Looking Ahead To 2011

The only good predictions are ones that we can point back to with some measure of accuracy. Putting those predictions in writing carries some risks, because it also provides proof to others in the event you were wrong. Economists are famous for having an opinion and contra-opinion about everything (“…on the other hand”), which I believe is only a hedge to ensure they can always claim to be right.

Demonstrating fearless confidence in my own sense of what to expect, I humbly offer these predictions about our economy and the contributing financial factors that will largely shape it in 2011. Watch this column late next year and we’ll compare notes to see how well I did.

Dow Jones Average – Having recently attained the highest value since August, 2007, and watching other international equity markets similarly climbing back up toward pre-crisis levels, I predict that the DJA will return to the high 13,000 – low-14,000 range in 2011. But don’t read more than economic confidence in the status quo into these metrics, because the Dow won’t be driven by extraordinary growth.

Many factors contribute to sending equities back into higher numbers: a) smaller investors have bailed out of the market as hundreds of companies have used surplus cash to repurchase shares and drive prices higher; this trend will continue. 2) Growth expectations are moderate, so companies will be rewarded by exceeding modest targets. 3) corporate profits will remain strong as no one ventures to break out into an aggressive growth strategy, and hesitate to bulk up employment further, and 4) most economists are starting to see daylight in an uptick in consumer spending during the holidays and lower unemployment claims.

Potential pitfalls may be financial stocks, given the unknown drama to play out over home foreclosures and growing litigation related to the CDO mess.  

Bank Failures – Bank closings in 2010 were less than expected with only 154 shut down while expectations were higher. No one is saying why, but I believe that the FDIC is still a little overwhelmed at the volume of work involved with so many failures and so many banks operating under formal agreements.

That may change in 2011 as the regulators seek to clear the decks and take the worst of their 800+ problem banks down. Their incentives would be to help the residential market begin to recover faster and consolidate more operations into banks that are healthy enough to continue lending.   Both of these factors would contribute to the general economic recovery. I predict 225 banks will be closed in 2011.

Home Foreclosures – No one is predicting unemployment will improve nationally to less than 9% in 2011, and that statistic will block progress on reducing home foreclosures. I believe the foreclosure volume will remain at the same volume, as will bankruptcies and short sales.

Gross Domestic Product – Lots of leading indicators smell like GDP will finally start migrating north, as consumers couldn’t hold back from a decent holiday sales spree, and new job are slowly growing.   I will go out on a limb and price a 3% growth rate for 2011 – optimism is a good thing.   You can help – take someone out to dinner one more time each month to do your fair share.

Tax Legislation – Hard to say what will happen in the 112th Congress, infused (confused?) with lots of rookie patriots who will try making their point in all the wrong ways. Look for much grandstanding on the deficit commission report, as the president seems to be signaling that he will present a plan to re-write much of the tax code to pave the way for broader tax base and lower tax rates.

Expect everyone to support these efforts enthusiastically… except seniors (who oppose tinkering with social security benefits of their grandchildren), home builders (who want to save the home mortgage deduction), and dozens of industries that have been enjoying decades of tax breaks we didn’t even know about.   In other words, it will be a mess.

But I predict something less than a heroic repair will emerge, but it will be more than just kicking the can down the road.

Happy New Year!

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