The world economies sputtered forward through most of 2009 despite warnings of a total economic paralysis. Those who invested long in equities and commodities and short the US dollar were handsomely rewarded. But 2009 will be remembered more for what failed to occur. Remember the pundits warning in March of a disintegration of the European Union and political revolution in China? What of the experts who predicted a dollar demise with hyperinflation by the end of the year? Well, there have been no major political upheavals caused by the financial crisis including in the United States. While the faces may have changed in the White House, the Obama Administration has largely marched to the drum of wealthy Wall Street bankers. Will the same hold for 2010? American Compass has some early predictions for the coming year.

1. Equity markets will move significantly lower

Stocks may lurch forward during the early months of 2010 as skittish individual investors are lured back by the economic prattle of the financial news networks. But look for the S&P 500 to move 30% lower by the summer or fall. Lackluster holiday profit, diminishing dividend yields, and swelling corporate debt make stocks a lousy long-term investment. Why hold paper with little to no dividend, high price-to-earnings ratios, and little access to credit? Look for the S&P 500 to fall below 800 and a sub-8000 DJIA. Foreign markets may fare even worse.

2. Commodities will mostly correct

Those who bought oil, gold, and copper in 2001 need not worry. These commodities will not approach their secular lows. However, as global economies realize that GDP growth has been artificially inflated through stimulus and higher debt, demand for industrial commodities will falter. Gold should fare the best of the commodities because it has no significant industrial use. The market for gold is fueled primarily as a store of value given financial uncertainty. While spot prices for gold could fall to $850/ounce, we expect strong support to remain. Commodity producers such as Australia, Brazil, Canada, and Russia could suffer with lower demand.

3. China will not be able to maintain global growth

China may very well become the strongest economy for the next millenium. But don’t expect China to sustain economic demand over the near-term. As the world’s 2 largest economies – the United States and Japan – struggle, China – which accounts for 5% of global GDP – cannot possibly buttress global demand. Consumer-driven economies take generations to build and are often empire driven. British consumption was financed by indentured servitude and imperial strength. American consumption was dependent on reserve currency status, military vassals, and globalization (by domestic corporations). While China has efficiently created a number of favorable political alliances to open up markets to its products, the nation is still very early in its economic growth. Huge increases in money supply also threaten to derail any real growth in the domestic market.

4. US Dollar Hyperinflation will not occur in 2010

The safest investment for 2010 will be the US dollar. Forgive us for this dramatic counter-trend prediction. Despite ongoing efforts by the Federal Reserve and US Treasury to undermine the greenback as well as grumblings from foreign governments for a new reserve currency, the US dollar will survive for another year. Please understand that the dollar is fundamentally a terribly unsound currency with the political backing of a spendthrift government. But, for now the US dollar still enjoys reserve status whereas a world awash in debt must make payments in increasingly scarce dollars. For the time being, the Federal Reserve has not turned on the printing presses to flood out all debt. Sure, the difference between just printing money and purchasing toxic assets for new money may only be a matter of semantics. But recall that the Federal Reserve has not given this money freely to the citizens. Instead, it has entrusted this money to banks to promote new lending. As long as banks expect ongoing mortgage defaults and credit defaults monetary supply will not increase. And as long as mark-to-fantasy accounting measures persist, investors will not capitalize zombie banks (i.e. Citibank). Deflation will win in 2010.

6. The 2010 mid-term elections will be America’s last opportunity to avoid hyperinflation

Those who placed all their hopes on the 2008 elections learned an important lesson: the executive branch of government has been thoroughly infiltrated by corporatists. Window dressing has no hope of changing existing power structures. For 10 years, the legislative and judicial branches have been marginalized by an increasingly authoritative and potent executive branch. America’s only opportunity for economic survival therefore rests in 1) a divided government and 2) third party candidates. Unfortunately, Americans are far more likely to know their television schedule than their political candidates and third party candidates historically lose their support come election day. Still, Democratic losses in the November mid-term elections could help control spending habits in Congress in the near term. If not, look for America’s debt ceiling to hit 15 trillion dollars by this time next year. Hidden taxes in spending bills will continue to proliferate.

7. Health care inflation will disappear in 2010

Health care reform won’t become a reality until 2014, so how does health care inflation come under control so quickly? Simple: contraction in the money supply will help control health care costs. Doctors, nurses, and technicians are far less likely to demand higher wages in a deflationary environment. Patients will be less likely to pursue litigation as the nation’s wealth disappears. States may even unwittingly reign in on frivolous lawsuits due to budget cuts. Venture capital money for new medical devices may disappear as well. Only true technological breakthroughs will garner funding in 2010 for a shrinking number of financiers. An intelligent citizenry would no doubt make a connection between monetary contraction and decreasing prices. Expect politicians to somehow claim credit for this one small victory during 2010.

8. The war on terror will grow

How have America’s recent wars coincided with her financial troubles? Iraq and Afghanistan in 2001 began after the tech collapse; the first gulf war during a short recession in the 90s; the Vietnam War escalated during stagflation; Korea coincided with a post-war recession. America’s military industrial complex composes an ever growing portion of the economy. Look for rancor to spread to Iran, Yemen, Sudan, Nigeria or any other energy-rich nation. The effort may remain covert, though, for much of 2010.

9. America’s middle class will disappear

There are many culprits in the slow death of America’s middle class. But the primary culprit is the middle-class itself. Six decades of sustained, unimaginable progress numbed the minds of many Americans. Achievement and intellect began to lag. Americans lost their grounding; too many lusted for wealth, riches, and fame; too few were willing to work hours, days, months, and years to build true skills. The middle class yearned to become the leisure class and in failing, invited a once lean government to take over almost all aspects of their lives. They lobbied and won the right to increase taxes on private sector workers to pay for bloated government salaries and pension plans. In its attempt to create a universal leisure class, America destroyed its middle class. What’s a society of 20-something, unemployed English majors to do?

10. The American empire will not end, yet

Contrary to these dour predictions, American Compass does not believe the American Century must end. We have a choice in our future, but it must be a collective choice. We must increase our awareness in government, we must demand responsible legislation, we must improve education and skills, and we must at all costs avoid heeding the empty promises of our leaders. There is no short-term solution to America’s troubles. But we may take short-term actions to improve our long-term prospects. Or we may take the easy road of failed policies and crony capitalism to universal serfdom. Here’s hoping 2010 represents a turning point for us all.

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice.  The content on the site shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas and information on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors, firms, or other entities affiliated with the author(s). The author(s) may or may not have a position in any entity or advertiser referenced on this site. Any action that you take as a result of information or content on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.