Sunday, December 26, 2010

Some Musings

As 2011 unfolds before us, I am thinking hard about my portfolio and how to position myself with the upcoming volatility.  To me, even if the FED is actively buying and adding liquidity to the market, headwinds are already blowing strongly.

China is now playing defense in trying to control a FED induced inflation, which will slow their economy down more than anyone is will to publicly comment.  Their banks are loaded with non performing assets, and their companies are operating on near zero margins.  It will be hard to justify the China is the engine theme.

Europe will have member state defaults, IMNSHO, Ireland will cry uncle and default, Sein Fein is likely to take control of the government in March, and they already are declaring this agreement null and void.  Once this occurs, the British banks are toast, and France and Germany take some sweet haircuts.  Best case scenario is a radical restructure of the current deal to Ireland's favor.  But Ireland is only a catalyst, Spain blows the barn down.  Either way the Euro weakens in 2011.

The BRIC nations, we already spoke about China, Brazil and Russia are commodity countries that have different futures.  Russia will suffer some serious food shortages next year, their wheat belt is already drought stressed, and with this very cold winter, expect the planting season to be late.  This brings frost into play and another failed crop will cause grain prices to spike, devastating Russia, and seriously impacting the ROW.  Brazil is dependent on a healthy China, as well as Australia.  Although I do not follow India that closely, it appears they are having some inflation issues.

Then there is the good ol USA, I already recapped in an earlier post regarding our priced for perfection market, and extreme bullishness, but we have some serious skeletons coming out, and a political environment that is hostile to the devalue and stimulate environment everyone blindly bought into for the past 20 months.

The mortgage crisis will come to a head this year, rising interest rates and judicial proceedings will see to that, this overwhelms any interest income spread the banks enjoy.  California, Illinois, and New York will blow up this year, here in CA the budget deficit is 25% of the entire budget, it takes 2/3 vote to increase taxes, which won't happen, and congress will block any attempt by Obama to subsidize the states like the past two years.  This is a train wreck coming.  The House is dominated by the Republican party with a voter mandate to shut down the spending, and this will dry up any expected uptick from the federal government.  The FED may try for QE 3,4, whatever, but there is a vote pending to raise the debt ceiling, I believe the Repubs will use that leverage to take power away from the FED, and most definitely Obama.

Does this sound like economic recovery to you?

This post is getting long, I will next explain my trading plan for 2011, based on this thesis.

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