What Will Drive Markets in 2011?

The Trends in Place from 2010 are Still Strong

Gold is Money
Reserve Banks Injecting a lot of Money to Help Stocks and Real Estate.
Bubbles Result and Real Estate Still Struggles
Debt Crises Stalking Us
Business Improving Despite Problems. Some Pickup in Jobs.


Big trends don't change course quickly just like big ships and 2011 will see more of the same opportunities and risks as last year.

I think the biggest wind in the sea this year is still the attempt of the reserve banks of the developed countries to reflate the value of assets like real estate and stocks in order to get a recovery going. The amount of money they are injecting is historic in its scale. It is visible in the ultra low interest rates we've seen and really still have.

Meanwhile, debt crises in both the US and Europe are visible in the distance as they form into tempests that will hit us at some point this year. Portugal, Illinois, Spain, California and potential defaults in numerous municipalities across America and perhaps other European countries are all queued up to come ashore, probably sometime in 2011. All that even as last year's storms, Greece and Ireland, have yet to be resolved.  

Economists were surprised again (and again and again) when their predictions of some improvement in the job market last year failed to appear. The lack of jobs was probably the biggest reason the number of home borrowers in default is still growing which feeds back to the likelihood that property values will only fall more in 2011, at least in areas that have a large supply of foreclosed homes on the market.

Despite these negatives, the economy is still mending and gaining some traction. It can keep doing that because there is a growing demand for cars, clothes, homes etc that need repairs or replacement. Business will be improved generally like it was this year, and there should be some pickup in hiring unlike last year.

How these trends translate into the investment world:

Deficits and money printing mean alternative money is becoming important. Gold is money today, just like it was for all the rest of human history excepting the past 20 or 30 years. If deficits are reversed and stimulus curtailed, this will be less so. However, the debt crises coming our way in 2011 and the reserve bank stimulus should only further the cause of alternative money so gold will remain desireable.

The policy of reflating investment assets by injecting money and keeping interest rates super low is also going to remain in the cards for 2011. The 9.6% unemployment rate is the number that guarantees it. When or if the injection of money ends, it will cause a change a traumatic change in the markets.

The reserve banks effort to reflate assets will help the stock market and the economy but also have unintended beneficiaries such as commodities or Chinese IPO's. Some of that may be a side show, but if oil prices are one of them, they will hurt the real economy. Values for some of these assets will seem unrealistic at times but they may not be. After all, the money has been put into place by the central bank.

An improving economy will help cure the credit issues in the economy. Banks and others who lend will benefit. Dividend payouts from banks are expected to increase quite a bit this year. Mergers in banking and other business sectors are expected to be very strong this year as well. All these trends create opportunities for investors.

Debt storms, new price levels and the huge share of total assets now managed by short term trading firms, will give us more volatility this year. There will be times when it will be possible to be very pessimistic about the economy and others to be optimistic. The sentiment and the prices will swing wildly at times, particularly in the commodity and gold sector. The arguments there about the right price for things will become very fierce as price levels exceed prior values.

The power of the cross currents at work mean I won't venture a guess what the outcome for the market will be since it could be raining or sunny at year end just like it will be a couple of weeks from now. I also don't hold early January market optimism to be much of a guide either.

It does seem the odds lean more towards a sunny outcome in 2011 as stimulus and imroving business can probably over come all else. I will predict, however, there won't be calm seas getting to year end and that more than anything is what we must be prepared for.

Disclosure: I own gold and at times other investments mentioned in this article.