Saturday, December 18, 2010

If I Were Invited to the Bespoke Roundtable

Bespoke just released their recent roundtable predictions for 2011. Before jumping into everyone's projections and my guesses for the new year, lets take a look at all the predictions from 2010.



Showing that projecting one year out (when the world is filled with so much uncertainty) is so futile, by my calculations a flip of the coin would have done as good a job in projecting the future (i.e. less than 50% of the above predictions are correct as of yesterday). Due to easy money, government intervention, and a recovering global economy, EVERY single asset listed above is up in 2010 (home prices are barely up through September, so that is far from a sure thing through December).



While that proves we should take the 2011 projections in the next chart with a grain of salt, lets take a look.



To summarize the above, the majority believe in a recovering economy that will result in strong performance for risk assets and poor performance for bonds. In other words, the exact same prediction as in 2010.

The most common selection in 2011 (same as 2010) that goes against historical norms is that for a strong equity market, but a weak high yield market (only two went off this specific projection). As EconomPic has shown in the past, the relationship between the spread on high yield and equities is VERY strong, which is turn has historically driven returns.

S&P 500 vs. BarCap High Yield (1984 - 2009)



The way this prediction works is if equities do well and rates rise much more than spreads compress hurting high yield; a definite possibility, but one I view as unlikely.


My Guesses

While I am actually becoming a believer in the recovery over the short-run, who knows what the next 12 months will bring. With Europe's issues, the lack of will to address long-term structural problems in the U.S., emerging markets choosing to accept our easy money policy in their over-heated economies with (outright or pretend-they-don't-exist) currency pegs, and the debt overhang in much of the developed world... I couldn't possibly call my thoughts projections.

BUT, lets play the "if a gun were pointed at my head and I were forced to guess" game:

S&P 500 - Up; a believer (for now) in the short-term recovery and investor confidence
Long Bonds - Down, though I don't see inflation causing a huge sell-off in rates
Corporate Bonds - Up; the spread will make up for the rise in rates
Junk Bonds - Up; same rational as S&P 500 and corporate bonds
Gold - Up; ride the golden bubble / negative real rates will continue to drive capital into the asset
Oil - Down; unlike gold, higher oil prices impact the supply / demand profile which will counter the rise
Dollar - Down; emerging nations will need to loosen pegs to prevent over-heating
Home Prices - Down; higher rates / higher supply is a deadly combination
China - No clue, so lets call it flat with a standard deviation of 50%

We shall see...

3 comments:

  1. Disagree with you on oil, Jake. Oil's fundamentals have become detached from supply and demand due to deregulation.

    In the last ten years or so mutual funds have been allowed to plow money into commodities and if equities and junk bonds rise then oil's going to go rise with them.

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  2. Great summary, thanks for sharing your view.

    Great video clip from last night, wow!

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  3. SPECTRE of DeflationDecember 20, 2010 at 7:48 AM

    My two cents. Either all the commodities pretty much rise in unison this year, or they all crash and burn like the last run up before the big dump to 666 on the S & P. All that borrowed money leaving here to chase return in other parts of the world will scramble back to here if the shoomer hits the fan in the ME, Asia and/or Europe. Every country is fiat, and I would view any dump in PMs, among all other asset classes, as a long term buying opportunity. The game is so rigged that we are playing at the casino, and I'm afraid the put us at the roulette table to boot.

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