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Reviewing my 2010 forecast



The first prediction I made a year ago was a no-brainer and absolutely right: I would never again get everything right. Of 11 other predictions I made a year ago, 6 were correct, 3 were wrong or mixed, and 2 were dead wrong. My biggest mistake was in thinking that the Fed would would begin raising rates this year in response to an improving outlook for growth.

Inflation will continue to trend slowly higher. Wrong/mixed. Inflation as measured by the CPI in fact trended lower over the course of last year, falling from 1.8% (year over year) from November '09 to 1.1% in November '10. But inflation as measured by the broadest possible measure—the GDP deflator—trended higher, from 0.2% year over year in Q3/09 to 1.2% in Q3/10.

The economy will grow 3-4% over the course of the year. Probably correct. Real GDP in the four quarters ending Sep. '10 was up 3.24%, and growth for 2010 will be 3% or better if Q4/10 annualized growth comes in above 4%. Most forecasts are calling for an upward revision to Q3 growth, and a relatively strong print for Q4 growth, so I think my lower bound growth forecast will hold.

The Fed will end up raising rates sooner and/or somewhat more aggressively than the market currently expects. Dead wrong. The Fed kept short-term rates close to zero for the entire year, and has given no sign at all that it intends to raise rates in the near future.

Residential construction activity is likely to slowly but gradually improve over the course of the year. Housing prices on average are likely to post modest gains as well. Wrong/mixed. Housing starts fell modestly over the course of last year, but have been relatively flat since early 2009. Prices, according to the Case Shiller data, were roughly unchanged. Compared to the consensus a year ago—which I think called for more bad news from the housing market—my optimism was not egregiously misplaced.

Interest rates on Treasury bills, notes and bonds should rise significantly over the course of the year, with 10-yr T-bond yields exceeding 4.5%. Dead wrong. T-bill rates rose, but only by a few bps over the course  of the year, 2-yr Treasury Note yields fell 40 bps, 10-yr yields fell about 50 bps, and 30-yr yields fell about 20 bps.

MBS spreads are likely to widen over the course of the year. Correct. MBS spreads rose from 70 bps a year ago to about 85 bps today. However, the rise in spreads was not enough to significantly detract from the generous total returns that MBS investors enjoyed for the year.

Credit spreads are likely to decline gradually over the course of the year. Correct. Spreads rose in the first half of the year, but ended the year with a net decline. Both investment grade and high-yield bonds enjoyed very strong performance as spreads declined and default rates plunged. 

Equity prices should be at least 10-20% higher by the end of the year. Correct. As of this writing, the S&P 500 is up about 12% year to date (with a total return of almost 15%), and the NASDAQ is up 17%. The going wasn't easy, however, with equities suffering a major setback in the second quarter after a strong first quarter.

Commodity prices will continue to work their way higher over the course of the year. Correct. The great majority of commodity prices registered strong gains for the year. 

Gold prices are likely to spike one more time to a new high this coming year. Correct. Gold rose from $1100 to $1400/oz., setting a new record high.

The dollar is likely to rise at least modestly against most major currencies, and it should be able to hold near its current levels against most emerging market and commodity currencies. Mixed. The dollar eked out a 3% gain against major currencies, but fell moderately against most emerging market and commodity currencies.

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