Contrarian Investing and Predictions-Plus for 2011

New Year’s Resolutions & Predictions-Plus!

We’re at the beginning of the 2nd decade of the 3rd millennium.

What will happen this year? We don’t know. Most likely 2011 will be a lot like 2010. That’s the way it usually works. Big trends are hard to see. One year seems to wander around much like the one before it and the one after. Only much later can you see where they were going.

If 2011 is like 2010 you can stop worrying. Almost everything went up in 2010 – except for real estate.

Stocks went up. Even US bonds went up.

What went up most was our favorite investment – gold. It closed the year at a record high, giving us a gain of nearly 30%.

So far this year, the trends continue. On the first trading day the Dow rose 93 points. Gold went up $15.

But wait. Should you bet on stocks and gold? Will gold do as well in 2011? Will stocks go up another year?

Do you seriously think we have answers to those questions?

You can’t know what will happen. Predictions are worthless. So what we give you are Predictions-Plus. What’s a prediction-plus? It’s better than a prediction; it’s the thing that probably won’t happen but that you should expect anyway. It’s the thing you should believe even if it isn’t true.

Hey, look, that’s the way all the important things in life work. No kidding. You meet a pretty woman. Maybe you could get to be friends. Maybe you could take her on a weekend tryst…like a state governor would. It could be a lot of fun. Most likely, your wife would never know. But you’re better off believing she would find out tomorrow!

Or, suppose you sent in a fraudulent IRS return in order to get a big refund. You’d probably get away with it; that’s a prediction. But here’s a prediction-plus: you’ll get audited before the end of the week!

Likewise, there are predictions-plus in the financial area. What’s most likely in 2011? A repeat of 2010. That’s what you usually get.

But that’s not the best thing to believe or the best way to bet. Everyone is betting on higher stock prices, higher gold prices…and higher just about everything.

The money is to be made in the Predictions-Plus – betting on the contrary.

Here’s our old friend Marc Faber with one of them. Bloomberg:

Marc Faber, who advised investors to buy US stocks in March 2009 as the Standard & Poor’s 500 Index began a rally of as much as 86 percent, said US Treasuries are a “suicidal” investment.

Government bonds are likely to decline, said Faber, who publishes the Gloom, Boom and Doom Report. After bottoming in December 2008, the 10-year Treasury yield rose as high as 3.9859 percent in April on government measures to stimulate the economy. Concern about a second recession in three years sent yields lower through October.

“This is a suicidal investment,” Faber said in a telephone interview from St. Moritz, Switzerland. “Over time, interest rates on US Treasuries will go up. Investors will gradually understand that the Federal Reserve wants to have negative real interest rates. The worst investment is in US long-term bonds.”

Treasury 10-year note yields will rise to 5 percent from yesterday’s level of 3.349 percent, Faber said, without specifying a time frame. As bonds fall over the next decade, he said investors should buy precious metals, real estate or equities. US debt has returned 5.7 percent in 2010, more than erasing last year’s 3.7 percent loss, according to a Bank of America Merrill Lynch index.

“If you print money, the currency goes down and the S&P 500 goes up,” he said. “By the end of 2011, people will look at 2012 and think 2012 could be a very bad year because the policies applied are not sustainable and create a lot of instability. Investors may look at 2012 and 2013 with horror.”

The Great Correction could make bonds a good buy again in 2011. But it’s a bad bet. So here’s a prediction-plus: the bond market will crack in 2011.

How about stocks? Well, we’ll have to talk about them tomorrow.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning