»The Daily Reckoning by Bill Borner

What will 2011 bring?
3 JANUARY 2011

Delray Beach, Florida

Okay, so what will 2011 bring?

Most likely, it will bring more of 2010. That is, the confusing and contradictory trends of the past year are likely to keep going.

---------- FREE Webinar with Ajit Dayal ----------
Find out what 2011 has in store for the Indian stock market... Register Now for our FREE Webinar with Ajit Dayal as Chief Guest. The Webinar airs on 10th January, 2011 at 5.30 pm. Register NOW!


On the one hand, the deflationary contraction that began in 2007 will continue shrinking prices and economic growth. The savings rate has climbed to over 5%. Unemployment is still near 10%? And the CPI - if you believe the official numbers - is nearly flat. We may be living through the biggest rush in monetary inflation in US history, but the core inflation numbers haven't moved so little in more than 50 years.

On the other hand, the inflationary expansion of the money supply that began in 2009 will go on too. It will bring more bubbles and more speculative pressure on oil and gold. It might also bring a collapse of the US Treasury bond market - if not in 2011, then soon after!

Which hand will have the upper hand?


Instead, they will continue jerking the economy this way and that...rewarding some speculators, punishing others...smacking economists...and giving central bankers the middle finger.

That's our prediction.

Gold will rise. Oil will rise. Emerging markets will rise.

The US economy will NOT rise.

What? Weren't there encouraging signs of life at the very end of the year?

Yes. But there are always signs of life in an economy. The US economy isn't dead. It's just going through a bad patch...like a man whose wife has left him...or a woman who has gained 20 lbs...or a 60-year-old couple who have to downsize. These things takes time.

"Baby boomers unprepared for retirement," says a headline in the local paper.

According to the article, 10,000 boomers will reach age 65 every day for the next 19 years. And few of them have saved enough money. Some were counting on 401k plans. But stocks haven't made any progress in the last 10 years. Others were looking to their houses as a source of retirement financing. They were doing fine until 2007. Since then, the value of their houses has been cut by a third.

The poor boomers! What are they going to do?

We talked to one of these boomers on the way from the airport.

"I'm going to work until I drop," he said. (Good plan. If you have a job... )

"I bought a little apartment over in Boca Raton," our driver explained after picking us up on Miami. "You know, like everyone else, I've been hurt by this recession. They say it's over. But it doesn't seem over to me.

"A couple years ago, people would rent my limo service for a big night out...maybe, twice a week. I'd take them down to Miami. They'd go to a big party...or to a Heat game...and then to a nightclub. They'd pay me for a whole night. It was good money.

"But now, I'm lucky if I get one a month. Either people don't have money or they're not spending it.

"My wife and I had a big house with a swimming pool...everything. But we also had a big mortgage, $4,500 a month. She didn't want to do it. But we had no choice. I needed to make sure that at least I'd have a roof over my head. So, I bought an apartment in Boca for $27,000. It was $90,000 three years ago.

"And I told my wife that we had to cut back. This way, I'll be able to save some money. Then, if we want to, we can always buy a big house again. But right now, I just don't want that burden on my back. I can't afford it."

*** "Bill, you made it sound like all the developments on the coast of Nicaragua have gone bust," said a friend. "But that's not true. The area is booming."

Last week, we stood on a mountain peak near the coast. On the one side were the failures of socialism - cooperative farms with low productivity and severe title issues. On other were the failures of capitalism - developments on the coast that had gone broke.

But our friend is right. Oddly, most of the small developments on the coast did go broke...but the area is still thriving. We visited one development last week. It is well-designed. It was well built. Still, the concrete roads are cracking up. The owners face a big burden - how to maintain the place now that the developer has gone.

Another one has been abandoned all together - with weeds growing up in the middle of the un-used roads.

Still another is holding on. But the developer faces a financing crisis. He has to raise money to finish the infrastructure. And who will lend against Nicaraguan real estate?

Meanwhile, the richest man in the country has begun his own development. He's going to spend $250 million - far more than anyone else has ever even dreamt of spending - in order to build a dream community near San Juan del Sur. He has sold million-dollar lots to his jet-set friends. He's putting in a golf course...an airport...and a marina.

Despite the bear market in real estate in the US, prices in Nicaragua have not come down - at least, not as much as you'd expect. And more and more people seem to be discovering the area.

The beach in front of our house, for example, was deserted 5 years ago. Two years ago, it might have had two or three bathers on the entire 2-kilometer stretch. But this year, there were 20 surfers on the water at 7AM. And on our morning stroll, we ran into an American who turned out to be a Dear Reader!

"What you don't understand," continued our friend, "is that this place has reached a kind of critical mass. There are restaurants opening up. There are tourists coming from all over the world. And the surfers are now reporting surf conditions here on a daily basis. It may be a country run by old communists. It may be corrupt and inefficient. But it's still a very nice place to live. I've looked all over the world. There are no better beaches anywhere. And the weather, too, is about as good as it gets. And compared to most other places, it is still very cheap."

*** On our way out of the country, we noticed a curious collection of pictures in the immigration office. There was a picture of the president, Daniel Ortega. There was also a picture of Che Guevara...the hapless Argentine revolutionary. Just beneath him was a picture of the Virgin Mary.

"Maybe the Virgin Mary will move above Che after the next elections," said Elizabeth optimistically.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author and Equitymaster, do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.
© Equitymaster Agora Research Private Limited