Specific Predictions for 2010

My reading of history convinces me that most bad government results from too much government. -- Thomas Jefferson

It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world. -- Thomas Jefferson

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. -- Ludwig von Mises

My predictions for 2010

Ones that are already happening or just starting are in red.

1. Residential real estate prices in general will drop at least another 10 to 20%. Despite what many optimistic experts say, banks are holding onto 1.7 million houses and pretending they’re not in default. These will have to be recognized and sold this year. There are millions more technically defaulting, but no one is calling them defaulted. The Alt A and Option ARMaggedon will be made worse by large scale prime defaults. Interest rates will be going up, which will finish off many with adjustable rates. Starts in the spring.

2. Commercial real estate will lose a lot more value and default like crazy. This is not a surprise. Millions will have to refinance this year with much lower valuations, tougher requirements, and possibly higher rates.

3. Unemployment, even the official rate, will hit at least 11%. Real (U-6) unemployment, meaning the number of people actually not working is over 20%, but even the official reported number should be 10.8 right now. The employment situation is getting worse, and small businesses don’t expect to be hiring.

4. Personal bankruptcies will continue to set new records. Why would they not?

5. The value of the dollar will continue to drop, driving up prices of gold, gas, oil, food, etc.

6. It will become clear that inflation has arrived, despite official denials. They can debate whether it’s true inflation caused by monetary expansion, but things will cost people more.

7. The stock market will drop by a few thousand points. I would guess to the 6000 range. Where the Dow is now doesn’t make any sense and is based purely on some professional traders taking what they can get with free money (ours) from the government. It’s a deliberate policy meant to be an invisible bailout.

8. Small banks will fail in droves. Hundreds of them are technically bankrupt, but refuse to admit the losses, as noted above in #1. I don’t believe they will be bailed out. In a normal year 12 banks fail. This year I would expect from 500 to maybe up to 2,000!

9. Talk of a recovery will evaporate as people realize unemployment is still rising, bankruptcies rising, defaults and foreclosures rising, and Christmas sales were dismal.

10. Gold will continue to rise as people run to it as they worry about paper money and putting money in things of dubious value. If we see sovereign debt defaults (see below), gold will be looking very good to people.

11. We will see the default/ bankruptcy of at least a couple of countries. There are about eight teetering on the brink in Europe right now, including England, Ireland, Greece, Spain. Some will be allowed to fail.

12. Commodity prices will continue to rise, as free government money all over the world is chasing investments. Government debt isn’t a great investment now; neither are stocks; currencies are iffy; real estate is scary. Commodities are always needed, and will probably be king, since money needs a place to park.

13. Despite what most experts say, China’s economy will prove to be a bubble if they don’t rein it in soon. Real estate is selling for 80 times average incomes in some cities, while whole sections of cities sit empty for lack of buyers. Building has gone out of control, as have the prices of commodities. It’s an easy-money bubble, same as we just crashed from.

14. This is the big one, the big show. Some experts would call me an idiot for this one. Oddly enough, it is probably the most mathematically certain. As I have mentioned in previous posts, LINK, I don’t see how the federal government is going to finance its debt. What they are trying to borrow this year is far, far beyond what any government has ever tried to borrow before. Americans are likely to lend about 5% of it. Foreigners, based on current trends, won’t lend any of it. That’s kind of a problem.

It sounds fine that our government would run out of money and have to stop spending like drunken sailors. In reality, a debt auction failure would send the US dollar into a tailspin, massively increase the cost of government borrowing and completely destroy the budget, starting a complete meltdown. People who had dollars and US debt would race each other to get rid of it at any price. The value of a dollar could become almost zero within days.

It sounds crazy, and seemed so to me a few months ago, but consider these recent developments:

• The government is forced to borrow from itself to keep bond auctions from failing.
• This borrowing from itself policy had to be extended.
• Our Federal Reserve twice has coordinated sell-offs of gold to make it look less attractive and prop up bond auctions – kind of like if you owned a restaurant and stooped to putting cockroaches at a competitor’s place
• They are now talking about forcing people to convert their 401(k)’s to government bonds to prop up the bonds – buy our stuff or else!
• There has even been talk of suspending the bond auctions temporarily to avoid a failed one (even with the government itself being one of the main buyers!). Remember, without these auctions the government runs out of money.
• A month ago, economist Paul Krugman said that the idea of a bond auction failure was ridiculous because we’d see yield spreads of 4.5 and bid-to-ask ratios down near 2. If we saw that, then we should build a bunker in the back yard. Take a guess whether the yields spread is now 4.5, and bid-to-ask near 2. Ok, well bid-to-ask is at 2.16 and falling.

This is the real game-changer NO ONE talks about – except a few dozen cranky economists. If this happens, all of the other stuff above collapses, everything collapses and it ripples through the whole world, taking down every major country. See the quote at the top by one of the greatest economists of all time, von Mises. These credit expansion boom-busts are very ugly, especially if for example, you have a new president who has been delaying the ultimate bust and making it much bigger.

I will be writing more about this in the future. Hopefully I’m wrong. If so, my predictions will have to stop being true, and I’m running at about 90% accurate, 100% recently.