Hat tip goes to reader Mal for pointing to this article “This Goldman Sachs Guru Sees 2011 as ‘the Year of the USA:’”
Jim O’Neill shot to fame by predicting the staggering rise of emerging-market economies. Now the head of Goldman Sachs (GS) Asset Management, O’Neill recommended investors buy into so called BRIC economies of Brazil, Russia, India and China a decade ago.
Few economic trends have been more consequential since, and O’Neill deserves plenty of credit for spotting it early on. Investors following his advice would have made handsome profits even as the developed world struggled. Indeed, O’Neill’s recommendation is often seen as the call of the decade.
So, what economy is he predicting will shine in the coming year? The U.S.
In a note to clients earlier this week, O’Neill wrote that he recently found himself “dubbing 2011 as the likely ‘year of the USA’ following a spate of stronger-than-expected economic data.
Even Employment Could Pick Up
O’Neill anticipates strong stock market gains of 20% in the year ahead. And while the jobs picture has continued to struggle even as the market surprised to the upside, that could change as well. “The growth is likely to be strong and robust enough to lead to declining unemployment which, if correct, should mean that the worst of the social consequences of the credit crisis should start to ease,” he wrote.
Bonds would get hit as yields rise in anticipation of growth, and the dollar could rally substantially, he predicted.
Of course, the U.S. economy continues to face problems like indebted consumers, low personal savings rates and big current account deficits. But 2011 “will be the beginning of a new phase in which the U.S. has strong GDP growth,” O’Neill wrote, led by exports an investments.
From “New Normal” to “Normal”
Bearish holdouts for much of the year, economists at Goldman Sachs recently threw in the towel and are now forecasting strong growth for the U.S. in the years ahead. While government statistics released Wednesday revised third-quarter growth up to an annualized 2.6% from the initial 2.5% estimate, Goldman now predicts a growth rate of 3.4% for 2011 and 3.8% for 2012.
During 2010, however, many in the U.S. worried about the prospects of a double-dip recession, while many emerging market juggernauts found themselves coping with strong growth. China and India raised interests rates to keep inflation in check, even as the Fed embarked on a second round of quantitative easing to try stimulating the economy and to avoid deflation.
Sour sentiment in the U.S. as high-profile investors predicted a long period of subpar growth under a “new normal” scenario weighed on financial markets. Investors huddled into safe assets like bonds despite meager yields even as corporate earnings boomed.
But brightening sentiment could change investor preferences and give stocks a boost. “All of this will result in a mood that the U.S. is returning to ‘normal,’ which will have predictable consequences for financial markets,” O’Neill wrote.
O’Neill’s predictions may seem farfetched to U.S. investors mired in years of pessimism following the financial crisis. But they should recall that his prescient call on the BRIC economies at a time when most investors were still focused on the aftermath of the dot-com bubble’s bursting seemed even less likely. You may not want to ignore him again.
There you have it—one man’s opinion. While I agree that the U.S. market may have more upside potential, it’s not because things are so hunky dory here, it’s because very likely they will be worse elsewhere.
Domestically, we certainly will have to deal with a host of issues. Real Estate is still tanking with no end in sight; unemployment is not showing any signs of improvement and gains in one area, like private payrolls, may be offset by losses in other areas, such as workforce reductions on all levels of government.
Budget shortfalls and red numbers wherever you look may result in a host of cities and municipalities filing bankruptcy in order to reduce debt and reorganize.
Nevertheless, as dire as that sounds, things may very well be worse in other parts of the world. Europe has its own debt issue to deal with, and it’s just a matter of time until one overburdened and debt ridden country is no longer willing to play musical chairs and ends up defaulting. It’s no question in my mind that a domino effect will be the consequence.
Other major global players are mired in their own real estate and debt bubbles, which could burst at some time during 2011. China, Canada and Australia come to mind with India’s economy reaching a critical boiling point.
In the end, when and if some of these issues turn into problems, the U.S. may not be such a bad place to invest after all. There’s a good chance that the dollar will be resuming its uptrend, especially if bad news from Europe prevails this year.
A good way to track the dollar’s progress, or lack thereof, is via the ETF UUP. While it’s still hovering below its long term trend line, watch for a break above, whenever that may occur.
Again, my theme for this year will be to look for changes in trend direction via our Trend Tracking Indicators (TTIs) and by watching individual ETFs break above or below their respective trend lines. Using that in combination with our trailing sell stop points, should put you in a position of better controlling your downside risk.
After all, just because some predictions are rosy does not mean the market can’t fool the majority of investors again just as it did in 2008. It pays to always be prepared.
Disclosure: No holdings in UUP