James Pethokoukis

Politics and policy from inside Washington

The surprises of 2011

January 3, 2011

Wall Street veteran Byron Wien, now vice chairman of Blackstone Advisory Partners, has issued his annual list of ten surprises as well as ten “also rans” for the next 12 months. Here are a few that I have thoughts on:

1.  The continuation of the Bush tax cuts coupled with the extension of unemployment benefits has put all working Americans in a better mood. Real Gross Domestic Product rises close to 5% in 2011 driven by improved trade and capital spending in addition to stronger retail sales. Unemployment drops below 9%.

Pushing down the U-3 rate won’t be easy with even hypergrowth (which I define as 5% or more) only knocking it down a half point or so. Yet I wonder about the political impact of a sustained high level of unemployment if the problem is more one of little hiring rather than lots of firing. If people feel secure in their jobs, will they care if their neighbor doesn’t have one?

2. The prospect of increasing Federal budget deficits and rising government debt finally begins to weigh on the bond market. The yield on the 10-year U.S. Treasury approaches 5% as foreign investors become more demanding. Spreads with corporate fixed income securities narrow.

This would be a huge story and certainly add urgency to efforts to cut spending. Spending doves are currently using the lack of bond market vigilance as a reason to argue against spending cuts.

8. Continuing demand from the developing world and a failure to bring onstream new supply causes the price of oil to rise to $115 per barrel. The higher price at the pump fails to discourage driving, increase sales of hybrid vehicles or cause Congress to initiate conservation measures.

Will the U.S. economy really be growing at 5% with $115 a barrel oil? Won’t that begin to bite into consumer spending as some point?

14. Sarah Palin announces she will seek the Republican nomination for President amidst the cheers of Tea Party supporters. More moderate Republicans fear her candidacy will diminish the chances of their party winning in 2012 and try to blunt her efforts. Rick Perry, governor of Texas becomes a contender. Mike Bloomberg is mentioned. On the Democratic side, liberals feel Obama has betrayed them and desperately try to find a challenger. With the economy improving the prospect of a second term for Obama becomes more likely.

I am beginning to wonder if the GOP field won’t be smaller than many assume. I still think Palin runs. Romney, too. But I have doubts about the rest of the field.

18. A major state fails to pay interest on a municipal bond issue because of a lack of funds, causing havoc in the municipal bond market.

Indeed! I refer you to this post from earlier last month.

Comments

Geez. The 10 predictions by Wien became 20, if you include his ‘also-rans’. With that scattershot approach he’s bound to be right once in a while. Worse, the predictions are not even controversial or entertaining. Seems Wein took a page out of the economists playbook that says if you want to predict the future, extrapolate from the recent past, and you’ll have a decent shot at accuracy. Pretty boring.

Posted by raylopez99 | Report as abusive
 

Interesting. I’d add a couple myself.

The flip side of rising bond yields due to the inability of Congress to realistically cut the Federal deficit is a stronger US dollar, as yield-starved investors buy USD in search of, well, higher yields. Eurobonds? JGBs? As if. All that is the first surprise. The second is declining commodity prices in response to a stronger US dollar, oil included. That’ll ensure a strong global recovery.

Posted by Gotthardbahn | Report as abusive
 

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