And if that isn't enough to lead to a bit of nail-biting on those greedy fingers, think flash crashes and technical trading indicators -- say, a certain famously tragic and highly explosive German airship -- that materialized out of thin air in 2010 as signs of mere market anarchy about to be loosed on the world of investors. Think there's nothing to worry about? Click on for the key suspects for Market Threats of 2011...
Granted, if the markets were able to ride out the EU crisis in 2010 when Greek citizens were rioting in the streets and German chancellor Angela Merkel probably felt like the only offspring of a European dynasty that hadn't thrown away her inheritance on yachts and vineyards, maybe the market can abide short-term weak spots for the euro throughout 2011. It should be noted that the median mid-2011 euro forecast of 41 strategists surveyed by Bloomberg has the vulnerable currency rising to $1.36 next year -- far from a currency-crash scenario. In the least, you can expect that the EU crisis will make for convenient business news headlines when a financial journalist can't think of another reason why equities are declining. But this hardly means that the market is going to starve for lack of other profligate spenders from among the ranks of public entities....
Where have we seen similar issues play out in 2010 and topple the market? Remember those Greeks violently rioting in the streets when their prime minister planned steep cuts to pensions and salaries, and the French going on strike -- well, when aren't the French on some type of strike -- when French President Nicolas Sarkozy undertook his campaign to raise the mandatory retirement age for French workers from, oh probably 25 or so, to 62. Indeed, is the U.S. state and local government crisis the EU of 2011? Even if not, the worst is yet to come. "The private sector has been paying in blood for a good two years before the governments even came to grips with the crisis and started laying off workers. When the coffers can't even be described as dry, but are like the Mojave Desert, muni defaults will stay at the forefront, and people who think it can't happen are missing the boat," the Bank of Tokyo-Mitsubishi UFJ economist warned. Governor Cuomo could reduce his salary to 1 euro, and it still might be wise of investors to steer clear of municipal bonds, and for Cuomo to convert that paycheck into some other currency, in a hurry.
Foreclosure watchdog RealtyTrac noted in its most recent monthly foreclosure report that activity had decreased 21% month-over-month and 14% year-over-year, representing the highest drops recorded since RealtyTrac began publishing the U.S. Foreclosure Report in January 2005. Whether it's a tidal wave or monsoon of mortgages, that was the calm before the 2011 storm. The bulk of three- to five-year adjustable rate mortgages hit the foreclosure pipeline in 2011. RealtyTrac is predicting a record year for foreclosures in 2011. The good news, if there is good news about the U.S. housing market, is that the continuing problems are well-telegraphed, and estimates for true recovery in the housing sector range anywhere from one to three years out. If there's a major U.S. economic issue that's not going to get better soon but shouldn't surprise anyone, it's this one.
The Bank of Tokyo outlook for U.S. unemployment in 2011 is a rate of 8.7% by the end of the year, revised from 9.2% after the tax cut package.
China vs. inflation is expected to be a dominant theme next year, as it grew as an issue for traders to monitor throughout the year, and on Christmas Day, even. The fine line that China is walking is to avoid a property bubble and inflation, while also allowing economic expansion to continue at a reasonable pace, is a major market theme, if not an outright fear factor, for 2011. For the time being, the economic consensus doesn't seem to be on the side of hedge fund manager and China doomsday soothsayer Jim Chanos, but this is one 2010 debate that's ongoing and will have traders with their finger not too far from the panic button all year.
While it may seem like the big issue with profligate spending by the government is moving down from the federal to state level in 2011, investors could have a short leash with the federal economic stimulus policy given the size of the deficit check written by the government to keep the economic recovery going. There's been plenty of evidence from past tax cuts that consumers don't always spend tax savings, especially at the more affluent end of the spectrum. Businesses haven't proven yet that they are set to ratchet up hiring in a significant way as a result of the stimulus package. Add to all of this the chance that consumers save 100% of their payroll tax savings, or use it to pay down debt, and the federal government's best laid plans to keep the economy on track could amount to nothing much in the end. In the words of Bank of Tokyo economist Ellen Beeson Zentner, "If there's no stimulus from the stimulus and all we do is add to ugly debt levels, investors may take issue with it. With no stimulus at all from the $858 billion, a massive flight from treasuries begins."
The run-up the market experienced to end the year, and the examples of panic based on technical trading theories and fears of high frequency trading machines that are pushing the little guy to the margins of market profit opportunities, all circle back around to the most fundamental question about equities: are they overbought or oversold as trading in 2011 begins? Even before the first earnings season of 2011 signals to investors the level of bullishness from the corporate sector, and with the muni bond crisis, systematic risk to Europe's financial system, Chinese inflation, U.S. unemployment, the U.S. foreclosure pipeline -- and, maybe worst of all, President Obama and Ben Bernanke still poised to be major market movers in 2011 -- it's hard to take for granted the economists' consensus bet that its onwards and upwards with the S&P 500 in 2011, without a shred of doubt. You don't have to take our word for it, either. The Federal Reserve Bank itself rattled off more than half this list in the minutes of its most recent Open Market Committee meeting, released on Tuesday. The Fed's decision-making body remains worried that the economy is at risk of slowing due to continued weakness in the housing markets, steep budget cuts by state and local governments, lack of pickup in hiring by corporations, and risk to the banking sector caused by the ongoing problems in Europe.
Eric Rosenbaum. >To follow the writer on Twitter, go to Eric Rosenbaum. >To submit a news tip, send an email to: firstname.lastname@example.org.