2011 Preview

Here is a PREVIEW of 2011 and beyond for Market Witch readers plus some of 2011’s oncoming issues and concerns.

Investment subjects and trends you should be aware of:

For several years we have posted a Fair Value and a Current Value price for gold in our commodities lists. The difference between the two values has for five years been hundreds of dollars. For example gold was selling @ $850/oz while the Fair Value of gold was around $1658. Late in 2009, the Fair Value of gold fell to around $1435 (this Fair Value number hasn’t fallen in the twenty or so years we’ve paid attention) because so much gold is being mined worldwide, while the Current Value of gold reached 1200. Now the Fair Value of gold, currently around 1700/oz, and the Current Value of gold, now at around $1400, is shrinking. As this new decade  moves on It will continue to shrink until the Fair Value and the Current Value are nearly identical. As the 21st century moves on, gold will remain the only real money (to a lesser extent silver & platinum) and all paper currencies will have to maintain a relationship with gold, or perish.

Central Banks are still trying to quell the pricerise of gold and especially to keep currencies from being re-pegged to any new gold & silver standard. So are the United States Fed and Treasury because they fear the huge federal debt will have to be paid in more expensive rather than less expensive dollars.

 It’s too late: gold has already become the 21st century global money. Equally as important, the US dollar’s reign as the global reserve currency has ended.

 For 18-24 months, the US economy and US equity indices have been the caboose of the thriving 21st century global economy, pulled along by China, Germany and Brazil. Now the US equities markets, and US companies with global reach and global sales, are starting to pull their own weight and we expect this to be a reasonably strong year for the Dow the S&P the CRB and even the Nasdaq. As investors, we’ll do ok this year, and we are aiming for 24% YOY.

But the overall US economy is no better. We may very likely see a 12,500-13,000 Dow in 2011 coupled with continuing 10% unemployment and a continuingly deteriorating US dollar.

The US economy is in much worse trouble- still irreparable on the path the govt is following now- than anyone in authority is willing to admit. A dollar destroyed by huge trade deficits, an out-of-control credit-based creation of “money” (rather than working to create wealth) plus a federal budget deficit that grows at the reported rate of more than a million dollars a minute means Weimar Republic- era inflation for a falling dollar while Americans continue to lose jobs, homes, and their ability to pay credit card debts the grocery and the gas station. It’s a recipe for disaster, and it can’t be fixed by creating federal “jobs” like census bureau jobs. Even though a real “1930s WPA style” starting to repair the US infrastructure would help, the US govt cant underwrite this now because it spent all that “invented” money bailing out the banks.

The world’s strongest economies in 2011 are Canada, Germany, Brazil, Australia,  Russia, Mexico, and China. A quick study will show each of these countries are creating wealth not “money” (debt) via exploitation of resources and investment in Infrastructure: gold iron ore gas oil farm crops hydroelectric, railroads, and so forth.

Gold exports have propelled Canada to a trade surplus. Canada needs a much larger population to become a world force, but has resources reserves second to none, including fresh water.

 China, whose trade surplus and 10% GDP growth rate is based on global exports  is beginning to turn to mining or metals and minerals, and may become truly wealthy, though it will not achieve a broad prosperous middle class because the population is too large. We believe the Chinese economy is more fragile and vulnerable than most American ‘experts’ realize. But China is the largest consumer economy on earth.

Brazil’s economic model- mining, agriculture, tourism, manufacturing, and banking- has made it a beacon to all of Latin America, and any South American nation following this model is bound to succeed. We’ll be investing further into South American nations.

 The Global Commodities Supercycle will rule the TwentyTeens and the TwentyTwenties as well. This commodities demand will create new fortunes for many investors. Global iron ore prices will edge up more in 2011 but the TwerntyTeens will become The Decade of Steel in 2012 and steel will become considerably more expensive because of demand. Copper will reach $5 and stay there, aluminum will reach $1.50 and then $2.00 $, platinum to $1700, silver to the $30s,s, while wheat soybeans rice sugar coffee etc will become more expensive as the world population moves toward 8 billion (not a sustainable human population level). Also set to rise in price: arable farmland. We expect oil to stay in the 88-105 range, kept low by falling US demand but kept high by increasing demand from India China South America and Indonesia.

America was formerly the world’s largest consumer economy. 70%++ of the USA’s GDP, even now, has to do with American consumers “buying stuff” but we would argue that this does not create wealth and that’s part of the reason America now is poor. Now the US is no longer able to support the world’s economies by buying their exports. A New Class War that began as the US became a nation of The Few rich and superrich 5% and The Many poor 95%, and which resulted in the 08 election of Obama, now has morphed into an enormous social uprising by the Former Middle Class, who are demanding a nation and fiscally responsible and socially-responsive government that conforms to their beliefs and values.

This is a mass movement, unlike anything that has happened in the USA in centuries. http://www.youtube.com/user/MrTugwit#p/a/u/0/TTA4FdzzATg

This is the stuff of revolution.

All you need to know about American Consumerism in 2011 is: Smartphones and Laptops. “Social Networking” has been utterly co-opted now by ad agencies and marketing firms (and by the Pentagon). Americans may go back to talking on their telephones instead of text-messaging. They may even begin speaking face-to-face. They may even relearn manners and etiquette.

But also you need to know about electric cars. The Chevrolet Volt™ may signal the restart of the USA’s manufacturing  base.

The role of Superpower is an expensive one to maintain. The USA’s internal strife and polarization clashes with its global military aspirations. The US will have to reinstate a draft in order to enforce its policies if it wishes to rule the 21st century. That’s a choice that the American people will have to make. A more important issue is how the US govt, now essentially bankrupt, will continue to be able to support its military.

The scramble for global resources means Africa, with its enormous natural resource wealth and mostly unstable politics, will continue to be a magnet of activity as other nations vie for control of a continent that is now firmly under development. The fate of Africa has been sealed.

We have stayed away from “Americana” stocks for several years- those legendary iconic brand-name American companies with decades-old or even century-old product lines/services and global clout- Coca Cola, Tiffany’s, Pepsi, Smucker’s, Disney, and others. Now, carefully, we’re starting to head back into those shares.

Watch for the continuing  separation in the USA between the Equities Markets and their economy and the American people and theirs.  We will see a probably see a 13,000 DOW and a 1300 S&P, and a continuing 10% unemployment.

An additional global most-sought-after commodity: WATER. We’ve talked about this for more than a decade: wars may be fought over water. The US can become energy- independent via wind-generated electricity and biomass transportation and industrial fuels. But unpolluted fresh water is fast becoming rare (The US, Brazil, Canada and Russia have most of it) and valuable and unless massive desalination industries are begun in the decade we are entering now, there will be trouble. Look for Corning (GLW) to begin manufacturing substrate materials for water and sewage filtration systems as well as diesel engine ‘clean-air’ products. A stack of other ‘water-issue’ companies bear watching.

A new global optical cable/bandwidth buildout, spanning the Pacific and connecting Asia and Indonesia, has begun. An optical-cable buildout has begun in South America and this decade it will get underway in Africa, and in the backwaters of Asia as well.

America’s manufacturing base has been enormously damaged. Traditionally, America always has been able to pull itself up by its bootstraps when new ideas new inventions and new technologies, often discovered and created during wartime and funded via a combination of government and military interests plus civilian R&D, then spill over in peacetime into the consumer marketplace. Spawning new consumer products, new technologies that have broad consumer application, and creating new American industries. Which in turn brings Americans the untold wealth that everybody became used to for half a century. We believe this may happen again as the US has an opportunity to turn itself around. But this also may not happen at all. We have become a Third World Country and we may remain one. Because the USA’s public education system has been badly damaged over decades of dumbing down, because Americans wear rags and t-shirts and can’t read, and because we gave away our manufacturing base. Can we get it back? We’ll see.

Here is a list of the top ten largest countries in the world, by area in square miles:

1. Russia 6,592,850 square miles
2. Canada 3,855,101
3. United States 3,794,083
4. China 3,705,405
5. Brazil 3,300,169
6. Australia 2,969,906
7. India 1,269, 211
8. Argentina 1,073,518
9. Kazakhstan 1,049, 155
10. Sudan 967,500

This is 19th century not 21st century thinking.

View Islam not as a series of small “tribal” nations but rather as a single unified force (internal Sunni/Shi’ite factionalism is ultimately irrelevant to Islamic expansionism) intent upon (a) bringing down the United States (b) gaining sociopolitical control over Europe, and especially regaining Spain, and (c) creating a world under Islam and ruled by Islamic sharia law.

Many of these “nations” of Islam are “fantasy” nations. Turkey and Iran are not. But many, including Saudi Arabia, were arbitrarily cobbled together from the turfs of nomadic tribes by the British Crown during the early days of the 20th century. Pakistan was in fact the result of war settlements between England and Russia in 1873. Afghanistan too was part of the “great game” between the Russians and the Brits, and in 1919 gained foreign policy freedom from England but although defined as a ‘nation’ actually remains a patchwork of tribal fiefdoms. Let’s tally them up, West to east, to create ISLAM: Morocco, Algeria, Libya, Egypt, Saudi Arabia, Yemen, Oman Syria, Jordan, Turkey, Iraq, Iran, plus the six Turkic states that gave the USSR so much trouble, including Uzbekistan, Turkmenistan, Tajikistan, and Kyrgystan. And finally, Afghanistan and Pakistan.

Now the list of the world’s ten largest countries in square miles looks like this:

Russia
Islam
Canada
USA

 If we add some of the wilder and more marginal and underdeveloped “nations” of Islam like Africa’s Sudan, the two largest countries in the world are Russia and Islam, a dead heat.

Many of these “nations” of Islam have enormous wealth in a broad spectrum of natural resources, not just oil: resources that are in short supply and gaining in value weekly.  TWO of the world’s very strongest economies, Iran and Saudi Arabia, are Islamic. A THIRD one, Afghanistan, not only has the world’s largest and most financially successful Global Outlaw Economy (poppies/opium/heroin) on earth, but has also been shown, in 2010, to have the world’s largest cache of valuable mineral wealth. For that reason alone, our continuing US presence in Afghanistan is an absolute necessity.

And now, for a longer take on things.

Let’s look a little bit at 2020. If you’re a Market Witch reader, and you stay with us, you’ll likely be very well off. But the world itself will have changed.
During this new decade, The TwentyTeens. countries all over the world will be changing status stature and social and economic position and power like a game of musical chairs.

  • The top ten largest economies in 2010 in terms of total GDP measured at purchasing power parity (PPP) are the USA, China, Japan, India, Germany, Russia, the United Kingdom (UK), France, Brazil and Italy. PPP is a method of measuring the relative purchasing power of different countries' currencies over the same types of goods and services, thus allowing a more accurate comparison of living standards;
  • Six out of the ten biggest economies in 2010 are advanced countries. With GDP measured at PPP terms accounting for 20.2% of the world total, the USA is the world's largest economy in 2010;
  • In 2010, China ranks as the second largest economy in the world, with GDP making up 13.3% of the world total in PPP terms. Other emerging economies in the top ten biggest economies in 2010 are India, Russia and Brazil. Emerging countries have fared better than advanced economies overall during the global economic recession;
  • By 2020, there will be major shifts in the world economic order in which emerging economies will become more important. China will overtake the USA to become the largest world economy in 2017 and there will be more emerging economies in the top ten economies by 2020 and beyond;
  • The rise in importance of emerging economies will have implications for global consumption, investment and the environment. Large consumer markets in emerging economies will present enormous opportunities for businesses. However, income per capita will remain higher in the advanced world.

The Top 10 largest economies by GDP in PPP terms, in
 2010 and in 2020

U$ millions

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Source: EuroMonitor International from IMF, International Financial Statistics and World Economic Outlook/UN/national statistics

Advanced economies are slowing down

Since the 1990s, advanced economies have experienced much slower growth compared to the developing world due to the rapid rise of emerging economies including China and India. The declining trend of advanced economies has been accelerated by the global financial crisis in 2008-2009:

  • The USA is the world's largest economy. However, its share in world GDP in PPP terms has declined from 23.7% in 2000 to 20.2% in 2010 due to faster growth of emerging economies as well as the severe impact of the financial crisis in 2008-2009. Real GDP contracted by 2.4% in the USA in 2009. The economy has recovered since early 2010 owing to stimulus measures;
  • Japan's economy recovered slightly in the mid-2000s after a prolonged period of stagnation due to inefficient investments and the burst of asset price bubbles. The country has been hit hard by the global economic downturn since 2008 as a result of its overdependence on trade and prolonged deflation. Population ageing has also accelerated Japan's economic slowdown. In 2009, annual real GDP shrank by 5.2%;
  • In 2010, the European Union (EU) economies account for 20.6% of world GDP measured at PPP terms, down from 25.1% in 2000. Population ageing and rising unemployment have contributed to their slowdown;

The IMF forecasts that annual real GDP growth of advanced economies will reach 2.3% in 2010 and 2.4% in 2011 after a contraction of 3.2% in 2009. This is much slower than the 8.7% expected in emerging Asian economies for both 2010 and 2011, which are driving the global economic recovery. Many advanced economies will also face the challenge of reducing public debts and government budget deficits, which will weigh on economic growth potential into the medium term.

Emerging countries are catching up and will overtake

Emerging economies are catching up with the advanced world. By 2020, there will be changes in the global balance of economic power:

  • China's share in world total GDP in PPP terms has increased from 7.1% in 2000 to 13.3% at the end of  2010. By 2020, it will reach 20.7%. China will overtake the USA to become the world's largest economy as early as 2017;
  • India is the fourth largest economy at the end of 2010. By 2012, India will have overtaken Japan to become the world's third largest economy, with GDP accounting for 5.8% of the world total in PPP terms. In the long term, India could grow even faster than China due to its
  • By 2020, Russia will rank higher than Germany in the top ten economies in terms of GDP measured at PPP terms and become the fifth largest economy. Brazil, on the other hand, will have overtaken both the UK and France to become the seventh largest economy in 2020. Being amongst the world's major exporters of energy and natural resources, Russian and Brazilian growth potential is promising although Russia's lack of economic diversification may cause problems in the longer term;
  • By 2020, Mexico will have overtaken Italy to be the world's 10th largest economy by GDP measured at PPP terms. A growing population and proximity to the USA aid the country's economic development;
  • With five emerging countries in the list of top ten largest economies, global power will become more balanced by 2020.

Top 10 largest economies as a percentage of the world total GDP in PPP terms: 2020

%

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Source: EuroMonitor from data provided by the IMF

We began our Market Witch efforts sixteen years ago studying the American product mainstream and American pop culture, and investing in America and American companies and products on that basis…Barbie® dolls, Harleys, Pentiums, iPods, Oreos…but a decade ago, as the US lost economic clout and we began to become a Third World country, Market Witch moved to a global perspective. And we go with the world’s strongest economies and their products. We carefully invest in,  China Germany, the UK, Australia, Mexico, South America, Russia, and very recently Africa, but we often do it through North American or European companies that have operations in these places, or via ETFs.
In recent years, the USA we have presented has NOT been an America we have been pleased to describe in these pages. In addition to our own failures, and even in addition to the USA’s recent inclusive gestures toward other parts if the world, much of the world still despises us, is jealous of us, envies us, and wants to see us diminished, brought down, destroyed.

This attitude also is a popular one among many Americans themselves: people who do not understand what they have placed at risk. And what has been lost.

The United States: 1773- 2008, RIP. The United States has dematerialized and has become a ghost or a spirit or a memory, or more accurately a hologram: something intangible and visible but no longer real. And a mythos that can be spread throughout the world as an ideal, something like Santa Claus or Ancient Greece. It may be too late to prevent this. But it also still may be our choice to be able to resurrect the US if enough Americans can agree to do it or can prevail over those who won’t. During 2011 and 2012 we will likely find out if America is salvageable, and can be resurrected. Or not.

The America of the 20th century has receded into history…but as always, we expect that some new idea that originates here in the US (not in China, which steals its technology from our patents, back engineers products, has a huge black market industry and buys American icons like IBM’s ThinkPad®)  and not in Islam, which does not have the technology to build a flashlight unless that technology has nuclear weapons potential and is purchased on the black market or downloaded from an American website) will spawn a new American technology and a new American industrial base. And that the US may regain its preeminent position as the world’s cradle of invention.

Ben Franklin said: “An investment in knowledge always pays the best interest.” Our country would do well to remember these words.

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