happy, healthy, and prosperous New Year!
Disclosure: No positions