I'm largely through talking about what I think should happen, as my opinions are different from those of the vast majority and I'm completely fed up with politics.  Instead, I'm just going to discuss what I think is going to happen and how one can try to profit, or at least protect one's self, from events.

First, let's not kid ourselves -- the debt ceiling will be raised.  The only question is by how much, and therefore how soon it will come up for yet another vote.  Oh, there will be some hand wringing and political grandstanding, but there is no way in hell politicians are willing to accept the immediate consequences of a failure to raise the debt ceiling.  The can will, once again, be kicked.

I think that the most likely course of events will be as follows:

1. Conservative politicians do a lot of tough talking and bloggers write about how we need to get this situation under control.
2. The stock market sells off sharply.
3. Articles start appearing in the MSM about all the bad effects of failure to raise the debt ceiling -- pension fund insolvency, big jump in unemployment, etc.  The rhetoric coming out of the administration (which Geithner has already started) increases to a fever pitch.
4. Politicians, after a lot of closed-door meetings with Wall Street types, where Armageddon is (yet again) threatened, decide they don't have the stomach for a difficult course of action.  Conservative bloggers write conciliatory pieces while trying to make it sound like they're not doing a complete 180.  
5. The debt ceiling is raised by about $1.5T, with some nominal budgetary concessions and a lot of stomach-churning grandstanding.  Conservative bloggers whine a bit but console themselves that 'it was the best deal we could get.'
6. Risk assets go 'yee-haw!' and rally back strongly.  Gold heads for $1,500, silver for $50, and Oil for $120.  Everyone immediately starts bitching about inflation.
7. The whole farce is replayed again in about a year except under much more dire circumstances.

Needless to say, I'm already set up for this kind of series of events, with a hedged wealth-preservation portfolio.  If all goes as predicted, the hedge can be lifted about two weeks prior to the actual vote on the debt ceiling.  Still, one will need to pay very close attention to any deviation from the above, as even seemingly small details (such as what comprises the concessions to enable the increase) can impact a proper investment stance.

Posted by: Hermit Dave at 11:40 AM | No Comments | Add Comment
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Making market predictions is a fools game.  There are too many moving parts, all of which can change rapidly, especially in a highly-charged political environment.  The smart observer / investor will, instead of trying to predict the course of the markets, evaluate probabilities and position appropriately, with a willingness to change one's overall thesis upon shifts in the financial landscape.

The starting theme for 2011 is one of a continuation of 2010, as the Fed is still doing QE.  Avoidance of dollar-denominated financial instruments, with wealth preservation as a focus, is still proper positioning.  The one thing to note is that all risk assets are well overdue for a correction, so I also believe that a hedge is warranted at this time.  Because of the difficulty of timing, I think cash is a bad idea, as we could easily see a further run-up in assets prior to a correction.

Going forward, the new Congress will play a major role, especially as we approach the current ceiling on the national debt.  This will be a major issue from the middle to the end of the first quarter, and could easily cause the long-awaited correction in risk asset pricing.  Also, at that point, QE2 will be about half completed, and the markets will be wondering about the Fed's next move.  Should a correction occur at this point, an investor is going to need to pay close attention, as possible policy paths would have widely divergent economic results.  We could correct and have a strong bounce, keep going down, or even never correct at all depending on which moves are made by Congress and the Fed.

To be honest, looking past this critical period is mostly a waste of time, as there are so many variables in play and a large number of possible outcomes.  Still, assuming we make it through relatively unscathed, that the policymakers largely preserve the status quo (with further economic can-kicking), the rest of the year is likely to return to a repeat of the 2nd half of 2010.  This would set us up for a 2012 disaster as, with gas breaking at least $4 / gallon and food inflation starting to put a huge dent in the average wallet, the election year would likely turn into economic and political chaos.  It probably will regardless, as there will be major economic pain somewhere -- a continued decline in housing prices, pension fund collapses, state and municipal defaults are all possibilities, especially if we don't go the inflationary route.

In short, I expect to see some first quarter fireworks, followed by a relatively tame rest of the year.  I wouldn't be at all surprised to simply maintain a wealth preservation portfolio, hedged with puts, throughout 2011.  2012 is where I expect the major issues to finally come to a head (damn those Mayans).  There are so many possible exogenous factors, however, that pretty much anything is possible.

Other areas to watch for are:  a possible Yen crisis, if Japan finally runs out of the ability to increase their national debt through the looting of the savings of their own citizens; a possible Euro crisis, if Spain or Italy blow up, or if Ireland gets balls and tells the EU to fuck off; a China crisis, if inflation takes further hold there, forcing some combination of capital controls, price controls, interest rate hikes, and/or Yuan revaluation.  Or, some global hot-spot (North Korea?  Iran?) could blow up and we could have an expansion of global conflicts.  There are more than enough potential plummeting black swans to keep everyone ducking for cover throughout the year, so even though I expect 2011 to be mostly calm before the storm, I'll do my best to be prepared for as many eventualities as possible.

Posted by: Hermit Dave at 02:40 PM | No Comments | Add Comment
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