Reviewing Byron Wien’s Ten Surprises for 2010
Byron Wien had a stellar record in 2009, accurately predicting the effect of a rather robust second half recovery across a broad range of markets. However, Byron Wien’s Ten Surprises for 2010 were well off the mark. Before we review I will repeat what I said when Wien made his predictions:
2010 list predicated on recovery
The first thing to note about his predictions is that they are predicated on a very strong economic recovery. He is clearly bullish. His first prediction is that the U.S. will grow 5% this year. That is a V-shaped recovery, folks. I see the following elements as very much dependent on a strong US economic recovery.
- The Fed starts hiking rates a la 1994.
- 10-year hits 5.5%.
- S&P goes even higher to 1300, basically doubling from March 2009 lows.
- Japan has a recovery pushing the Nikkei to 12,000.
- The Democrats only lose 20 house seats in the mid-term elections.
The other elements are not predicated on a V-shaped recovery and are pretty idiosyncratic. I can’t say I disagree with anything at this point since I also see a (U-shaped) recovery. Even, the non-recovery based predictions seem plausible. I agree most with his calls about how industry-friendly financial services regulation and healthcare reform is likely to be.
In general, as last year, it is the bullish bias that I disagree with. I see a lot more downside risk than Wien does. And my predictions would reflect this. Even though past performance is not necessarily indicative of future results, his accuracy in 2009 certainly makes one pay attention to what he says for 2010.
Indeed, past performance was not indicative in the least this year.
Here’s the list:
The Surprises of 2010
- The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%. Exports, inventory building and technology spending lead the way. Standard and Poor’s 500 operating earnings come in above $80 [WRONG: the recovery slowed from 2009, dipping to a cyclical low in September causing double dip worries to surface.]
- The Federal Reserve decides the economy is strong enough for them to move away from zero interest rate policy. In a series of successive hikes beginning in the second quarter the Federal funds rate reaches 2% by year-end. [WRONG: Again, the recovery slowed and the US is in a state of PZ – permanent zero, just like Japan.]
- Heavy borrowing by the U.S. Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. Banks loan more to corporations and individuals and pull away from the carry trade, thereby reducing demand for Treasuries. Obama says, “The suits are finally listening” [WRONG: Do I have to keep repeating myself? The recovery slowed, PZ means relatively low yields. At least yields did tick up from the sub 3% level we saw at the cyclical slump in September.]
- In a roller coaster year the Standard and Poor’s 500 rallies to 1300 in the first half and then runs out of steam and declines to 1000, ending where it started at 1115.10. Even though the economy is strong and earnings exceed expectations, rising interest rates and full valuations present a problem. Concern about longer term growth and obligations to reduce leverage at both the public and private level unsettle investors [WRONG: I don’t get this one. If he’s bullish – which he obviously was – why does he see the S&P selling off to 1000? It doesn’t make any sense. In any event, the S&P has risen to near 1300 as he indicated but only after the weakness mid-year due to economic weakness.]
- Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted. Longer term prospects remain uncertain [HALF RIGHT: Can I give Wien a half point here for recognizing the strength of the dollar over the Euro.]
- Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000 [WRONG: permanent zero continues in Japan as does economic weakness.]
- Believing he must be a leader in climate control initiatives, President Obama endorses legislation favorable for nuclear power development. Arguing that going nuclear is essential for the environment, will create jobs and reduce costs, Congress passes bills providing loans and subsidies for new plants, the first since 1979. Coal accounts for about 50% of electrical power generation, and Obama wants to reduce that to 25% by 2020 [WRONG]
- The improvement in the U.S. economy energizes the Obama administration. The White House undergoes some reorganization and regains its momentum. In the November Congressional election the Democrats only lose 20 seats, much less than expected [WRONG: Once again, the recovery slowed and that spelled curtains for Democrats. See here for where I said the Democrats would get killed when Wien was writing this. The difference is the economy.]
- When it finally passes, financial service legislation, like the health care bill, proves to be softer on the industry than originally feared. There is greater consumer protection, more transparency, tighter restriction of leverage and increased scrutiny of derivatives, but the regulatory changes for investment bankers and hedge funds are not onerous. Trading volume and merger activity increases; financial service stocks become exceptional performers in the U.S. market. [BINGO]
- Civil unrest in Iran reaches a crescendo. Ayatollah Khameini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides. Talks with the U.S. and Europe begin but the country remains a nuclear threat. Pakistan becomes the hotspot in the region because of the weak government there, anti-American sentiment, active terrorist groups and concerns about the security of the country’s nuclear arsenal [NO: liberals are always loth to be weak on defense and push the other way to demonstrate otherwise. A perfect example from history at the state level comes from Nelson Rockefeller and the Attica Prison Riot.]
So, I’m getting 1 1/2 out of ten here. In truth, as I said last year, the problem was not the analysis but the bullish bias. Wien overestimated the robustness of the recovery and this led him astray. In the next day or two we will get a lot of commentary on Byron Wien’s Ten Surprises for 2011 which are no more in keeping with the balance sheet recession we are experiencing. Expect a post shortly from me.