Everyone seems to be wondering what bombshell will hit world markets next. Will the economy continue to recover? Will it slip back into recession? What can we expect and why?
The uncertainty of today's market is perhaps unlike any before it. In response, on this page are The Frost Report's official predictions for the next two years.
Note that as my name is not, nor has ever been “Nostradamus,” so take this for what it is – a murky prediction based on current events and statistics. I encourage the reader to think about the reasoning behind these statements, rather than getting caught up on specifics.
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The world's economies will remain stable - though not rapidly growing - until the cataclysmic event: the collapse of the massive Chinese asset bubble.
Within the next two years, the Chinese bubble in real estate, shell-companies and factories will burst. Faced with huge declines in asset values, China's citizens will go into self-preservation mode and stop buying overpriced real estate and unproven stocks. As corrupt and wealthy Chinese flee with their remaining assets, the poor will be left to wallow. A revolution is a very real possibility.
Due to the collapse of the Chinese bubble, other economies currently dependent upon Chinese overspending will also burst. Canada and Australia will be most affected, as they will be hit with the double-whammy of home price declines of between 20%-40% (depending upon the area), and a fall in commodity prices due to reduced demand. Since both Canada and Australia have commodity-based currencies, these currencies will dive. Large-cap usable commodities producers will also be hard hit.
Similar asset-plunging disruptions will be felt throughout the world, from Israel to Lebanon to South Africa. The list of countries experiencing low-interest rate asset bubbles is long. As citizens around the world shut their wallets in response to their shrinking net worth, world markets will decline.
During this entire period, gold and silver prices will roller-coaster from one extreme to another, from both high demand and the actual need to cash in gold and silver for money. Due to fear in the stock market, gold and silver producers will be in the strange position of having record profits and marginal stock prices at the same time. It will be possible to buy these stocks and receive excellent dividends.
The big winners of all this strife will be the US and Japan. US markets will drop when China’s drops; but, because US markets are already valued so minimally, the US market will rebound quickly. US housing, already fairly priced in some regions and underpriced in others, will remain a coiled spring, waiting to jump.
Any substantial drop in values in US markets will be a long-term buying opportunity. If one is smart and buys actual stock (not options), and uses no margin (borrowed money), this period will be extremely lucrative, though time and patience will be required to reap the rewards. In fact, buyers of US stock and real estate who have the conviction to buy as prices drop - and hold without selling - will be the big winners of this century.
Japanese manufacturing will have a tough time at first, since Chinese companies fighting for business will go cutthroat with regard to pricing. As more and more Chinese companies fail, however, Japanese businesses will pick up the pieces. Both Japan and the US will benefit from the low cost of Chinese goods and materials available for purchase. Due to the influx of low-priced Chinese goods, inflation will be kept in check.
Canada, Australia, New Zealand, Germany, Norway, England and other Germanic-speaking countries (excluding the US) will recover but remain sickly for years to come, since a quarter of their populations will be bound by high levels of personal debt. All talk of China becoming the “next superpower” will disappear.
The events of the past three years have resulted in the strange worldwide coexistence of vastly overpriced assets (ex. Chinese real estate and BRIC stocks) and vastly under priced assets (ex. US regional financial stocks and real estate). "Regression to the mean" will haunt unwary investors.
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Time will tell if these predictions prove correct, or not. But, for great investors it really doesn't matter.
I have been buying undervalued stocks of great companies, and will continue to do so regardless of whether or not the world's economies are rocked; and that, my friends, is perhaps the greatest lesson of all.
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"Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied."
Benjamin Graham
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