Forecast #1

The Federal Reserve will not relent in its money printing madness until it’s absolutely forced to do so. Because it’s in black and white — right in the Fed’s own statements, month after month. It’s what they told us they’d do. It’s what they’re doing. And it’s what they’re telling us they’re going to continue doing. We also know Bernanke will pursue this policy because of the persistence of those forces. We’ve had 120 bank failures from the beginning of 2009 through mid November, the most since the S&L crisis of the 1980s.

Forecast #2

A continuing, virtually unstoppable long-term decline in the dollar. Yes, we will have dollar rallies. And yes, the dollar rallies will be sharp. But they will be traps. After each rally, the dollar will consistently resume its long-term decline. Mr. Bernanke is creating massive new supplies of U.S. dollars, ad infinitum. So he’s naturally diluting their value. But so far, the U.S. dollar’s decline has been orderly. 2010 will also bring louder voices demanding that the dollar be replaced as the world’s dominant reserve currency. Most important, at some point, the pressures on the dollar could reach critical mass, and the pace of decline will accelerate. Instead of a zigzag decline, you’ll see a freefall, and ultimately, outright panic. Against the euro, the dollar is just 4 euro cents from its lowest level in the euro’s history. When that low is broken decisively, it could set off a dramatic wave of panicky dollar selling here and in the Euro zone. Against the Japanese yen, the dollar is now just 2.5 yen from its lowest level of all time. When that low is broken decisively, it could set off an even more dramatic wave of panicky dollar selling in Japan. And globally!

The sovereign wealth funds, the giant national pension funds, which I track avidly. Not only have they grown dramatically in size — to as much as 3 trillion dollars — but with the dollar decline, they are now becoming far more aggressive in shifting out of the dollar and moving into alternatives — other currencies, other sectors, other continents, such as Asia. Most economists are greatly underestimating their impact. And most investors will probably miss the opportunity to follow their lead to some very profitable asset reallocations in 2010.

Forecast #3

The entire concept of “RISK” will be REDEFINED by global investors. The new definition will be: HOLDING U.S. dollars and dollar-denominated assets.

First of all, more and more investors perceive U.S. dollars — and anything denominated in dollars — as high-risk investments. They don’t really care how conservative the instrument is or how strong the company may be. All they see is that it’s wrapped in greenbacks, and they paint everything associated with those greenbacks with a single broad brush and a single color — red for risk. Which makes them anxious to dump dollars. It means they are compelled to find other assets that can replace the U.S. dollar as stores of value. They must rush to buy alternative forms of money for their wealth … Like gold . Not just gold, but also silver, copper and other commodities. Not just commodities but also other tangible assets like real estate. Not just tangible assets, but also paper assets that provide a stake in those tangibles … including common stocks!

I call this “the monetization of assets” — the phenomenon whereby other assets of many shades and colors become substitutes for the traditional role money plays as a store of value. That’s the inevitable result of the Fed’s efforts to flood the economy with devalued money. That’s why they’re buying gold.

Forecast #4

Gold will reach $1,500 if not higher as central banks help drive up its price with massive new buying of their own. China is actively buying gold, boosting its gold reserves from 600 metric tons to 1,054 metric tons — a 76 percent increase since 2002. India has just spent a whopping $6.7 billion to scoop up 200 tons of gold from the International Monetary Fund. But how big is this in the context of the broader global market for gold?  It’s equal to roughly 8 percent of all the gold mined in the entire world each year. Meanwhile, in addition to central banks, you’ve got a rush of private investors buying gold. Demand for gold investment products like ETFs soared to a record 1,732 metric tons of gold in the third quarter, $55 billion of gold. All this buying is converging right now. And this is the most obvious factor that will drive up gold in 2010. Every ounce of gold bullion you can buy for less than $1,000 an ounce should be seen as a great bargain.

Forecast #5

The overwhelming majority of oil producing nations will demand that the U.S. dollar be replaced as the pricing standard for crude oil. In past OPEC meetings, the debate was always about how to lower or raise the price of oil. More than ever before, oil will be driven by free market forces, and more than ever, the rise in oil prices will be tied to the fall in the U.S. dollar. As the dollar falls, the demands to replace the dollar will get louder and more unanimous. And as those demands grow in strength, you’ll see more and more upward pressure on oil prices. In 2010, the price of oil will move into a new, higher, and broader trading range — $110 on the high end, $70 on the low end.

Forecast #6

The U.S. economic recovery of 2010 will go down in history as one of the weakest and shortest in 100 years. There are currently 27.4 million unemployed or underemployed workers in the United States. Banks are clamping down on credit cards, tightening standards for the last nine quarters in a row, according to the Fed’s own surveys. Also never forget that more than one in five U.S. homeowners has lost all their equity in their home and is upside down on their mortgage.  No job security. No credit. No home equity to tap. And to add insult to injury, rising energy bills.

Forecast #7

The economies of Brazil, China and India will grow up to four times faster than the U.S. Consumers are not threatened by record unemployment, are not overly reliant on credit cards or home equity as a source of spending power … and are not directly impacted by rising energy. In the U.S., even if the recovery holds until the latter part of 2010, I don’t think you’ll see growth of more than a couple of percentage points. Meanwhile, Brazil will grow by nearly 5 percent, India by 7 percent and China by almost 9 percent.

Forecast #8

Stocks in countries like China, India and Brazil will rise up to three, four, even FIVE times faster than the S&P 500.

The immediate reason is quite simple — China’s $586 stimulus plan is working like a charm. China didn’t have to borrow a dime to finance that stimulus. And unlike the U.S., which used trillions to buy out worthless sub-prime debt, China spent its stimulus money on highways, airports, dams, utilities, bridges, shipping ports and more. Not only has this created millions of jobs, it has created a foundation of productive infrastructure that will keep the Chinese economy humming for years to come. We are in the first years of one of the most powerful mega-cycles in the history of civilization.

Forecast #9

The best performing stock markets in 2010 will include Indonesia, Thailand and Vietnam. Indonesia has the fourth largest population in the world and is growing like a weed. It just reported that its economy grew by 4.2 percent in the third quarter and that’s on top of 4 percent in Q2. That makes it the THIRD fastest growing economy in all of Asia, just behind India and China.

Indonesia is extremely rich in natural resources, especially oil and coal. How rich? Many people don’t realize that Indonesia was the only Asian member of OPEC until it voluntarily withdrew last year. You know why they withdrew? Because their economy was growing so fast and they were making such good use of their own oil, they didn’t need to export it any more. OPEC stands for Organization of Petroleum exporting countries.

Forecast #10

Sovereign wealth funds of Asia will become far more aggressive buyers of contra-dollar assets in 2010, helping to drive up their values at a much faster clip than generally expected, especially in Asia. The top ten Sovereign Wealth Funds in the world have nearly $3 trillion in capital. More than 80 percent of that capital originates from the Middle East and Asia — and more than 70 percent of that capital is going into natural resources, which are contra-dollar assets. What most people don’t realize is that the sovereign wealth funds are also global trendsetters. When they start gobbling up natural resources, other companies will follow their lead and do the same.

Forecast #11

Expect a MASSIVE new global boom in mergers and acquisitions, focusing on small- and mid-cap natural resource stocks.

Goldcorp gobbled up a company with gold mining operations in Mexico by the name of Canplats for $238 million. And this acquisition was driven by a wave that will lift a lot more small boats, targeting not only gold, but other natural resource like oil, silver, copper and more. The wave I’m talking about is that the large producers can’t replace their production fast enough.

And it’s accelerating. Bear Creek Mining bought three gold and silver exploration companies in South Peru. El Dorado Gold bought Sino Gold in China. Jin Shan, based in Canada, recently merged into a larger Chinese miner.

Bonus Forecast

2010 will bring a NEW phase in Asia’s

real estate boom — a boom which is

both broader and far more sustainable

than America’s real estate boom of the 2000s.

Thank you again for joining.

Have a good day and a great 2010!

Your friend

MME

This time the improving data gave investors the idea that the Fed could begin reversing its zero interest rate policy sooner. That got the dollar moving higher. And that got the wheels turning for a bounce in the weak dollar trend.

The dollar has continued to show strength following that turn in sentiment, but the prospects of a sooner move on rates has now been dismissed. The knee-jerk reaction in the markets that priced in an earlier hike in rates was subsequently fully reversed.

What is now underpinning dollar strength is a shift in market focus toward some of the headwinds facing the global economic environment. That’s swinging the risk appetite pendulum back toward safety, which is positive for the dollar.

So what can keep this momentum going in the dollar? Answer: Growing risks to the global economy.

Let’s take a look at some of the specific catalysts that could fuel more demand for dollars …

Catalyst #1: Rising Prospects of a Sovereign Debt Crisis

First it was Dubai that stoked fear in the financial markets over the Thanksgiving Day holiday. Now, Greece has been called on the carpet over concerns that the nation will struggle to meet debt commitments. Fitch downgraded Greece to just three notches above the lowest investment grade status.

Debt problems in a global crisis have the ability to be contagious. And that can destroy investor confidence in the capital markets of such countries, and in the global economy. And when confidence wanes, capital flees. That’s a recipe for falling dominoes.

First it was Dubai that rattled the markets. Now Greece’s debt has investors worried.

Catalyst #2: Problems for the Euro

The recent downgrade in Greece turns the market focus back to the problems that exist in the Eurozone, and that’s putting downward pressure on the euro … which means upward pressure on the dollar.

The European Union’s growth and stability pact limits all member countries to a budget deficit of 3 percent of GDP. But Greece is running a budget deficit of 12.7 percent of GDP, over four times the limit.

In fact, on average, the 16 member states of the single currency are running a budget deficit more than twice the 3 percent limit!

So the uneven performance in Europe will likely call into question the viability of the euro currency again. Another bout of speculation of a break-up of the euro is hugely dollar positive.

Catalyst #3: Growing Uncertainty Surrounding Economic Recovery

Now that sovereign debt problems are surfacing, investors are getting concerned about the sustainability of this recovery. After all, the unprecedented global fiscal and monetary response was an experiment. The outcome is unknown. And the underlying problems related to the crisis still exist: Bad debt, reduced wealth and tight credit to name a few.

Moreover, when you answer a liquidity crisis with more liquidity, you’re bound to create more bubbles. While ground zero for the credit crisis was the U.S. housing market, new bubbles in real estate are developing in the areas that were relative outperformers in the downturn (such as China, India and Canada).

In Shanghai, housing prices were up 40 percent in October from the same period a year earlier. And in a story about the Canadian housing market this week, Bloomberg quoted a real estate agent as saying, “Where else in the world do you have agents lining up overnight to buy a condominium?”

To someone here in the U.S., that sounds familiar.

Catalyst #4: Protectionism

We’ve already seen evidence of restrictions on global trade and capital flows. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery.

After the lessons from the Great Depression, the leaders from the top 20 countries of the world vowed to avoid protectionist activity. But actions from the G-20 countries are speaking louder than words. New trade restrictions have been erected by most of them since the pledge was made.

Trade restrictions could derail global economic recovery.

Perhaps the biggest factor in the protectionism threat is China’s currency policy. Even after recent tour stops in China by U.S. President Obama and European Central Bank President Jean-Claude Trichet to lobby for a stronger yuan, the Chinese have remained steadfast on keeping their currency weak. As this issue with China’s currency gains in intensity, expect protectionist acts to rise in retaliation. And expect collateral economic and political damage.

Bottom line: If sovereign debt problems and the prospects of a double dip grow, you can expect investors to pull in the reins on risk. And this time, they might not be as eager to turn the risk appetite switch back on. That could give the buck a strong lift … a lift that might last longer and rise further than many expect.

Your friend

MME