Blackstone’s Byron Wien announces the top ten surprises for 2010  

January 6, 2010

Byron R Wien, vice chairman, Blackstone Advisory Services, who has been giving his predictions about the US economy, financial market and politics since 1986, has unveiled his ten surprises for this year making 2010 the 25^th year of his predictions.

Mr Wien began the tradition in 1986 when he was the chief US investment strategist at Morgan Stanley. He joined The Blackstone Group in September 2009 as a senior advisor to both the firm and its clients in analysing economic, political, market and social trends. Here is a list of his predictions and surprises for 2010.

The Surprises of 2010

1. The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%.  Exports, inventory building and technology spending lead the way. 

2. The Federal Reserve decides the economy is strong enough for it to move away from a zero interest rate policy. In a series of successive hikes beginning in the second quarter, the Federal funds rate reaches 2% by year-end.

3. Heavy borrowing by the US Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%.  Banks loan more to corporations and individuals and pull away from the carry trade, thereby reducing demand for Treasuries. President Obama says, “The suits are finally listening”.

4. In a roller-coaster year the Standard and Poor’s 500 rallies to 1,300 in the first half and then runs out of steam and declines to 1,000, ending where it started at 1,115.1.  Even though the economy is strong and earnings exceed expectations, rising interest rates and full valuations present a problem. Concern about longer term growth and obligations to reduce leverage at both the public and private level unsettle investors.

5. Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted. Longer term prospects remain uncertain.

6. Japan stands out as the best-performing major industrialised market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium-sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000.

7. Believing he must be a leader in climate control initiatives, President Obama endorses legislation favourable for nuclear power development. Arguing that going nuclear is essential for the environment, will create jobs and reduce costs, Congress passes bills providing loans and subsidies for new plants, the first since 1979. Coal accounts for about 50% of electrical power generation, and Mr Obama wants to reduce that to 25% by 2020.

8. The improvement in the US economy energises the Obama administration. The White House undergoes some reorganisation and regains its momentum. In the November Congressional election, the Democrats only lose 20 seats, much lesser than expected.

9. When it finally passes, financial service legislation, like the healthcare bill, proves to be softer on the industry than originally feared. There is greater consumer protection, more transparency, tighter restriction of leverage and increased scrutiny of derivatives, but the regulatory changes for investment bankers and hedge funds are not onerous. Trading volume and merger activity increases; financial service stocks become exceptional performers in the US market.

10. Civil unrest in Iran reaches a crescendo. Ayatollah Khameini pushes out Mahmoud Ahmadinejad in favour of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides. Talks with the US and Europe begin but the country remains a nuclear threat. Pakistan becomes the hotspot in the region because of the weak government there, anti-American sentiment, active terrorist groups and concerns about the security of the country’s nuclear arsenal.

— Ravi Samalad