Saturday, January 1, 2011

2011 Investment Forecast

It's that time of the year again when everyone looks forward optimistically to a brand new year. And it's also the time of year when you hear all sorts of predictions for the new year.

As I did last year, I will share a few of my thoughts about the upcoming year in the financial markets. But first, I will look back at 2010.

It was the year when everyone looked like an investing genius. It didn't matter where you put your money as most investment classes were up strongly for the year. US stocks – up, overseas stocks – up, corporate bonds – up, overseas bonds – up, Treasuries – up, commodities – up.

About the only thing that was lower was the US dollar. The rally in the financial markets and the weakening dollar had the same cause...the Federal Reserve's policies.

The Federal Reserve's policy of quantitative easing (which is money printing, despite what Ben Bernanke says) has flooded the banks with dollars. The Wall Street banks, of course, have gladly taken this money. Taken it not to lend to individuals or businesses, but to continue their orgy of speculation in financial markets.

Large investors, many of them overseas, see the long-term implications of this policy (a debased US dollar) and have sold the dollar. Thus we have a lower US dollar...which effects each American in his or her everyday life.

Here is just one example: I'm sure many of you have noticed the price of gasoline rising at the pump. And yes, there are some legitimate reasons for the rise, such as increased demand for oil in emerging markets like China.

But much of the rise in the price of oil and gasoline is due to the weakening US dollar. It's not so much that oil is going up in price, but that the currency it is priced in – the dollar – is going down in price.

But enough about 2010, what will happen in 2011?

The obvious answer is that no one knows. At best, it's an educated guess. For what it's worth, here is my two cents worth.....

GOVERNMENT BONDS - It is ok to park your short-term money into short-term US Treasury bills, but I continue to urge all investors to avoid any longer-term US Treasuries. The beginning of the bursting of the Treasury bubble may have begun in the last months of 2010.

Treasuries sold off sharply, as did municipal bonds. Fears have begun creeping into the muni market as investors begin to awaken about the dangers of outright default of some governments' bonds. The carnage in munis may have just begun.

OTHER BONDS - I do continue to like other bonds, such as corporate bonds of strong multinational companies. Another area I like for the long-term are bonds of emerging market countries which continue growing rapidly and are becoming less dependent on the United States. Trade between emerging market nations is booming.

CURRENCIES – Longer term, unless US government policies change, there is only one direction for the US dollar – down. The currencies I continue to like for the longer-term are those of the major emerging countries like Brazil and China and also the currencies of country that have and produce lots of natural resources like Canada and Australia. These currencies did very well in 2010.

COMMODITIES - I continue to urge people to add gold and silver to their portfolio as an 'insurance policy'. I do expect commodities to seesaw higher, propelled by a lower US dollar, increasing demand for commodities from emerging markets and most importantly - diminishing production.

Most people are unaware that the production of many commodities is dropping. These commodities include not only oil, but also copper and tin, and agricultural commodities like sugar, cocoa, wheat and corn. And to bring a major project online, be it either a mine or an oil field, takes 5 to 10 years.

STOCK MARKETS - I do expect to see a large correction in ALL global stock markets fairly soon. With that being said, I still favor the emerging markets for the long-term. The future of the global economy lies with these nations - this is where most of the economic growth will come from. Of course, many American companies can and will participate in that growth.

I continue to favor sectors that benefit from the growth in the emerging markets such as commodity and industrial companies, and other sectors such as consumer goods and technology.

The only sector I strong dislike globally is the western financial sector. Financial companies in the US and Europe still have trillions in bad loans still 'hidden' and papered over by government support.

That's my two cents worth, please feel free to give me your thoughts by sending me an email.

I hope everyone has a happy and prosperous new year!

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