10 themes for ’10 reviewed

10 Economic Themes for 2010: Year-End Review

Since we’ve now closed the chapter on 2010, we’d like to review our “10 economic themes for 2010”  from last January, to see how well our ideas performed.

We’ve graded ourselves using these symbols:  Y Right  N Wrong  ? Not Exactly.

1. ? We expect to see the US unemployment rate to peak at 11% in 2010: We were a bit aggressive with the numerical portion of this theme. While the US job market remains anemic, the headline unemployment rate stayed within the 9.5% to 9.9% range, ending the year at 9.8%[1]. Over 15.1 million American workers were unemployed and actively seeking work at the end of 2010, this is a larger number than at any time since WW-II (except for late 2009 when there were 15.6 million). Private sector job-creation continues to be very slow, and the broader measure of underemployment, U-6 has stayed between 16.5% and 17.1% all year, ending the year at 17.0%. U-6 counts those working part-time involuntarily and workers discouraged from looking for a job.
2. Y Investors will continue to re-allocate towards less volatile investment classes, like bonds in 2010: This scenario played out almost entirely as we had outlined.  ICI[2] reports that investors withdrew a net $29.6 billion from stock mutual funds through Nov 2010.  Meanwhile, taxable and municipal bond funds saw net inflows of $266.4 billion.
3. Y We expect a number of credit downgrades for developed nations as their persistent deficits come into focus.  The US Dollar will strengthen in any ensuing flight to safety: We were almost entirely right on this one. Throughout the year, we saw major credit downgrades affecting Greece, Portugal and Spain, as well as the creation of an unprecedented EU bailout plan for peripheral economies.  The US dollar started 2010 valued at 1.4323 per Euro, but strengthened as the situation in Europe deteriorated.  It reached a level of 1.1875 per Euro on June 6^th and ended the year at 1.3373.
4. N Interest rates will remain effectively at 0% until the 4^th quarter of 2010, where we will expect to see the Fed raise rates to the 1-2% range: We were wrong on this one.  The Fed has continued to keep the fed funds rate at historically low levels and employed every form of monetary stimulus available to it.  We underestimated the dovish tone of the current Fed, and the Chairman’s commitment to maintain easy monetary policy while unemployment remains high.
5. Y Continuing the trend from 2009, paying down debt will remain the highest priority for US consumers as they attempt to get their financial houses in order: This was a major theme for consumers in 2010.  For Q2 2010, the personal savings rate was 10.5%, and it is likely that the full year personal savings rate will be above 5%, which is far higher than the 2006 full year rate of 0%.  Consumers continued to pay down credit card debt, the most recent data from the Fed[3] (for Oct 2008) shows revolving debt at $800 billion, which is down from $866 billion at the start of 2010 and $958 billion at the start of 2009.
6. N The US economy will see almost negligible growth for 2010: We will not have final estimates on 2010 GDP growth till the end of 2011, but it is likely that GDP grew between 2.5% and 3.0% (as compared to 0.0% and -2.6% in 2008 and 2009).  The caveat, of course, is that this has been accomplished with record government stimulus.
7. Y Corporations will increasingly turn to mergers and acquisitions to grow market share: We’ll take half a victory lap on this one.  The New York Times[4] estimates global M&A activity grew 23.1% (to USD 2.4 trillion) by value over 2010, though we are still nowhere near the $4 trillion level achieved in 2006 and 2007.  This is partly due to lower stock market values and corporate treasurers who, after being shell-shocked by the turmoil in the commercial paper market in 2008-09, are now hoarding cash.
8. Y Growth in emerging markets will continue to outpace developed economies.  But this will not be enough to offset the stagnation in developed economies or lead to a robust global recovery: This trend appears to have held up well.  Though we have our doubts about certain large economies (see below), emerging market economies and financial markets performed well in 2010.  The MSCI emerging markets index[5] ended the year up 16.36% in dollar terms, while the S&P 500 ended the year up 12.78% (neither number includes dividends).
9. ? We believe there is continued risk for a massive correction in China: While we have not yet seen a “massive” correction in China, the Shanghai composite index ended the year down 10.61% (one of the few major market indices down in 2010).  Residential real-estate prices have moderated in many markets and concerns about overbuilding continue to exist.
10. N In 2010, certain commodities are poised for a sharp sell-off.  Top of our lists for a correction are gold and oil: We were flat out wrong on this one.  ICE’s Brent index rose from 77.85 to 93.49 over the course of 2010 and gold was up from 1096 to 1421 over the course of the year.

So the final tally is 5 themes right, wrong on 3, and not exactly on 2.

[2] The Investment Company Institute, http://ici.org/research/stats/trends/trends_11_10

[3] http://www.federalreserve.gov/releases/z1/Current/

[4] http://dealbook.nytimes.com/2011/01/03/confident-deal-makers-pulled-out-checkbooks-in-2010/

[5] http://www.mscibarra.com/products/indices/global_equity_indices/gimi/stdindex/performance_em.html