2011 Predictions and Investment Themes

Hal Blackwell’s Predictions for 2011

On my website I claim the title “futurist”. No state or federal license is required to make the claim but a list of predictions for the coming new year is mandatory. Without further adieu:


1. The financials, with Bank of America leading the way, will be the best preforming sector on the NYSE in 2011. 

With the Fed Funds rate stuck at zero and the Federal Reserve unsuccessfully battling to keep mortgage rates low, the spread between short and long term rates will widen. The wider the spread, the more money banks make. Banks making historic profits borrowing money from the Federal Reserve for free will continue to be satisfied with the bounty earned by investing in “risk free” treasury debt. Banks will not have to lend money into the economy to make outrageous profits. Usually increased profits at financial institutions bode well for increased lending but not in 2011. Mortgage “put back” fears are overblown.

2. Unemployment will rise to 11%.

The stimulus created in the new tax measures recently approved by Congress will keep the unemployment rate steady at 9.7% through the first two quarters of 2011. But as that stimulus begins to fade and Republicans threaten to cut spending, the economy will start to turn south again. Cuts by state and local governments will add to the ranks of the unemployed. 

3. Jim Demint will emerge as a front runner for the Republican presidential nomination.

Demint has built his political career on the principles that are gaining favor with independent voters. Very few Senators can say, “I told you so!” Demint is presidential, comes across as trustworthy and is smart. He can also raise a cazillion dollars from the Tea Party constituents at the drop of a hat. 

4. The Mexican government suspends the writ of amparo (Mexican hebeas corpus) in a last ditch effort to hunt down and destroy the drug cartels and avert complete anarchy. 

The drug cartels will continue to operate with complete immunity in Mexico. The rule of law in the country will become subjugated to the indiscriminate violence and corruption. As the conflict deepens the trickle of illegals coming across the US border turns into wave of refugees.

5. The state of California will end the year in dire need of a bail out.

Another decline in the real estate market coupled with refugees coming across the Mexican border will put a sever strain on state and local governments. There will be a record number of defaults on municipal bonds in California and the cost of borrowing will force federal intervention in 2012.

6. The Real Estate market will take its final leg down.

“Water treading” in the Real Estate market comes to an end. The number of foreclosed properties going on the market coupled with higher mortgage rates (despite QE2) will finally drive the market to its bottom.  

7. Merger and deal activity on Wall Street will have a record year. 

As inflation fears creep into the board room, the piles of cash sitting on corporate balance sheets will be used to vertically and horizontally integrate. Some really strange partnerships emerge as organizations desperately look for places to invest mountains of cash. 


8. House Republicans play politics and refuse to make any hard decisions preparing to take on Obama in 2012. 

Our political leaders stay in power by demonizing the other side of the isle. We are likely to see some government shutdowns and other rhetorical moves to claim the moral high ground to impress the political center. Nothing of substance will be done to address the deficit.


9. The European sovereign debt crisis continues to boil under the surface. 

The German’s are on record as saying they will stand behind their Euro partners. We can expect a bailout in Italy, Spain, Portugal, Ireland (again) and possibly Belgium. The German’s should be able to “kick the can down the road” for at least one more year. If there is a “restructuring” of Spanish or Italian sovereign debt all bets are off. The second great financial collapse (the Great Depression was the first) will be under way in earnest. Such a “restructuring” would be the death of the Euro and signal that the ECB’s best efforts (along with secret Federal Reserve assistance) were unable to prevent such a calamity. The European banks are loaded down with Euro denominated sovereign debt.

10. Civil unrest in Europe will escalate dramatically.

As European governments face economic reality; their populace will still deny the certainty of arithmetic. Denial of services most Europeans view as entitlements will spur an ever larger segment of the population into the streets.

11. The China story will take a different turn as its economy begins to overheat.

China is in the midst of a real estate bubble. As the government tries to reign in inflation by raising rates there is a good chance this bubble will pop. The Chinese government, flush with cash, will be able to cope with the collapse but this will put dramatic deflationary pressure on the global economy. As inflated commodity prices revert to the mean, the imminent danger of global deflation looms as 2011 comes to a close.

12. The Korean peninsula will be reunited as the North Korean government collapses under the strain of China’s pressure and dissension within the military.

After a short and desperate military action the North Koreans will have their towel thrown in for them by the Chinese. The DMZ will be flooded with refugees as the world pours aid into the North.

13. The Iranian’s will explode a nuclear devise or demonstrate a “dirty bomb” ballistic missile capability. 

The Iranians will gain a nuclear devise or a “dirty bomb” capability. The world will come to know what the “Mahdi” is and why it is important. Tehran will start the first phases of a campaign to hold the world hostage in an attempt to destroy Israel. 

14. The war in Afghanistan fails.

The Obama Administration’s proclaimed date of withdrawal coupled with a lack of commitment to “win” the war, will be the key to the demise of US efforts there. The President will attempt to declare victory and leave. The White House will use verbiage similar to “we have done all we can do”. Obama’s dependency on the far left wing of the democratic party will demand a US withdrawal and politically he will have no other option but to withdraw US forces.

15. The Obama administration will descend into chaos.

In an effort to bolster his reelection prospects the President will make a schizophrenic move to the political center. The left wing of the democratic party will threaten to run primary opposition. Several candidates on the left of Obama will emerge.  A crisis along the Mexican border, as violence spills into Arizona and California, and rising unemployment will reveal political miscalculations and core incompetencies within the administration. The Obama presidency will be rendered powerless to deal with these escalating economic and national security challenges.

Note: Do not be surprised if the White House is rocked with scandal. There has been too much money flowing through government and too much ill will in powerful places.

Signs my predictions are coming to pass will include the following:

• A significant run up in the S&P 500 (1,243 currently) to 1,390 occurs as bond holders sell due to inflation fears and insufficient yields in the fixed income arena. 
• Interest rates begin to rise as the debt market demands higher yields. Higher interest rates choke off the anemic recovery.
• The Federal Reserve announces QE 3 in late summer as the optimism sparked by the stock market’s run up fades.
• Summer 2011 brings increased volatility back to the market.
• Market sells off in late September and early October 2011.

Signs that I am completely off my rocker:

• If the move up in the financials is confirmed by increased revenue within the transportation sector. This would mean I am way off base!
• The US Treasury curve starts to flatten.
• The price of gold collapses.
• Interest rates start to decrease at the beginning of the year.
• The Chinese government quits trying to curb inflation.
• The US dollar strengthens significantly.
• Inflation fears subside in the first and second quarters.
• The price of oil decreases in the first half of the year.
• The Iranians allow complete inspections of their nuclear facilities.

Summary: Predictions for December 31, 2011 

S&P 500 950

Dow Jones 10,000

10 year US Treasury Yield 2.45%

Spot Gold Price $2,300

GDP 2.5% 

Investment themes for 2011

• Buy gold on the dips
• Buy US financial institutions too big to fail (Bank of America, JP Morgan, Wells Fargo, Morgan Stanley Smith Barney, AIG)
• Short high yield muni bonds
• Lighten fixed income portfolio now, hold the cash, when the yield on the 10 year US Treasury goes under 3.1% mid year, start dollar cost averaging on the long end of the curve
• Dollar cost average into high dividend paying large US cap stocks. On brisk moves up in the market buy put leap options 15% out of the money (they should be cheap during the first half of the year)
• Increase emerging market exposure, Brazil, Argentina and Australia  
• Remember to always hedge, even I am wrong now and then!

Final note:

I know this is a dreadful forecast. It is, however, based on sound economic principles and one common sense axiom of life- “there is no free lunch”. To think America can borrow trillions of dollars, default and walk away having only paid the price of an extended period of 9.7% unemployment ignores the laws of nature. To think we have paid a penalty commensurate with our folly is to deny the ying and yang of the universe. Sorry.

Fed Action Leaves Little Doubt

Fed’s Action Leaves Little Doubt

If anyone wondered if the Fed finally had a handle on America’s economic predicament the recent interest rate spike should dispel any lingering vestiges of doubt. The Fed’s much ballyhooed QE2 seems to have backfired. Instead of lower, or steady, interest rates (the stated purpose for QE2) the very opposite has occurred in a humbling blow to the intellectuals at the Federal Reserve.

Fed Chairman Ben Bernanke came on 60 minutes to assure us he could stop inflation “in 15 minutes” using rate hikes. Mr. Bernanke’s ability to keep rates low to help the sputtering economy is now the question riddling the bond markets. Already having taken the Fed Funds rate to zero Mr. Bernanke’s monetary six shooter is out of “traditional bullets”. The latest ammunition, a mammoth purchase of US treasury debt has unexpectedly had the opposite effect. Over the last three weeks, the 10 year US Treasury bond has seen a historic spike in its rate, over 30%.

Remember when bond prices go down, rates go up. In order to bid bond prices higher Mr. Bernanke announced that he would be stepping in to participate in the auctions (or marketplace) to keep bond prices high. There appears to be only one hitch in his giddy up. The Fed has agreed to buy US Treasury debt with longer maturities. When the folks did their arithmetic, and some figuring, they came to the conclusion Mr. Bernanke was just egging the politicians on, and encouraging Congress to borrow more. A mouth watering Federal Reserve has that effect on politicians. 

Mr. Market is not easily fooled. Inflation fears generated by Mr. Bernanke’s actions set off a selling of US debt (remember lower bond price, higher interest rate).

The risk to our economy is that rates will spike and choke off the fragile recovery. The Federal Reserve’s communistic manipulation of the economy further validates that free market capitalism is able to heal our economy that the “central planning” model. How can Americans have confidence in a process that achieves the exact opposite of its desired result? Mr. Bernanke’s contention on 60 minutes that there was no cost involved in expanding the Federal Reserve’s balance sheet is a troubling insight into how Fed governors view the limit of their abilities.

The Fed is fast losing credibility and thus its grasp of monetary policy. 

The Fed is right about one thing. If interest rates go up now it will be like stepping on the throat of a barely breathing economy on life support; not some overheated recovery. 

New Tax Law Promises Each American BOHICA

New Tax Law Promises Each American BOHICA

BOHICA (pronounced bo’ hic a’) is a medical term most often used by comedic proctologist. The acronym stands for Bend Over Here It Comes Again. The agreement by Republicans and President Obama on legislation designed to avert the catastrophic expiration of the “Bush tax cuts” is the latest in a long line of government probes. 

Regardless of your stance on Mr. Obama’s agenda, one must be in awe of his ability to borrow and spend money. Given the results of last month’s election, the chances of another stimulus package passing through a Republican controlled House is as strong as a fresh vapor on a hog farm. Yet, with this new law, that’s exactly what he gets; a $390 billion stimulus package!

By increasing spending and expanding the deficit in the face of last month’s election, the Congress and the President have spit in the face of the American electorate. Republicans nor Democrats get it. Do we really need any further proof our government doesn’t work? Balancing the “give with the take” is entirely subjugated to reelection efforts. The concept is nonexistent in the Washington lexicon.

On probably the most critical piece of legislation having to do with job creation since the onset of the Great Recession our political leaders kicked the can down the road again. Two years from now (probably during another lame duck session of Congress following the presidential election) our esteemed friends will present us another tax law with equal or even less deliberation. It’s the quality of work our politicians have found acceptable to Americans.

In return for his agreement to not raise taxes on the highest income earners (small business owners who are going to create jobs, if any get created), Mr. Obama negotiated a 30% reduction (FICA tax cut from 6.2% to 4.2%, the media is reporting a 2% reduction!) in the amount workers must pay in Social Security tax and a 13 month extension of unemployment benefits.

A quick look at the legislation reveals three disheartening aspects of the law. 

First, and foremost, not a single hard decision was made. Our govern refuses to govern.  The report received from the “debt commission,” with legitimate ways to curb the deficit, is a macabre joke in the hands of these perpetual campaigners.

Incredibly, these boneheads on both sides of the isle, who ballyhooed endlessly about their commitment to fix Social Security, have decided to cut funding going in to the program. Social Security is on a collision course with mathematics and this legislation ignores the reality of addition and subtraction. 

The extension of the unemployment benefits will cost about $120 billion. Was there any consideration given to the idea of reducing spending to pay for this? Don’t be ridiculous!

Twenty three days is not long enough for such a debate! Unfortunately, twenty three years would not be long enough for this debate. 

What are the immediate ramifications of this new law? First I would say that a double dip recession is now almost completely off the table and I can assure you that a double dip recession was America’s best case senerio. The stock market will probably do well over the next two years (sell your bonds now!). Unemployment will stay about the same.  Ben Bernanke’s commitment to QE 3, 4, 5, 6 ……. assures that stock market prices will remain steady or slightly improved. The economy may also improve marginally over the next two years, enough to get Mr. Obama reelected. But there is no free lunch.

The inescapable truth is that America is headed for a day of reckoning which is beyond anything in our nation’s history. Americans do not have a context for measuring the woe that will eventually befall this nation. And it is coming, make no mistake about it. This “balancing of accounts” will surprise Washington and Wall Street because our policymakers are not trained to think like this. Alan Greenspan, David Walker, David Rosenberg, Mohammed El Arian, Nessim Taleb, and Nouriel Roubini do know how to think in this context. Don’t take my word for it, read what they are saying.

My speculation above that we have put off, for at least two years, this day of reckoning is predicated on no monumental unforeseen strain being forced on the economy. A large natural disaster, an attack on the homeland, gasoline at $5 per gallon, or a cascading collapse of European banks and/or sovereign debt issuers changes everything. Of course, lurking out in the future is the unimaginable event. They are the most likely to occur and potentially the most devastating. 

The American economy’s ability to put food on grocery store shelves is dependent on the US government being able to sell US Treasury debt at auction and have the Federal Reserve Bank buy what other countries or investors don’t want. How long can the Federal Reserve issue checks backed by the very same debt being purchased? No one knows, but everyone agrees not indefinitely. On 60 Minutes Sunday night Mr. Bernanke stated that he felt “100% confident” he could control inflation by raising interest rates. What Mr. Bernanke did not say was that every time interest rates rise the US government debt sitting on the Federal Reserve’s balance sheet loses value. 

What difference does the Federal Reserve’s balance sheet make? Good question. No one knows, but if history has any credibility as a teacher, one day the value of the assets on the Federal Reserve’s balance sheet will be the only thing that matters to America. What day will that be? That, my friends, will be the day of reckoning; the mother of all BOHICAs. 

The $400 million question for Bank of America

The $400 million question for Bank of America

My guess is that when Wikileaks dumps on Bank of America the “ecosystem of corruption” Assange has referred to in his remarks will be revealed by inquiries centered around the old Watergate question asked by former Senator Howard Baker- “What did they know and when did they know it?”

In August of 2008, I was working on a large renewable fuels deal as a financial advisor at Merrill Lynch. My client wanted to set up an escrow account to facilitate the infusion of an equity investment arranged by Jasper Capital in Dubai. The initial deposit my client wanted to make was $400 million dollars. After two weeks of scouring the organization for the person who could set up this mundane, administrative account, complex director Don Plaus had to inform me that Merrill Lynch would be unable to accommodate my client. This development was perplexing beyond words. Stranger still was Mr. Plaus’ steadfast refusal to offer any explanation.

To this day I do not know why Merrill Lynch was unable to accept these funds (management gave me the “go ahead” to call a competitor who promptly set up the account). I can only speculate that the transfer of foreign currency into the account would have created some liquidity demand the firm was unable to meet. Given the events that befell the firm in September of 2008 30 after this private admission to me by Merrill Lynch management, it is safe to conclude that the firm’s financial condition was the sole reason for this inability to accept a large foreign deposit.

The ramifications of the admission that, in early August of 2008, Merrill Lynch’s ability to conduct business had already started to erode considerably, are immense and wide ranging. One can only speculate on the degree of panic that had gripped the management team in these dark hours. But no legitimate historical review of the crisis will be complete until the psychology of these decision makers is examined in context. The facts are no doubt embarrassing to those involved as they plotted and schemed to preserve shareholder value while attempting to managing a crisis of their own making.

Given the circumstances, I am sure the management team felt they had carte blanch to misrepresent facts and shade the truth to prevent the panic from moving down the organizational chart and out on to Wall Street. Any double talk will be attributed to a concern for the markets.This “concern for the markets” was awfully convenient for this group whose personal fortunes were at risk should the information leak out. 

Outside of this claimed altruistic motive, the management team at Merrill Lynch had more undeniable pragmatic concerns. The primary danger, short of a complete financial collapse, was retention of the “Thundering Herd” of financial advisors that represented the core of Merrill’s ability to earn money. If the “Herd” suspect the firm was in serious financial straits, a mad rush out the door would have ensued. There would have been nothing left to sell Bank of America on September 15. My request for a measly escrow account threatened to "out" these guys in a way I am sure was completely out of left field.

The decision makers at Merrill Lynch knew the firm was toast at least by mid August 2008, but probably much earlier. Acknowledgement of this timeline produces a legitimate list of profound questions:

• Did Merrill Lynch have the right not to disclose these realities to their financial advisors?
• Did Merrill Lynch have a duty to their clients to warn of an impending crisis?
• If Merrill Lynch did not have a duty to warn clients, did the clients know they were on their own? (they had no idea)
• Did regulators know about Merrill’s situation?
• Did Merrill mislead regulators?
• If regulators did not know, why?
• Did Merrill Lynch have a duty to inform regulators?
• Were Merrill Lynch and the regulators in cahoots to keep their plight from the public (in order to protect the public)?
• How was Temasek talked into reinvesting in Merrill Lynch at this time? Was full disclosure made?
• What principles were guiding the decision making processes at a firm in the midst of a crisis that posed a systemic risk to the global economy?

The last question is the most important because these financial institutions still pose a systemic threat to the global economy. I think Assange has been made privy to the same arrogance that colored my experience with this “apparatus.” The attitude of these elitist is beyond comprehension of the average American. On the level playing field of a free enterprise economy such a sense of entitlement does not exist. The systemic necessity of their organization’s success has created in the minds of these Wall Street kingpins an inglorious distortion of the contribution they make to the American standard of living. This distortion is common to those who believe their ends justify their means. Such minds dominate the highest strata in our financial services industry and these grandiose distortions still pull the levers behind Wall Street’s curtain. The eradication of these rascals should have been the silver lining of the crisis but that has not come to pass, yet.

The almost unchallengeable power centered on Wall Street has moved the financial services industry out of the realm of  Friedman Capitalism into the oppression of monopoly. Bank of America does business with 1 out of every 2 households in this country! This benefits no one but Bank of America shareholders and the firm’s highly paid bankers. In exchange for this systemic risk, working class Americans receive zilch. Brake Bank of America up now!

If Bank of America decides to share with the public why Merrill Lynch could not accept the $400 million deposit and refused to offer me an explanation, hell will have frozen over. Their arrogance will never allow them to answer such a question; but it should not stop the media from asking the question and demanding an answer. Where is the fourth estate on this matter? I beg the media to step forward and ride to America’s rescue! Bank of America/Merrill Lynch owes the taxpayer an explanation posthaste! There is no need to wait for a Wikileaks document dump. The time is now!

I will have more on Merrill Lynch’s escapades in future blogs. Stay tuned.  

Hal Blackwell is the author of “Secrets of the Skim.” You can visit him at halblackwell.com.

Wikileaks Spooks Big Banks

Wikileaks Spooks Big Banks

“Too big to fail” banks in America have much to fear from Wikileaks’ promised document dump scheduled for early in 2011. My book “Secrets of the Skim” outlines some of the misfeasance likely to be made public by Wikileaks. The website, run by Jillian Assange, claims to have in their possession documents that will expose abhorrent behavior by executives at one of America’s banking behemoths. Mr. Assange was quoted as saying, "it will give a true and representative insight into how banks behave at the executive level in a way that will stimulate investigations and reforms, I presume." 

Consensus seems to be that the bank in question is Bank of America. This speculation is fueled by comments Assange made about a year ago. The timing of that statement seems to preclude the subject matter being the auto signing of foreclosure documents. Since Mr. Assange has wryly theorized that his disclosures would bring down “one or two banks” my guess is he has some scoop on Merrill Lynch. Assuming Bank of America is involved and only one executive’s hard drive is in Wikileaks’ hands, it is fair to speculate the target only gets plural if Merrill Lynch is boiling again. 

Having had a front row seat at the Merrill Lynch masquerade, I suspect these documents will disclose how the elitist institutional financiers in this country operate in conflict with their client’s interest. It is a secret the industry is desperately trying to keep from the public and the single aspect of their business practices that would demand immediate regulatory action. It is the type document dump that fits Wikileaks’ MO as well. 

These institutions have scattered billions of dollars down Madison Avenue to create an image to engender public trust and to cloak their real agendas. Their image is a bought and paid for house of cards. Bank of America’s cards are particularly shaky right now.

Wall Street spent millions on lobbyist to shape the financial reform legislation to avoid having to adhere to the “fiduciary” standard. If Wikileaks has copies of an executive’s documents communicating, in a transparent way, concerns about the possibility and ramifications of such legislation it would be explosive. These documents would most likely expose why having to act in their client’s best interest is the death nail to the “too big to fail” business model. The industry, Bank of America in particular, is aware of this meteorite heading for their earth. Mr. Assange’s destruction of one or two banks could (should) turn into the destruction of a business model that encompasses Morgan Stanley Smith Barney, Wells Fargo Advisors, Merrill Lynch, Morgan Keegan and UBS. 

The wirehouse wealth management industry is blinded by an innate hubris that bellows behind the closed doors high a top the enclaves on Wall Street. As I describe in “Secrets of the Skim” these guys have a sense of entitlement when it comes to collecting their “skim” off of our nation’s financial dealings that will infuriate American investors. Joking about the lame deals closed to earn high commissions and laughing at their good fortune of earning commissions on “blown up” client accounts is common place among certain bankers (in closely guarded circles).

Assange is, by now, well aware he’s holding a straight flush and is boldly playing up his hand. He’s not bluffing. You can bet banks are scurrying to find out who is in his crosshairs and budgeting funds for damage control. This episode could cost a pretty penny and the careers of a few unfortunates who are caught with their nickers down. The bank will make examples of these rogues and proclaim their ranks free from such rascals. 

The insulated bankers will plan to spread a few billion more down Madison Avenue and in the halls of Congress to regain their footing. They figure an innocuous fee slipped deep into a disclosure form will crank out the needed dollars. Moves like this make bankers laugh the loudest behind their contrite expressions. Why not? It has worked so well in the past. 

I despise Assange and Wikileaks for betraying US national security and betraying America. He should be stopped at all cost; right after he publishes these documents stolen from this “too big to fail” monster bank that threatens our markets and free enterprise system. Assange owes America. It’s time Americans (and the scores of honest bankers) to have the last laugh.