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Hopeful Predictions for 2011

Welcome to the second annual round of Hopeful Predictions.  This feature is my attempt to make a few educated guesses about the economy and the financial world.  Since the news and economy affects all of our finances to some degree, knowing what lies ahead is important.  I hope these predictions are useful in your endeavor to prosper. 

Scorecard for my 2010 Predictions

New Years in Times Square

Image by MoLeY2K

Here were my 2010 Predictions: 

  • Housing Will Recover Slowly
  • The Stock Market is Headed Up
  • Incumbents will get Voted Out
  • Electric Cars will Spark Change

Electric Vehicles only started selling in December, so there hasn’t been enough time or cars available to make an impact.  I still believe EVs are going to be a hit and a catalyst for change in the field of energy.  With $4 gasoline right around the corner and practical cars being released, I believe people are going to give EVs a serious look. 

The rest of my predictions were pretty accurate.  The stock market had a great year and a lot of politicians were voted out.  The housing market is still in a funk and I believe that will continue for years.  Housing is still historically expensive based on real wages and problems such as the foreclosure robo-signing and government meddling are interfering with the recovery process. 

Prices are Definitely Going Up

I don’t think we will see inflation as high as it was in 2008, but it’s definitely not going to be near the 1% the government is claiming.  Between the quantitative easing, weak dollar, recovering economy and global demand, the prices of most commodities are going up.  I also expect the prices for services, especially medical and education, to go up.  I expect the real rate of inflation (not the government’s bogus CPI) will come in somewhere around 5-8%. 

The bad news is that income probably won’t keep pace, especially for the working class and the retired.  Another 5-8% doesn’t sound like much, but you will definitely feel it when you pick up groceries or fill your tank.  And, this is just for a single year.  The cumulative effect over decades is huge. 

 

Government is Going Broke

I believe next year is the year the government is finally going to have to deal with their deficit spending and unfunded promises.  I predict a rash of municipal bankruptcies and other problems that force the issue.  Taxpayer’s budgets are stretched wafer thin and they can’t afford the massive tax increases it would take to bail out the government at their currently unsustainable levels of spending.  Something has to change. 

The shoe is also going to drop on underfunded government pensions.  The city of Prichard, Alabama, which has been bankrupt since 2009, stopped sending pension checks to retired employees.  This could set a precedent for other bankrupt cities, such as Vallejo, California.  Even cities as large as San Diego and New York City are struggling with pension costs that are unsustainable.  Either reform has to come or disaster will soon follow.  

Unemployment is Coming Down

In December, there were 103,000 new jobs created and the unemployment rate dropped to 9.4%.  Although this was good news, the jobs growth was much slower than expected.  In fact, it was barely enough to keep pace with the population growth.  Ben Bernanke of the Fed is warning everyone that at this rate, employment won’t recover for another 4-5 years. 

Part of the reason for the poor December numbers is that the stimulus jobs the government created are starting to disappear.  And, December is traditionally a poor hiring month for the private sector.  I think we will see much better January numbers, because companies tend to hire after the holidays are over.  My opinion is that we are at the beginning of a slow employment recovery that will speed up in the coming year.  

Companies have been running very lean staffs and banking record profits during the recession, but that’s going to change.  As orders go up and the economy recovers, companies will be forced to hire.  The bad news is that some industries will do much better than others.  The unemployment rate for construction workers is currently at 20.7% and I don’t see that dropping quickly.  I also think people in manufacturing, mortgage, real estate and the public sector will continue to have a difficult time finding jobs. 

Stock Market is Going Up Again

Last year, the stock market had a terrific recovery year and I expect another good year in 2011.  I expect the market to cool a little and take a breather, but there are a lot of forces that will push it upwards in 2011.  Many stocks, such as Ford, are reasonably priced at their current levels, so increases in earnings should send them higher.  Finally, there is pent up demand for many items, such as cars and luxury goods that were put on hold during the recession. 

There is a stock market indicator called the “First Five Trading Days”.  Whenever the first five trading days of the S&P 500 are positive, there is an almost 90% chance the entire year will be positive.  The first five trading days of this year, the stock market did pretty well.  I am hoping for gains in the range of 5-8% in the Dow and much higher gains for small cap stocks. 

I hope 2011 is a prosperous and enjoyable year for you. 

The Bottom Line

The bottom line is that predictions are only guesses and it’s just as easy to be right as wrong.  But, approaching your future without a guess is like wandering through the desert; vision is necessary to reach a destination.

“The best way to predict the future is to invent it.” 

Alan Kay – American Computer Scientist 

Recommended Reading

Len Penzo – The Magic 8 Ball makes it’s Predictions for 2011
Financial Samurai – Financial Samurai Predictions for 2011
Go Banking Rates – Outlook 2011: This Year’s Financial Forecast

This post was featured on the Carnival of Personal Finance over at Wallet Blog. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the greatest carnival on the net.

14 comments to Hopeful Predictions for 2011

  • Hi Bret, I agree that CPI is higher than the government numbers suggest. I expect a painful hike in our grocery bills in 2011 as food manufacturers finally pass on higher costs to consumers.

    I also agree about municipal bankruptcies. I wouldn’t be surprised to see a bailout of your state even if they avoid calling it the “B” word.

    I hope you are right about unemployment. I fear that many companies are dragging their feet due to uncertainty about the health care law.

    I think stocks will probably go up but not because they are especially cheap. I think it’s mostly due to QE2, and that money will make its way into all kinds of assets including stocks.
    Jennifer Barry recently posted..Be Green- Save Green By Cutting Fuel UseMy Profile

    • Right now, the Governor of California is proposing huge budget cuts, instead of a huge tax hike, like Illinois just did. I hope it starts a national trend towards fiscal responsibility.

      I think stimulus, such as QE2, can only affect the prices of stocks in the short term. In the long term, it is earnings multiples, such as the P/E ratio, that govern the price. The good news is that I see earnings heading up.

  • Hope that it’s a good year for you too, Bret. I wonder about inflation vs. debt. If inflation is picking up, that helps the federal govt, though maybe not local govt that has to pay higher salaries and service fees and try to pass that on to the voters.
    Invest It Wisely recently posted..Ongoing Personal Goals for 2011My Profile

    • Right now, the federal government is having their cake and eating it too. They are inflating (aka easing or stimulating) to weaken the dollar. At the same time, they are underreporting the inflation rate (with the new CPI), so they don’t have to pay high treasury bond interest or COLAs for employees, retireees and those receiving entitlements.

      I expect this charade to come to an end at some point. I just don’t know what the trigger will be to collapse this house of cards. People are definitely starting to get wise and maybe we can calmly reverse course to avoid a catastrophe.

  • I agree with predictions; interesting on why they’ll come true though.

    Illinois is the worst state in the nation as far as a deadbeat entity. They seriously can’t pay local vendors and partners. Illinois is broke. Instead of cutting spending? They’re proposing a huge tax increase!

    Stocks will continue to rise as the bond bubble continues deflating. Money’s gotta flow somewhere and it’s being printed like there’s no tomorrow. And rates still stink. So I’ll play.

    • Yes, Illinois seems to be the poster child for graft, corruption and fiscal irresponiblity. I saw the news about the big tax hike today and I wonder how that is going to go over with the voters. I also wonder if the new incoming representatives are going to try to repeal it, since it was passed by a lot of lame ducks.

      Passing a huge tax hike during a recession while making zero effort to cut the budget seems pretty irresponsible. It would show a lot more leadership to address both parts of the equation.

  • Hi, I’m usually not one for predictions (even though I tend to make them myself 🙂 ). But I can state with CERTAINTY that inflation is going up! Have you been to the supermarket recently? I think electric cars have way to go…maybe a 10 year prediction!
    Barb Friedberg recently posted..MBA CLASS 2011 Risk vs RewardMy Profile

    • “Have you been to the supermarket recently?”

      Barbara,

      Are you kidding me? I have a 21 year old son and he eats like a starving piranha. I know all about inflation the hard way.

      You may be right about 10 years for the electric car to take off. I always seem to be more optimistic about new technologies than the masses. I won’t be waiting 10 years, that’s for sure. In ten years, gas will be at least $5-6 per gallon and more if they raise taxes.

  • I hope the stock market does well again this year as my retirement account could use a boost!

    I didn’t know about that first five days indicator and will now keep an eye on that each year.

    • Kay Lynne,

      My investments have completely recovered from the crash and then some. I have much more volatile investments than I would recommend for others my age. And, it was miserable when they tanked. But, it’s been great to watch them beat the pants off the indexes, when they recovered. If we have another good year, it will be all gravy for my IRAs and 401K. Considering the outlook for inflation, it looks like I’ll need it.

  • I have to agree with all your predictions, Bret.

    Don’t forget though, you predicted on my blog last year the Dow would get to 13,000! I’m calling in my chit now. See you this Wednesday for lunch! 🙂

    All the best,

    Len
    Len Penzo dot Com

    • Len,

      I was a little optimistic about Dow 13,000, but it turned into a pretty good year. I’m happy to buy you lunch and celebrate my earnings for the year.

      How about Wahoo’s in Laguna Beach?

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