My recent birthday, which neatly almost coincides with the end of the first quarter, caused me to pause and take stock in my predictions for 2011.
I think my general economic of assessment of stagflation has been right on. We are seeing both commodity prices, including oil prices, continue to rise.
The U.S. stock market is flat to down for the year. I wouldn't have predicted the political turmoil in the mid-east, but I think in these times it is best to plan for the unplanned.
Japan
We visited Tokyo last year. It is a stunningly efficient modern city, and it is difficult to imagine the country brought to its knees by the horrendous results of this earthquake. Although demographics are not on its side, I believe in Japan. Their determination and focus on efficiency and quality will see them through this crisis, and they will come out of it stronger than ever.
One odd effect of the earthquake is the rise in the Yen while the Bank Of Japan continues to inject liquidity into the market. Japan is less likely to be a net buyer of U.S. treasuries as they invest domestically to rebuild their cities and economy. Currency traders maybe pricing in the possibility of Japan becoming a net seller of U.S. debt. Japan buys U.S. debt to constrain the value of the Yen to make their exports more competitive.
The end result could be even more inflationary pressure in the U.S. as the Japanese supply chain is disrupted and the value of the dollar falls relative to the Yen. I think Taiwan, South Korea, and of course China will be the beneficiaries of this crisis. It is unlikely that production will move back to U.S., instead it will increase the speed at which production is moved out of Japan and toward the rest of Asia.
Real Estate
I'm increasingly bullish on prime Real Estate in the U.S. which again I believe will rise in the face of inflation. This is already becoming the case in S. Florida, which has flattened and is starting to rise.
I'm still bearish on suburban and ex-urban housing (which I believe is one reason why new home sales numbers are hitting new lows). There are still large amounts of inventory to work off in less desirable areas that do not have established economies.
I'm personally wondering if makes sense to buy on the Central Florida coast, an area I'm familiar with. The region is seeing downward economic pressure from planned end of the Space Shuttle program (which by the way is a move I support. The future of our space program lies with private companies like Scaled Composites which is run by one of my hero's: Burt Rutan, but I digress), but prices for coastal properties are a fraction of those on the West Coast.
Commodities
I doubt there will will see as much rise in precious metals as we have in the past couple years, but I'm still bullish on energy commodities, especially natural gas. There is has been a disconnect between oil and natural gas prices (while oil has risen dramatically, natural gas has been down to flat). Eventually the U.S. is going to be forced to listen to T. Boone Pickens and exploit our own energy resources. Right now natural gas is a bargain relative to oil.
I don't understand Chesapeake's strategy of selling shale resources at the bottom of the market. This is appears to be the result of an over leveraged strategy, and of being too early in the market.
I'd be looking at those on the other side of these trades, including super majors like ExxonMobil who has been buying.
Nuclear
This isn't so much of a prediction, but some general thoughts following the situation at Fukushima, Japan. I think there is going to be a over-reaction and calls to pull back on nuclear investments in the developed world. I think this is a mistake, especially for the U.S.
Following the Fukushima crisis, I did some personal research into nuclear power and the history of the industry. I didn't come away disgusted, but in awe of the engineers that came before my generation.
They created industries out of thin air with the belief that they could change the world, and built them at humungous scale. The fact that an off-the-shelf design like GE's Mark I reactor, which was designed over 45 years ago, is still in use today, should be a testament to our engineering prowess of the day.
That doesn't mean we shouldn't re-evaluate the use of older nuclear designs, but I think we need to give the industry, which, in the U.S., has had as steller safety record for a heavy industry, more credit.
If it wasn't for our paranoia over nuclear, I believe we would deploying designs that are much more economical, efficient, and safer than the first generation reactors. The industry has stretched the useful life of early designs, because it is prohibitive to get new nuclear projects off the ground. If we don't get back in the game, the U.S. is poised to loose its lead to other countries, specifically China and India, who are investing heavily in nuclear energy.
The U.S. needs to use our extensive experience to be the leaders in nuclear power, rather than leaving others experiment. More nuclear power is coming, the question is does the U.S. want to take the lead or follow?