BYRON WIEN’S 10 SURPRISES FOR 2010

Byron Wien, vice chairman of Blackstone Advisory Services, issued his 10 surprises for 2010 yesterday. If you saw his 2009 predictions, he was really accurate. His 2010 predictions are below.

1. The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%. Exports, inventory building and technology spending lead the way. Standard and Poor's 500 operating earnings come in above $80

2. The Federal Reserve decides the economy is strong enough for them to move away from zero interest rate policy. In a series of successive hikes beginning in the second quarter the Federal funds rate reaches 2% by year-end

3. Heavy borrowing by the U.S. Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. Banks loan more to corporations and individuals and pull away from the carry trade, thereby reducing demand for Treasuries. Obama says, "The suits are finally listening"

4. In a roller coaster year the Standard and Poor's 500 rallies to 1300 in the first half and then runs out of steam and declines to 1000, ending where it started at 1115.10. Even though the economy is strong and earnings exceed expectations, rising interest rates and full valuations present a problem. Concern about longer term growth and obligations to reduce leverage at both the public and private level unsettle investors

5. Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted. Longer term prospects remain uncertain

6. Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000

7. Believing he must be a leader in climate control initiatives, President Obama endorses legislation favorable for nuclear power development. Arguing that going nuclear is essential for the environment, will create jobs and reduce costs, Congress passes bills providing loans and subsidies for new plants, the first since 1979. Coal accounts for about 50% of electrical power generation, and Obama wants to reduce that to 25% by 2020

8. The improvement in the U.S. economy energizes the Obama administration. The White House undergoes some reorganization and regains its momentum. In the November Congressional election the Democrats only lose 20 seats, much less than expected

9. When it finally passes, financial service legislation, like the health care bill, proves to be softer on the industry than originally feared. There is greater consumer protection, more transparency, tighter restriction of leverage and increased scrutiny of derivatives, but the regulatory changes for investment bankers and hedge funds are not onerous. Trading volume and merger activity increases; financial service stocks become exceptional performers in the U.S. market

10. Civil unrest in Iran <span class='keyword_link'><a href="/company/crescendo-capital-partners" target="_blank">reaches a Crescendo</a></span>. Ayatollah Khameini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides. Talks with the U.S. and Europe begin but the country remains a nuclear threat. Pakistan becomes the hotspot in the region because of the weak government there, anti-American sentiment, active terrorist groups and concerns about the security of the country's nuclear arsenal

DISCUSS

Comments (6)

Jan 5, 2010 - 5:37pm
squawkbox, what's your opinion? Comment below:

This is too bullish. A big part of the 2009 revival was inventory replenishment. This will end in the short term. To make up for it, consumers will have to increase consumption dramatically.

No mention of 1) the pending commercial real estate devaluations in 2010-11 --> regional banks under pressure 2) the Fed withdrawing from the MBS market 3) the housing tax credit coming off

Jan 6, 2010 - 8:44am
Ben Shalom Bernanke, what's your opinion? Comment below:

JSinNOLA, I could agree with that but I feel very strongly that #3 can easily happen. I believe bonds will get killed in 2010.

Best Response
Jan 7, 2010 - 2:39am
Greenback8, what's your opinion? Comment below:

He's way too bullish on #1. It's funny though. If you look through his slides, you'll notice that he probably bases a lot of it on regression analysis - slide titled "history suggests +4% recovery is conservative", where there is a strong positive correlation between the steepness of the initial decline in GDP and the steepness of the the subsequent recovery. Yet in the slides right after, he acknowledges that this hasn't been a typical recovery cycle and a lot of factors have yet to rebound (i.e. real retail, consumer confidence, S&P recovery are all lagging 1 SD+ away from a typical cycle) and that we're off to a slow start. Im no expert but from his breakdowns to get to +4.2%, inventory buildup seems pretty heavily weighted (+1.5% contribution). I just can't see it since I think UE will be high so consumer spending won't really be picking up much. Without that, I can't see that big of a build up (he seems pretty bullish on UE decreasing)

If you look at what's about to happen in the near term. GDP will probably do okay in 1Q and 2Q and maybe even 3Q because of gov't stimulus spending coming down the pipeline. But with the fed stopping the liquidity facilities and then hiking liquidity mid year and then hiking interest rates, it will definitely take a toll on GDP. I'd agree more with the double dip outlook from TPG if anything.

Everyone keeps talking about how credit is available again as per the ted spread and even junk bond yields. But small businesses are still struggling (Wien even acknowledges that small businesses aren't hiring but doesn't say what his outlook is) and really, funding is only really available to larger + investment grade (although I think there has been some PE backed non investment grade refi's lately if i remember correctly, but still), and small business recovering and hiring will be crucial to getting the overall economy going. While we're on small businesses, I will say I don't think #3 will happen in terms of lending to small businesses and individuals. I can see treasury yields pushing up and the carry trade going the other way. I've been calling long usd for a while now. But what I can see is banks lending more to individuals and small businesses. They are not stupid and all the banks are already being dragged down enough by deliquencies from the retail side. It would be nothing short of disasterous for them to lend more to people who are not creditworthy. So long as the dems don't cut taxes, difficulty for small busineses will remain. As well, I'm still convinced that shit will hit the fan in one of the eurozone countries (portugal, iceland, hungary, poland, ukraine,.... so many potential ones). When that happens, it definitely will not help the cause and the US won't be spared from its ripple effect. That said, I think it might be a catalyst for long usd.

Too tired to comment on all of them (I know I ramble) but #9 seems to be up in the air now with Dodd wanting to leave his legacy and all....I guess it could really go both ways.

---------- “If the government is going to be giving away money, it’s our fiduciary responsibility to take it on behalf of our investors,”
  • 2
Jan 8, 2010 - 1:37am
MarginCalling, what's your opinion? Comment below:

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