Tuesday, February 23, 2010

Update of my October 2010 forecast

On another forum, I made some long term forecasts regarding the economy. I won't reprint the entire posting other than the introduction.

From time to time, I develop my 'main economic scenario' to set direction for my investments. I like to post it here at REIN not only to share my ideas, but also because of the feedback (i.e. testing my economic model for weakness). I would like to point out that I am not a financial planner or stock broker. I do plan to become a real estate agent and hope to do so coming January. Any investment ideas mentioned are my personal opinions and I may own or have owned a large number of the investments mentioned below. So, if you follow up on any of the ideas discussed below, you'll do so at your own risk. Neither will I follow this up with specific advice to anyone but myself. I have to be this circumspect because after posting my ideas before on this forum I was asked for advice privately by some people. I did and will decline to do so other than what I post here on REIN.

A forum member folowed up yesterday:
[quote name='Yev' date='Feb 22 2010, 11:59 PM' post='79919']

I've read the books that you quote (both Harry S. Dent and Jeremy Siegel). What I wonder is how do you include in your forecast/outlook the following list of facts:

1. US unfunded debt is ENORMOUS and getting much larger all the time. I.E. when the US dollar collapses - it will make our lives in Canada MUCH harder.

2. US (and to a lesser extent) Canadian GDP figures are 'up biased' due to a large 'consumer component' as the cause of them historically - but likely NOT in the future (more savers)

3. China is likely in a Real Estate bubble Jim Chanos with MASSIVE over-construction. When this bubble blows, the demand for a lot of the raw materials that we export to China will significantly decrease.
........... etc.

Thanks for the opinions
Yevgeni [/quote]
Hi Yevgeni,

The best forecasters are those who forecast often. Don't you know how long ago I wrote this forecast? Having said that my first prediction, that I would be a realtor by January 2010 was dead on. Amazing! :)

Regarding Harry S. Dent, I think he counts too much on demographics, just like Jeff Rubin counts too much on oil. Jeremy Siegel was trying to create his own simulation after running into Harry S. Dent and added the impact of increased savings and increased economic growth in the emerging markets (in particular the BRIC countries).

I think that the Harry's assumption that retiring babyboomers will behave the same as previous retirees in regard to spending habits is flawed. I think babyboomers will reinvent retirement; we see that already now. Babyboomers may consume less because the kids are out of the house, but they will keep working much longer. Even affluent boomers are likely to do so because of the social interaction. So many boomers will be maintaining their lifestyles and possibly buy a recreational property in addition to their city condo.

Overall, I still think leverage is on the decline. In Canada, Jim Flaherty helped a bit as well lately. Many companies are reducing leverage dramatically, babyboomers and many Americans have increased there savings rates big time (from -3% or so to nearly +7%). Other than energy prices, inflation is still tame.

That leaves U.S. debt. Well, they are working on that. Everyone is down on the U.S. debt but they greatly underestimate the fundamental strength of the U.S. and the American Dream. This is a democratic society with lots of education and entrerpreneurial savvy and truly brilliant corporations like GE, Microsoft, J&J, Pfizer, Exon, etc., etc. Yes they have problems, but think back how long it took Canada to turn from high debt to envie of the world - less than 5 years!

China has many problems ranging from population unrest to fixed currency, a stale state industry and strange banking practices. It is far from certain in my mind that China will become the economic leader it aspires to be.
If it will become so powerfull (last time I looked, with all its people it was still less than half the U.S. economy) it is not likely to go up in a straight line. But have you noticed how much oil companies and other industries it is buying up? That is Jeremy Siegel's assumption at work.

Regarding China's role as an exporter of cheap goods, I think that will end over the next decade, like it did for Japan. Besides its population is quite old and again there can be a parallel drawn with Japan. My thoughts are that China and India are going to be growing with the increasing affluence of its own population. The momentum initiated by exports may be gradualy overtaken by its internal demand.

Oh, and a collapsing dollar? Forget about that. See what happens if Greece has a flue and Europe sneezes? Like last week, the U.S. dollar was suddenly the 'flight to safety' target. Same happened in the midst of the 2008 debt crisis. Yes it may go lower, especially against the Canadian dollar, but collapse? I don't think so. BTW did you notice recently, oil price went up inspite of the rising dollar? Hmmm!

So I stick with my prediction of low interest rates and low inflation for at least another year. Yeah, it may perk up a bit in short term rates. Long term rates may actually come down.

Regarding energy - looks like we are going to get high oil prices and an abundant natural gas market with moderate prices for long times to come. So Jeff Rubin's small world may be augmented by cheap N.G. energy here at home. The renewal energy business is hitting a snare, but over the longer term it is likely to change the world we live in. I just wish car tires are less noisy so I can sit in my back yard without hearing the traffic on Crowchild Trial.

I truly think energy is the most exciting development of the decade. It will restore manufacturing in north America. Especially, when the car industry comes of their contemplative and contented big as..s. Solar may be a big disappointment, but wind and electricty generated by N.G. and possibly nuclear will make electric cars viable. I also think that we may see a major revival in geothermal (that is what we call 'going out on a limb').

Regarding Climate Change, it will become less important over time. The chart fixing has hurt the crediblity of the 'science' big time. I sincerely hope though that we don't throw out the good with the bad. CO2 injection is probably crazy; but energy conservation, emission control, aiming for a sustainable economy, controlling worl population growth, alternative food generation technology to reduce agriculture and its excessive water and energy requirements, etc. These are realy where we should go in the future. Conservation, sustainable production practices and production efficiency through innovation are real money makers - manufacturers and energy producers can find here true sources of wealth creation.

I still am down on Saskatchewan on the long term. But I do think Thomas Beyer and others made some valid points on this forecast. Since I don't invest in Saskatchewan but stick with Alberta, I don't think it matters for my investments. I might want to buy into Potash though. The fertilizer theme is not to be counted out.

My outlook on the Islamic world is more or less the same. I am realy concerned about the loss of wealth due to declining oil exports. If the Islamic world does not truly adapt to the modern world it is likely to continue its decline and it may become a mess worse than Africa. To some degree it is admirable to stick strongly to traditional values; but there is a difference between sticking to things that have proven to be valuable and obsessed self-strangulation using destructive laws and habits from the past including a resistance to growth.

I hope I answered your questions, although in a somewhat roundadbout way. As always, these are only forecasts, my opinion on what may happen.They may change overnight once reality sets in. I am surprised they still stand. Maybe I have done too much real estate and too little reading lately :) (Are there no emoticons available on this editor - they're so cute).

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