I. U.S. Markets
2011 was a disappointing year for U.S. stock markets, especially in view of the fact that the third year of the presidential cycle has historically been the best. The S&P 500 returned 1.9% in 2011, including dividends. If you take into account the volatility one had to endure in order to garner 1.9% last year, it was indeed a sub-par performance for stocks. U.S. Treasury bonds were a different story. Global risk aversion drove investors into treasuries last year in spite of anemic yields (~2% for a 10 year bond). U.S. Treasuries were up by an amazing 34% in 2011, due almost purely to capital appreciation.
My prediction last year for U.S. stocks to be up by 10% was obviously too optimistic, as was my U.S. GDP forecast of one year ago. I wrote that GDP would increase by 3% in 2011, which is a very sub-par growth rate for the second year of an economic recovery. It looks at this point (4th quarter numbers not in yet) that GDP growth will come it at ~1.5% for all of 2011. U.S. households and governments continue to be over-leveraged, and a new threat emerged from across the pond. Europe’s troubles stemming from excessive sovereign debt and the resulting credit risk to their banking system has been a major drag on global growth, and will continue to be so in 2012. Of course paralysis of our political system exacerbated the economic problems last year, even though it was not a primary cause. I predict that in 2012 U.S. stock market returns will be 5% because of uncertainty over elections and continuing economic problems in Europe. There may be pockets of strength in U.S. markets, such as the micro-cap sector (small companies with a market cap of <$1.0 B), which I believe are undervalued. Small companies have had a harder time accessing capital over the past few years compared to their bigger brethren. Additionally, the U.S. dollar’s recent strength should place more emphasis on domestic operations where micro-caps excel. A U.S. recession would undermine this prediction, but I don’t believe that is in the cards. Unemployment is slowly coming down, corporations are flush with cash, and the housing market should finally bottom in 2012. GDP growth should still be stuck at ~2.0%. As I mentioned last year, 2% is the new baseline for U.S. (and all developed markets, i.e. Europe and Japan) GDP growth because of a secular shift in economic dynamism to emerging markets. Another area of relative strength in 2012 should be income-producing securities that do not have excessive leverage. Because of inordinately low U.S. interest rates and widespread risk aversion, any security that is relatively safe and produces a steady, high income stream will be in demand. When I say high, I don’t mean double-digit, but anything higher than a Treasury bond (a very low bar indeed). This should include dividend-paying stocks, preferred stocks, publicly-traded Master Limited Partnerships, securitized bank loans and mortgages, REITS (real-estate investment trusts), and high-yield corporate (junk) bonds. It may sound like anathema to recommend securitized mortgages after the destruction and well-deserved reputation they garnered over the past few years, but remember Fannie and Freddie guarantee a lot of them. It’s your tax dollars propping them up, you might as well take advantage of the high dividends they throw off. With leverage, many of these vehicles yield in the double digits.
I predict that as soon as the existential threat to the EU is removed, the long rally in U.S. treasuries will be over, and interest rates will begin to climb, probably in the second half of 2012. Until then, however, the 10 year Treasury bond yield can stay under 2%. Normally climbing bond yields are a bad sign. These are not normal times, however. Rising interest rates will be a signal that risk taking is returning to capital markets.
II. Foreign Stock Markets
The only way European nations can get out of their debt morass is to let the ECB (European Central Bank) print money hand over fist the way our Federal Reserve has for the past three years. Of course Germans hate this option because it implies rising inflation, but it is the least painful option. The EU cannot allow austerity to rule the Eurozone countries without a counterweight from the ECB (by buying up sovereign debt of the weaker economies and keeping rock-bottom interest rates and easy funding for banks). An austerity-induced depression would impose severe hardship on all Eurozone countries, including Germany.
Emerging-market stock markets performed abysmally in 2011, in direct contrast to my prediction of a 25% return. Most markets were in fact down by 25% last year, hammered by currency depreciation and inflation fears. The currency depreciation was related to global risk aversion caused mainly by Europe. Inflation has also plagued many emerging markets due to their relatively high economic growth (5-10%), high commodity prices in 2010 filtering through the supply chains, and influx of foreign capital (“hot money”) over the past few years. The strongest stock markets were in Southeast Asia, namely Thailand, Malaysia, and Indonesia. They were almost break-even last year, while many markets, such as India and Vietnam were down by ~40%.
I made the correct call on the Irish stock market last year, predicting that it would be the strongest in Europe, which it was. Unfortunately, returns in Ireland were only break-even, while most of the rest of Europe were down by ~20%. So far the austerity and discipline of the Irish along with their low tax rates have stabilized their economy and set the stage for future growth. Not without significant pain I might add.
Political developments in the Middle East, and newfound middle-classes in some countries are important developments for the long-term health of the global economy. If new democracies can thrive in Egypt, Libya, Iraq, Tunisia, etc, and new middle-classes in Botswana, Ghana, Nigeria, and others are sustainable, then these could be prime investment locations in the future. These countries are worth a close eye, along with some better-known ones like Vietnam, Chile, Thailand, and Peru.
I predict that emerging market stocks will bottom out in the first half of 2012 as the ECB starts to get a handle on its debt problems, and the respective governments start to see progress on the inflation front. Progress on inflation will be the direct result of the deflationary policies put in place in places like China, Brazil, India, and others. Inflation worries will ameliorate next year mainly from slow growth prospects in developed countries such as Europe, U.S., and Japan. Developed country pain I believe is emerging market gain! Emerging market stock market losses in 2011 and possibly the first part of 2012 should set the stage for powerful gains thereafter. I believe this is the place to be in late 2012 and 2013. Of course within a broad brush statement like that there will be many caveats and individual country outliers, but a broad basket of emerging market stocks should do well.
III. Commodities
A fear of global economic slow-down in 2011 put a serious dent into what had been a powerful commodity rally. There was a lot of volatility during the year, and a wide range of performances between the various categories, but suffice it to say it was not a good year. The top performing commodities were oil and gold. They were up slightly on the year after much volatility. Economically-sensitive commodities were down huge on the year, such as copper and palladium (by ~20%). Anything nuclear-related got crushed by the Japanese tsunami and resultant power plant meltdown. Natural gas prices were down by ~35% due to the continuing over-supply created by the fracking industry. And worst of all was the solar power industry. Anything clean energy-related such as solar panels, wind or solar stocks, etc. got wasted last year by a wind-down of subsidies coming from cash-strapped governments, and an over-supply of manufacturing capacity (mainly in China).
I was pretty accurate on my gold and oil predictions in 2011. Just as I predicted a year ago, gold set a high of ~$1900 per oz. in the middle of the year, but then sold off hard toward the end of the year. Much the same for oil, though the moves were not as dramatic. I was also accurate in the prediction that agricultural commodities would outperform in 2011 due to the continued demand from 6 billion poor people throughout the world. Even though the agricultural complex was down by ~10% last year, that was a relative standout compared to most commodities.
2012 should see commodities in general under pressure during the first half of the year as Europe wrestles with a huge sovereign debt refinancing problem and the rate of global growth bottoms out. Oil should average ~$100 (for light sweet U.S. crude) per barrel and bottom out in the first half. I believe that gold will also bottom out in the first half at ~$1450 per oz. before starting to march higher, reaching a new high of $2000 per oz. by the end of 2012.
IV. Currencies
The predominate theme for currencies in 2011 was flight from risk. Money flowed to the perceived safest currencies such as U.S. dollar, Swiss franc, Japanese yen, Australian and Canadian dollars. This is in spite of the fact that U.S. government debt was actually downgraded for the first time from AAA to AA by S&P, and the Japanese economy was hammered by a terrible natural disaster. The economies of Switzerland, Canada, and Australia are three of the best (and best run) in the world, with sound banking, and relatively low debt levels. As mentioned earlier, risk-aversion hammered emerging market currencies, and Europe’s well documented travails put constant pressure on the Euro. The British pound fell somewhere in the middle, relatively safe compared to emerging markets or Europe, but still under pressure relative to the “safest basket.” Remember that currency appreciation is only meaningful relative to another currency. So even though the U.S. has many well documented problems, it still is perceived to be a desirable destination for global funds with respect to the alternatives.
I was accurate in my predictions for the U.S. dollar last year when I wrote that it would appreciate 5-10% against the Euro and British pound, and stay flat against the Australian and Canadian currencies.
For 2012 I predict that the U.S. dollar will appreciate again with respect to the Euro, possibly to the 1.20 range (from 1.30 at the close of 2011). Emerging market currencies will stabilize (relative to the U.S. dollar) only when instability wrought from Europe seems to be resolved (or at least contained), probably in the second half of the year.
Have a great year investing in 2012!
Showing posts with label commodities. Show all posts
Showing posts with label commodities. Show all posts
Monday, January 2, 2012
Monday, February 1, 2010
2010 Global Financial Market Prediction
I. US Markets
US stock markets in 2010 will be hostage to three forces: inflation, Federal Reserve policy, and the economy. The economy is almost guaranteed to be weak, which means unemployment will remain high (>9 %). In spite of rampant money supply growth around the world, the weak US economy will keep inflation in check this year. That means the main driver will be the Fed. The Fed has acknowledged that it is preparing to remove some of the exceptional quantitative monetary easing of the past 1.5 years. This will create a choppy stock and bond market, but it appears that this will happen gradually and with plenty of warning so as not to upset markets too much. Hence the economy’s fragile recovery should remain intact. This should lead to high single-digit returns in the US stock market in 2010. One exciting secular investment area for the next few years is in the area of water resources. Fresh, clean water will only grow in importance and scarcity over the next decade and beyond as the world population increases, and rivers, lakes, rainfall, aquifers, etc. become depleted or polluted.
Corporate earnings will continue to grow slowly in a weak economy in 2010, although they will have favorable comparisons to last year’s weak numbers. The stock markets snapback from last year’s panic lows is now over. Further gains in 2010 will be predicated on accommodative Fed policy that renders safe alternative investments such as money market funds, CD’s, and treasury bonds unattractive. Bankruptcies are still growing in the corporate sector, but the junk bond market discounted a depression in 2008, and it turned out to be “only” a Great Recession. This “upgrade” accounted for sterling junk bond returns in 2009, but will not be repeated. One can expect to collect the coupon from junk bonds in 2010 (~9% depending on the credit risk) at best, with minimal appreciation. Treasury bond investments are only be for the most risk-averse in 2010. The monster rally in Treasuries in 2008 and early 2009 was a pure flight-to-quality, and has left yields at historically low levels (3.6% for a ten years).
Economic growth will be inhibited by weakness in real estate markets, including both commercial and residential. Foreclosures in both markets are still growing. Residential foreclosures have migrated from sub-prime where they started to prime markets. Residential markets are closer to healing because the market crashed remarkably quickly in 2008. Commercial real estate markets are experiencing a slow-motion meltdown, mainly due to the nature of long-term leases and the reluctance of banks to take big write-downs. It is a bit early to invest in commercial real-estate, but the time may be getting close to start picking through some of the carnage. Publicly-traded REIT’s actually are faring pretty well, all things considered, because they were restricted by securities laws from over-leveraging like some of the private companies. Therefore this year may be a good time to begin accumulating commercial real-estate investments on weakness.
The world economic pie will continue to grow over the long-term, but it will be driven mainly by emerging markets and the desire of 4 billion poor people to achieve a higher standard of living for themselves and their children. The US’s percentage of the world economy will continue to shrink in the long-term as will all developed markets. This is an unstoppable secular trend and the US will adapt one way or the other. It is very important to understand that the US economy can still grow over the long-term at 2.0 %, but the relative size of the US economy compared to the rest of the world will shrink as the world economic pie gets bigger at rate significantly faster than 2.0%. Education will be a critical element for the US to ameliorate the effects of declining economic might, as well as sound economic management. The excessive borrowing of the past decade was a symptom of US citizens, corporations, governments, etc. desperately trying to maintain past standards of living and economic power. The two huge bubbles that we witnessed over the past decade in technology stocks and real-estate markets is another symptom of the same over-reaching to maintain dwindling economic power. One way or another the US will adapt to these secular trends and cede relative economic power to China, India, Brazil, and the many, many new economies with very high growth potential. This adjustment will include more competitive wages and technologies, more savings, and probably less dependence on the consumer to drive the economy. The US consumer accounted for around 70% in recent years, which is unsustainable. If the US doesn’t adapt quickly enough, world markets will impose discipline on the US through currency depreciation and the pain of market dislocation like we witnessed in 2008-09. Of course these secular trends do not bode particularly well for US stock markets over the next decade. Valuations are still not particularly cheap even after the meltdown in 2008-09. Over the next decade we can therefore expect single digit returns on average from US stocks.
II. Foreign Markets
Expect slow economic growth in developed markets of Japan and Europe over the next few years as these economies heal from the shock of financial meltdown in 2008-09. Japan’s declining population, persistent deflation, and huge budget deficit make Japan an unlikely place to make money in 2010. Europe is not a cohesive market, but a fragmented collection of individual markets. Countries such and Germany and France have manageable budget deficits, while Greece, Ireland, Spain, and Portugal have huge government debt problems. The UK is much like the US in terms of its banking problems as well as excessive government budget deficits. Since developed international markets represent approximately 45% of world stock market capitalization, portfolios should be exposed to these markets, but at a lower percentage.
Canada and Australia are similar in that they are both largely natural resource economies, with relatively sound banking systems. These countries have some of the best economic prospects amongst developed countries in 2010. Of course markets have already discounted these positive outlooks. However, these countries should be over-weighted relative to other developed markets in 2010.
Emerging markets are where the economic growth will be in 2010. China and India are projected to grow at around 9%, while Brazil, Indonesia, and Malaysia are projected to grow at around 5%. Eastern Europe is an interesting place because long-term prospects are good based on their proximity to the huge Eurozone, but excessive borrowing couple with last year falling currencies really put the clamps on near-term prospects. Russia falls into this same camp, with the additional plus of abundant natural resources, and the additional minus of excessive state control in the economy. One exciting area for investment in 2010 and beyond is in “frontier” markets, or markets a tier below “emerging,” since some of the emerging markets such as Brazil, China, South Korea, Taiwan, Hong Kong, and Singapore are becoming pretty large and well established. Frontier markets with high growth prospects include Vietnam, Thailand, some Middle-Eastern, South American, and African countries, as well as some of the better-managed Eastern European countries. Of course these countries carry high risk as well as the potential for high returns, and must therefore be managed appropriately.
III. Commodities
The world population is over 4.5 billion and growing. The vast majority of these people are poor, and have not had the opportunities that we take for granted in America. The introduction of capitalism and consumer economies to huge swaths of these folks will continue to fuel demand for natural resources for many years to come. Therefore commodities will continue to see increased demand in 2010 and beyond. This increased demand will not result in a boom period this year because of sub-par world economic growth, but will entail a gradual increase. Of course demand is only one side of the pricing mechanism. As long as producers can increase supply at a comparable rate, then prices will remain flat or even drop. A good example of this is illustrated by the natural gas market. Natural gas is positioned to be the energy source of the future. It is relatively clean-burning, especially compared to coal. Recent drilling advances in horizontal fracturing technologies have resulted in increased supplies for natural gas and much lower prices over the past year in spite of the rosy long-term outlook. This provides an attractive long-term investment thesis because of the environmental and energy advantages of natural gas. The price ratio of oil/natural gas is at an all-time high which should favor increased usage of natural gas relative to other energy sources over the next decade. Natural gas prices should stabilize or increase slightly in 2010, and continue to head higher in future years.
Gold and gold mining stocks had a stellar 2009, and have come under some pressure of late. This is a good buying opportunity due to three reasons: people are distrustful of financial assets due to the many excesses of the past few years, excessive money supply growth world-wide may lead to inflation if and when economic growth gets back on track, and commodities in general are likely to be in demand for the next decade.
IV. Currencies
What a wild ride for currencies in 2008 and 2009! The dollar was viewed as a safe-haven and therefore soared higher against practically all currencies during the panic of late 2008 and early 2009, then reversed and went into a huge slide as world markets stabilized during the last three quarters of 2009. In early 2010 the dollar is rising slowly once again and appears to be stabilizing at an equilibrium level. This pattern basically reflects similar patterns followed by most markets throughout the world followed over the past two years. Risk-based assets such as stocks, corporate bonds, real estate, sovereign debt and currencies from small or economically-weak countries cratered, while safe US treasury securities and the US dollar soared in a panic-driven flight-to-quality. All this in spite of the fact that the epicenter of the global financial meltdown was right here in the US! Now markets are reaching an equilibrium where future movements will be driven by fundamentals.
Currency movements are driven primarily by perceived economic management, relative interest rates, and balance of trade. The dollar should appreciate against the euro, the pound, and the yen in 2010. The Eurozone is such a fractured place economically with relatively well-managed economies like France and Germany commingled with basket cases like Greece, Spain, Portugal, and Ireland. The European Union cannot discipline wayward members easily, which puts the European Central Bank in a very precarious position. Britain has many of the same problems as the US, but the financial sector there accounts for a bigger portion of Britain’s GDP than in the US. And Japan has the biggest debt-to-GDP ratio of any developed country, a new left-leaning government, stagnant population growth, and a historical propensity to solve their economic problems with currency depreciation. The Canadian and Australian dollars were quite strong versus the US currency in 2009. They should hold onto those gains and possibly appreciate some more due to their well-managed banking systems, relatively low debt, and natural resource economies.
US stock markets in 2010 will be hostage to three forces: inflation, Federal Reserve policy, and the economy. The economy is almost guaranteed to be weak, which means unemployment will remain high (>9 %). In spite of rampant money supply growth around the world, the weak US economy will keep inflation in check this year. That means the main driver will be the Fed. The Fed has acknowledged that it is preparing to remove some of the exceptional quantitative monetary easing of the past 1.5 years. This will create a choppy stock and bond market, but it appears that this will happen gradually and with plenty of warning so as not to upset markets too much. Hence the economy’s fragile recovery should remain intact. This should lead to high single-digit returns in the US stock market in 2010. One exciting secular investment area for the next few years is in the area of water resources. Fresh, clean water will only grow in importance and scarcity over the next decade and beyond as the world population increases, and rivers, lakes, rainfall, aquifers, etc. become depleted or polluted.
Corporate earnings will continue to grow slowly in a weak economy in 2010, although they will have favorable comparisons to last year’s weak numbers. The stock markets snapback from last year’s panic lows is now over. Further gains in 2010 will be predicated on accommodative Fed policy that renders safe alternative investments such as money market funds, CD’s, and treasury bonds unattractive. Bankruptcies are still growing in the corporate sector, but the junk bond market discounted a depression in 2008, and it turned out to be “only” a Great Recession. This “upgrade” accounted for sterling junk bond returns in 2009, but will not be repeated. One can expect to collect the coupon from junk bonds in 2010 (~9% depending on the credit risk) at best, with minimal appreciation. Treasury bond investments are only be for the most risk-averse in 2010. The monster rally in Treasuries in 2008 and early 2009 was a pure flight-to-quality, and has left yields at historically low levels (3.6% for a ten years).
Economic growth will be inhibited by weakness in real estate markets, including both commercial and residential. Foreclosures in both markets are still growing. Residential foreclosures have migrated from sub-prime where they started to prime markets. Residential markets are closer to healing because the market crashed remarkably quickly in 2008. Commercial real estate markets are experiencing a slow-motion meltdown, mainly due to the nature of long-term leases and the reluctance of banks to take big write-downs. It is a bit early to invest in commercial real-estate, but the time may be getting close to start picking through some of the carnage. Publicly-traded REIT’s actually are faring pretty well, all things considered, because they were restricted by securities laws from over-leveraging like some of the private companies. Therefore this year may be a good time to begin accumulating commercial real-estate investments on weakness.
The world economic pie will continue to grow over the long-term, but it will be driven mainly by emerging markets and the desire of 4 billion poor people to achieve a higher standard of living for themselves and their children. The US’s percentage of the world economy will continue to shrink in the long-term as will all developed markets. This is an unstoppable secular trend and the US will adapt one way or the other. It is very important to understand that the US economy can still grow over the long-term at 2.0 %, but the relative size of the US economy compared to the rest of the world will shrink as the world economic pie gets bigger at rate significantly faster than 2.0%. Education will be a critical element for the US to ameliorate the effects of declining economic might, as well as sound economic management. The excessive borrowing of the past decade was a symptom of US citizens, corporations, governments, etc. desperately trying to maintain past standards of living and economic power. The two huge bubbles that we witnessed over the past decade in technology stocks and real-estate markets is another symptom of the same over-reaching to maintain dwindling economic power. One way or another the US will adapt to these secular trends and cede relative economic power to China, India, Brazil, and the many, many new economies with very high growth potential. This adjustment will include more competitive wages and technologies, more savings, and probably less dependence on the consumer to drive the economy. The US consumer accounted for around 70% in recent years, which is unsustainable. If the US doesn’t adapt quickly enough, world markets will impose discipline on the US through currency depreciation and the pain of market dislocation like we witnessed in 2008-09. Of course these secular trends do not bode particularly well for US stock markets over the next decade. Valuations are still not particularly cheap even after the meltdown in 2008-09. Over the next decade we can therefore expect single digit returns on average from US stocks.
II. Foreign Markets
Expect slow economic growth in developed markets of Japan and Europe over the next few years as these economies heal from the shock of financial meltdown in 2008-09. Japan’s declining population, persistent deflation, and huge budget deficit make Japan an unlikely place to make money in 2010. Europe is not a cohesive market, but a fragmented collection of individual markets. Countries such and Germany and France have manageable budget deficits, while Greece, Ireland, Spain, and Portugal have huge government debt problems. The UK is much like the US in terms of its banking problems as well as excessive government budget deficits. Since developed international markets represent approximately 45% of world stock market capitalization, portfolios should be exposed to these markets, but at a lower percentage.
Canada and Australia are similar in that they are both largely natural resource economies, with relatively sound banking systems. These countries have some of the best economic prospects amongst developed countries in 2010. Of course markets have already discounted these positive outlooks. However, these countries should be over-weighted relative to other developed markets in 2010.
Emerging markets are where the economic growth will be in 2010. China and India are projected to grow at around 9%, while Brazil, Indonesia, and Malaysia are projected to grow at around 5%. Eastern Europe is an interesting place because long-term prospects are good based on their proximity to the huge Eurozone, but excessive borrowing couple with last year falling currencies really put the clamps on near-term prospects. Russia falls into this same camp, with the additional plus of abundant natural resources, and the additional minus of excessive state control in the economy. One exciting area for investment in 2010 and beyond is in “frontier” markets, or markets a tier below “emerging,” since some of the emerging markets such as Brazil, China, South Korea, Taiwan, Hong Kong, and Singapore are becoming pretty large and well established. Frontier markets with high growth prospects include Vietnam, Thailand, some Middle-Eastern, South American, and African countries, as well as some of the better-managed Eastern European countries. Of course these countries carry high risk as well as the potential for high returns, and must therefore be managed appropriately.
III. Commodities
The world population is over 4.5 billion and growing. The vast majority of these people are poor, and have not had the opportunities that we take for granted in America. The introduction of capitalism and consumer economies to huge swaths of these folks will continue to fuel demand for natural resources for many years to come. Therefore commodities will continue to see increased demand in 2010 and beyond. This increased demand will not result in a boom period this year because of sub-par world economic growth, but will entail a gradual increase. Of course demand is only one side of the pricing mechanism. As long as producers can increase supply at a comparable rate, then prices will remain flat or even drop. A good example of this is illustrated by the natural gas market. Natural gas is positioned to be the energy source of the future. It is relatively clean-burning, especially compared to coal. Recent drilling advances in horizontal fracturing technologies have resulted in increased supplies for natural gas and much lower prices over the past year in spite of the rosy long-term outlook. This provides an attractive long-term investment thesis because of the environmental and energy advantages of natural gas. The price ratio of oil/natural gas is at an all-time high which should favor increased usage of natural gas relative to other energy sources over the next decade. Natural gas prices should stabilize or increase slightly in 2010, and continue to head higher in future years.
Gold and gold mining stocks had a stellar 2009, and have come under some pressure of late. This is a good buying opportunity due to three reasons: people are distrustful of financial assets due to the many excesses of the past few years, excessive money supply growth world-wide may lead to inflation if and when economic growth gets back on track, and commodities in general are likely to be in demand for the next decade.
IV. Currencies
What a wild ride for currencies in 2008 and 2009! The dollar was viewed as a safe-haven and therefore soared higher against practically all currencies during the panic of late 2008 and early 2009, then reversed and went into a huge slide as world markets stabilized during the last three quarters of 2009. In early 2010 the dollar is rising slowly once again and appears to be stabilizing at an equilibrium level. This pattern basically reflects similar patterns followed by most markets throughout the world followed over the past two years. Risk-based assets such as stocks, corporate bonds, real estate, sovereign debt and currencies from small or economically-weak countries cratered, while safe US treasury securities and the US dollar soared in a panic-driven flight-to-quality. All this in spite of the fact that the epicenter of the global financial meltdown was right here in the US! Now markets are reaching an equilibrium where future movements will be driven by fundamentals.
Currency movements are driven primarily by perceived economic management, relative interest rates, and balance of trade. The dollar should appreciate against the euro, the pound, and the yen in 2010. The Eurozone is such a fractured place economically with relatively well-managed economies like France and Germany commingled with basket cases like Greece, Spain, Portugal, and Ireland. The European Union cannot discipline wayward members easily, which puts the European Central Bank in a very precarious position. Britain has many of the same problems as the US, but the financial sector there accounts for a bigger portion of Britain’s GDP than in the US. And Japan has the biggest debt-to-GDP ratio of any developed country, a new left-leaning government, stagnant population growth, and a historical propensity to solve their economic problems with currency depreciation. The Canadian and Australian dollars were quite strong versus the US currency in 2009. They should hold onto those gains and possibly appreciate some more due to their well-managed banking systems, relatively low debt, and natural resource economies.
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