Monday, December 20, 2010

Reviewing my 2010 forecast

The first prediction I made a year ago was a no-brainer and absolutely right: I would never again get everything right. Of 11 other predictions I made a year ago, 6 were correct, 3 were wrong or mixed, and 2 were dead wrong. My biggest mistake was in thinking that the Fed would would begin raising rates this year in response to an improving outlook for growth.

Inflation will continue to trend slowly higher. Wrong/mixed. Inflation as measured by the CPI in fact trended lower over the course of last year, falling from 1.8% (year over year) from November '09 to 1.1% in November '10. But inflation as measured by the broadest possible measure—the GDP deflator—trended higher, from 0.2% year over year in Q3/09 to 1.2% in Q3/10.

The economy will grow 3-4% over the course of the year. Probably correct. Real GDP in the four quarters ending Sep. '10 was up 3.24%, and growth for 2010 will be 3% or better if Q4/10 annualized growth comes in above 4%. Most forecasts are calling for an upward revision to Q3 growth, and a relatively strong print for Q4 growth, so I think my lower bound growth forecast will hold.

The Fed will end up raising rates sooner and/or somewhat more aggressively than the market currently expects. Dead wrong. The Fed kept short-term rates close to zero for the entire year, and has given no sign at all that it intends to raise rates in the near future.

Residential construction activity is likely to slowly but gradually improve over the course of the year. Housing prices on average are likely to post modest gains as well. Wrong/mixed. Housing starts fell modestly over the course of last year, but have been relatively flat since early 2009. Prices, according to the Case Shiller data, were roughly unchanged. Compared to the consensus a year ago—which I think called for more bad news from the housing market—my optimism was not egregiously misplaced.

Interest rates on Treasury bills, notes and bonds should rise significantly over the course of the year, with 10-yr T-bond yields exceeding 4.5%. Dead wrong. T-bill rates rose, but only by a few bps over the course  of the year, 2-yr Treasury Note yields fell 40 bps, 10-yr yields fell about 50 bps, and 30-yr yields fell about 20 bps.

MBS spreads are likely to widen over the course of the year. Correct. MBS spreads rose from 70 bps a year ago to about 85 bps today. However, the rise in spreads was not enough to significantly detract from the generous total returns that MBS investors enjoyed for the year.

Credit spreads are likely to decline gradually over the course of the year. Correct. Spreads rose in the first half of the year, but ended the year with a net decline. Both investment grade and high-yield bonds enjoyed very strong performance as spreads declined and default rates plunged. 

Equity prices should be at least 10-20% higher by the end of the year. Correct. As of this writing, the S&P 500 is up about 12% year to date (with a total return of almost 15%), and the NASDAQ is up 17%. The going wasn't easy, however, with equities suffering a major setback in the second quarter after a strong first quarter.

Commodity prices will continue to work their way higher over the course of the year. Correct. The great majority of commodity prices registered strong gains for the year. 

Gold prices are likely to spike one more time to a new high this coming year. Correct. Gold rose from $1100 to $1400/oz., setting a new record high.

The dollar is likely to rise at least modestly against most major currencies, and it should be able to hold near its current levels against most emerging market and commodity currencies. Mixed. The dollar eked out a 3% gain against major currencies, but fell moderately against most emerging market and commodity currencies.


BBL Jr said...

Pretty good calls. We will assume you played these with options and thus no path dependence!

Benjamin Cole said...

Nice column, and a rare shining example of honesty in punditry.

In all, a great blog.

J said...


Benjamin Cole said...
This comment has been removed by the author.
Benjamin Cole said...

Benjamin said...
OT, but worth being scared about. From Bloomberg, investors expect Japan deflation to last at least eight more years...

"The Bank of Japan’s forecast for an end to deflation in 2011 and 35 trillion yen ($416.9 billion) of spending have done little to change the thinking in the bond market, where investors see eight more years of falling prices.

Bonds designed to protect investors against inflation show that money managers in Japan anticipate prices will decline at an average 0.6 percent pace over the next five years and 0.4 percent annually through 2018. Japan is the only country where bonds linked to price changes show entrenched deflation expectations, according to data compiled by Bloomberg."

The Dude said...

Very refreshing. Few others hold themselves accountable. I really enjoy your blog and the mostly interesting conversation it starts. Happy New Year!

The Lantern said...

Thanks for the review! Few forecasters own up to their calls. For what it's worth, I'd call your stock market call "Dead Correct". With the volatility of the stock market, getting within a few percentage points is pretty rare.

brodero said...

No bad have one of the best economic blogs out there...

CDLIC said...


Based on your excellent 2009 forecast form last year, I moved into various investment in January 2010: purchased gold at 1078 and sold at 1417; went long stocks--portfolio up 19%. I owe you a dinner--no, make it a dinner for you, your wife....and let's invite your brother and his wife for introducing me to your blog.

Thank for sharing your passion with all us. You are the best!

Happy New Year!

John said...


Let me add my congratulations to your generally accurate forcasts, particularly regarding the equity markets. It is that forcast that gives your readers specific information with which to act to benefit their lives.

Count me among your loyal readers.

Merry Christmas and a happy and prosperous new year to both you and your family.