In this entry I layout my current expectations for the remainder of 2010, and how I expect to initiate positions to make money in 2011. My views are by no means set in stone and I expect to fine tune my views as future events unfold.
August 23 - September 10: Calmer period as investors consider recent economic trends. During the next two weeks I plan to develop investment ideas for the fall and take a position in the VIX, ideally below $20 but more likely around $22-23.
September 13 - October: Increasing volatility as a number of economic signals are published and companies begin reporting earnings, which likely offer at best mixed signals and at worst the start of a more significant slowdown, in my opinion. The source of the slowdown in the U.S. is a combination of tighter mortgage standards, higher credit card rates, and weak employment. Given the overall high level of debt in the country, these factors are powerful brakes, in my view. I also expect to see increased anxiety between countries, either due to renewed debt worries within European countries or talk of military initiatives like Israel striking Iran, as discussed in the recent edition of The Atlantic.
I expect to see declining equity prices and rising treasury prices, with potentially a "black swan" event before the end of the year. International equity markets likely react negatively to increased worries in the U.S., offering opportunities to establish positions. The U.S. dollar likely strengthens during this uncertain time as investors flock to perceived safe havens, providing greater purchasing power for domestic investors outside the U.S..
In 2011 I expect much more drastic efforts by the U.S. government to jump start the economy. Potential actions include: (1) Aggressive efforts by the Federal Reserve to keep interest rates low and expand the money supply; (2) Increased political activity centered around both stimulus spending and tax cuts, with deficit hawks pushed to the side; and (3) Growing discussion by investors and media about a fiscal crisis at the state and local level with announcements of service shutdowns (examples from recent news include: furloughing employees in CA, efforts to reduce pension and healthcare costs in Illinois, and closure of transit services in GA). These issues likely encourage foreign investors to reduce their exposure to the U.S., such as China's recent sale of $24 billion of U.S. Treasuries.
While the Federal Reserve likely attempts to keep interest rates low in 2011, at some point market dynamic could overwhelm its efforts if foreign investors decide the U.S. is going down an unsustainable path. This is where it gets scary with the likely popping of the Treasuries bubble, leading to higher interest rates and potentially accelerating inflation. For this reason, I would rather position myself on the inflation side rather than the deflation side going into next year.
Starting in September through the end of the year I expect to initiate positions opportunistically. I expect to over-weight international equity exposure, in general, with greater emphasis in Asia and South America. I plan to invest in variable rate debt to cushion myself from rising interest rates. I also plan to take a position in an inverse Treasuries ETF to capitalize both on the inflating of the Treasury bubble and its potential decline. I will make a few strategic investments in U.S. equities, early on focused on high dividend yield and later on stocks that have been overly sold with solid growth potential. Finally, I will take a couple positions in metals that likely benefit from demand trends outside the U.S.
Note: Do I expect events to unfold according to this script? Of course not. I do expect events close to what I have described, but I've learned that timing is always shorter or longer than anticipated. Thus, I use this post as a way to organize my thoughts and a baseline from which to make adjustments going forward.
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