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Surprise No. 3: Rising commodities prices becomes the single greatest concern for the U.S. stock market and economy. Scarcity of water boosts agricultural prices and causes a military confrontation between China and India. The continued effect of global warming, the resumption of swifter worldwide economic growth in 2011, normal population increases and an accelerated industrialization in emerging markets (and the associated water contamination and pollution that follows) contribute importantly to more droughts and the growing scarcity of water, forcing a continued and almost geometric rise in the price of agricultural commodities (which becomes one of the most important economic and stock market themes in 2011). Increased scarcity of water and higher agricultural commodity prices (corn, wheat, beans, etc.) not only have broad economic consequences, but they become a destabilizing factor and serve as the basis for a developing powder keg in the relations between China and India.China has about 23% of the world's population but only approximately 7% of the world's fresh water supply. Moreover, China's water resources are not distributed proportionately; the 550 million residents in the more industrialized northern area of the country are supported by only one-fifth of the fresh water and the 700 million in the southern region of China have the other 80% of the country's fresh water supply. The shared resources of water supply have been a focal point of conflict between China and India since the 1962 Indo-China War.
My big surprise is that in early 2011, tension intensifies based on a decision by the Chinese government to materially expand the plans for the diversion of the 1,800-mile long Brahmaputra River, which hugs the Chinese border before dipping into India, from the south back up to the water-deprived northern China area in an expansion of the Zangmu Dam project, original construction plans of which were announced earlier this year. At first, trade sanctions are imposed by India against China. Later in the year, the impoverished northeastern India region is the setting for massive protests aimed at China; ultimately, groups of Indian rebels, fearful of reduced availability of fresh water and the likelihood of flooding, actually invade Southern China in retaliation.
Surprise No. 9: A new political party emerges. Screwflation becomes a theme that has broadening economic social and political implications. Similar to its first cousin stagflation, screwflation is an expression of a period of slow and uneven economic growth, but, in addition, it holds the existence of inflationary consequences that have an outsized impact on a specific group. The emergence of screwflation hurts just the group that authorities want to protect -- namely, the middle class, a segment of the population that has already spent a decade experiencing an erosion in disposable income and a painful period (at least over the past several years) of lower stock and home prices.
Importantly, quantitative easing is designed to lower real interest rates and, at the same time, raise inflation. A lower interest rate policy hurts the savings classes -- both the middle class and the elderly. And inflation in the costs of food, energy and everything else consumed (without a concomitant increase in salaries) will screw the average American who doesn't benefit from QE2.
Stagnating wages and ever higher food and other costs energize Middle America, the chief victim of screwflation, and a new party, the American Party, emerges chiefly through a viral campaign begun on Facebook. This centrist initiative initially is endorsed by several independent Republican and Democratic Congressmen, but a ratification by Senator Joe Lieberman (Connecticut) leads to several Senatorial endorsements as it becomes clear that the American Party's ranks are growing rapidly. (Both the Tea Party and Sarah Palin abruptly disappear from the public dialogue.)
By the end of 2011, between 5% and 10% of all U.S. voters are believed to be members of the American Party. With its newfound popularity, the American Party asks New York City Mayor Bloomberg to become its leader. By year-end 2011, he has not yet made a decision.
-- Doug Kass, The Edge, "15 Surprises for 2011"
Largely ignored by the media was the announcement that fourth-quarter 2010 unit labor costs declined by 0.6% and employee hours dropped by 2.0%, while the very necessities of life increased dramatically.
This is screwflation, and it holds broad economic and political ramifications and represents the principal challenge to the self-sustaining economic thesis that serves as the foundation of the bull market.
Bernanke's head-in-the-sand mentality is paving the way for a classic policy mistake of easing too hard and for too long.
As evidence, the yield on the 10-year U.S. note made a new high yesterday. Watch the price of the HOLDRS-Retail (RTH) ETF as evidence that personal consumption expenditures, an important contributor to aggregate growth, will falter in the months ahead.
The food fights and civil unrest occurring around the world are a natural reaction to screwflation.
If Bernanke isn't careful and the trends in commodity inflation (and in the absence of wage growth) continue, my two surprises (No. 3 and No. 9) might come to fruition sooner than later.
In today's opening missive, Jim "El Capitan" Cramer writes that "Just Being Bullish Is Not Enough."
Jimmy's view is winning by an overwhelmingly lopsided score.
Shorts are being trampled, and some (not surprisingly), like my buddy/friend/pal, the thoughtful and talented Whitney Tilson, are even packing up their bearish bags (and positions!)
From my perch, these are not signs of another bull leg, but rather represent a sign that the beginning of the end of the bull market is nearing, especially with the fundamental risks to domestic economic growth I see.
Similar to Jim, play the momentum, if one sees fit -- it's fun and profitable -- but have one foot on the brake at all times as the investment roads grow less consistent and more bumpy.
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