Long term predictions and predictions for 2011

Wish you all a very happy new year.

Before making any predictions for 2011, I would first like to make some long term predictions.

Usually these are supposed to be easier to get right than short term predictions, but let us see.

Predictions are from 2010 to 2050. All dollar values in current value not inflation adjusted.

Economy:
USA: I expect the USA to go into a fairly long term low production growth situation. Having peaked at $45000 per capita GDP per annum, I expect much slower growth of maybe 0.5% per annum in productivity. Total productivity rise can only take place with increasing population of immigrants who will be less productive than the mean – so productivity per capita should fall even if the total GDP rises. This means Americans will be progressively less wealthy and will fall to meet the rising East Asia.

I am failing to see the kind of innovations from 1980-2010 in computers, telephony and internet which transformed society. I don’t think there is any such enormous technological shift in the near future which increased productivity drastically. USA will remain a 15 trillion economy till 2050, unless they encourage massive migration

Europe: I anticipate steady state. Productivity will be dependent only on the aging phenomenon and demographic shifts. Productivity of 6 trillion in Germany, 4 trillion in UK, France and Italy each. Probably 20 trillion in whole of Europe put together.

Japan: Status quo. 4 trillion economy

Korea, Taiwan, Singapore: Will reach developed country status of 45000 dollars per capita very soon. Total economy will grow because of younger population and will flatten trajectory by 2030. Probable economy size of South Korea would be 4 trillion, Taiwan 2 trillion.

Indonesia, Malaysia, Tailand: Will accelerate productivity growth to reach Korea levels in next 20 years and by 2050, Tailand and Malaysia at least should have reached 45000 levels (or whatever level inflation adjusted). Which means Indonesia 5 trillion, Malaysia 5 trillion, Thailand 3 trillion $.

China: Currently at 4000 dollars, it may rise to 8000 by 2020, 15000 by 2030 and mean productivity of 25000 per capita per annum is possible by 2050. It will be a massive economy and supreme super-power. Probable size of economy 30 trillion.

India: I anticipate a lot of struggle to rise.

It is the only economy facing multiple hurdles and suffering from stupidity on a massive scale, with inability to learn modern ways. Currently it is at 1000 $ per capita per annum. With insufficient infrastructure and training, will reach 2000 $ per capita by 2017 assuming 9% growth, which is by no means certain.

India is facing massive government failure and economic failure, given the speed with which every other economy is racing ahead. The capable elite in India is prevented from leading the country by disenfranchising the educated population, unsustainable taxation levels which kill growth and encourage low grade parallel economy in black. The current population of 15 million elites, who were released from shackles in 1992, have propelled the last 2 decades of growth, with current ptoductivity of around 20,000$. Their numbers have failed to reach critical mass. They will probably double in the next 10 years to 30 million, since the population is young and 1 to 2 children from each family will be added to the productive population, along with slow accretion from the lower classes. The rest of the population currently consists of 150-200 million at 2000 $ per annum and 800 million at 500$ per annum.


Much of India’s growth is going to come from movement of an unpredictable number from 500$ per annum to 2000$ per annum and beyond to 3-4000$ per annum.

By 2020 one can expect the 2-3000$ producing workers to increase to around 300 million, 4-500 million by 2030 and 1000 million by 2050. Best case scenario for per capita productivity gain is 2000$ by 2017, 4000$ by 2025. I actually expect 8000$ in 2050, because I anticipate problems which would prevent doubling every 7 years. Which means probable size of economy is 8 trillion.

However, if India overcomes its problems, it could reach 15000$ per capita by 2050 and a 15 trillion economy, which would be a best case scenario.

However, please note that a 500 to 5000 $ productivity transition is twice as good as a 5000 to 25000 transition and five times better than a 25000 to 50,000 transition and is a much better business opportunity because the unconsuming become consuming rather than already consuming upgrading their consumption. So for businesses, India is the best

Russia, Brazil: Currently at 10,000 per annum, should reach 45000 by 2050, matching developed country. So they will be some 8-10 trillion each.

Politics
USA: It is likely to see marked shifts in focus in internal and external politics.

The total growth of population being needed for increase in economy size, there will be marked fights between the right and left on immigration. Currently, with underemployment, we are likely to witness a prolonged shift against immigration, until the excess unemployed workforce gets employed again. Since currently democrats are in power, they are likely to shift to right against immigration for the next election. As a repercussion, a fairly prolonged 5-7 year anti immigration wave is likely. If democrats win re-election, the anti-immigration will be overturned as soon as the economy recovers, maybe by 2014. If republicans win in 2012, the anti immigration is likely to continue till 2016 re-elections are over. After that, both parties would encourage immigration on a fairly large scale.

Lower paid workers would be needed for the infrastructure upgrades, health care and nursing for elderly. Mexico is currently at 10,000$ per capita. By 2016 this should be close to $15,000.
Infrastructure of Mexico is much better than India and there is no real incentive for richer Mexicans to go to USA where they will be looked down upon as “illegals”. Same may be the case with east Asia, where incomes and productivity will reach developed country levels soon. So I expect that only the poorest grade of workers would come from Mexico to USA, largely illegals.
USA will also encourage the best workers to immigrate there. Since most of East Asia would be close to attaining productivity of 40-45000$ per annum on their own, in all probability, Indians, currently stuck at 20,000$ productivity and salary would be the most likely to emigrate to USA. Within a few years, there is likely to be massive migration of highest grade of Indian workers to USA, maintaining the trend seen over the last 2 decades. Doctors, IT workers, Managers and Finance pros are the most likely people who might migrate to USA. Where they can shift from $20,000 to $60-80,000 paying jobs and more. They will also have the attraction of much better infrastructure, law and order, lack of corruption, health care and no chaos.

In other internal politics, democrats will try to increase taxes to pay for health and elderly care, but that will lose elections.

Also, democrats don’t have children whereas right wing republicans have lots of children, increasing their voter base.

The only quick fix is to import doctors, nurses (Philipinos and Latinos) and cleaners/construction workers (latinos). They will also have to reduce the doctor and nurse pay – currently 200,000 and more per annum / 45,000 per annum. This is likely to further reduce the incentive for whites to undergo prolonged training and difficult working conditions.

In international politics, USA will try to maintain its pre-eminence by a few tactical strikes.

There are two main strategic goals for USA. One is to prevent Iranian oil and Ex-USSR republics oil from being piped to China, without at the same time encouraging massive terrorist strikes in retaliation. Second is to encircle China.

Currently, USA is encouraging Ex-USSR oil republics to pipe oil to India and Pakistan. It is in our interest to cooperate in this, possibly using US capital for it.

Once this is in place, USA will probably encourage Israel to carry out air strikes in Iran nuclear sites. Iran will probably retaliate by trying to bomb the USSR-India pipelines and other US assets, which will give USA the excuse needed to effect a regime change in Iran. Once in control of Iranian oil, it will again try piping the oil to India through Pakistan.

Its policy of encirclement of China should see USA encourage India to have more border disputes with China, encourage India to be permanent member of UN – (the latter only if India stops being stupid and learns how to play the great game, which currently it does not), and engaging with Bangladesh to counter Chinese presence in Chittagong and to discourage Muslim extremists there. It may also try to boost tourism in Nepal and Tibet. It will probably leave Taiwan and North Korea alone, since China has given nuclear weapons to N Korea to deter USA (same as with Pakistan).

Once US economic situation improves, it is likely to target Chinese economy by trade wars.


China is probably trying to counter these moves in many ways. First by scaring India from being a partner with USA in these by war mongering. Second by using Indian communists as a fifth column sabotaging these efforts. Third by building its own oil pipeline from Baluchistan to China, which can then be linked to both Iran and Ex-USSR oil. Fourth, by encouraging North Korean belligerence and using the threat to peace as a bargaining counter in preventing US attack on Iran and reducing the efficacy of US encirclement of China. It will also increase presence of Chinese navy in Chittagong, Rangoon and Columbo ports. There is a possibility of China Iran military pact with stationing of Chinese forces in Iran to prevent Israel or US attacks. Fifth, China is busy reducing its reliance on US economy and is in a race to see whether US recovers first or China reduces dependence levels first.


All Indications are that Chinese efforts have been superior to USA and it will win the strategic battle.

India has shown itself to be a bad friend to USA and too unreliable for any real push from USA in these tactical and strategic goals.


Europe and Japan are likely to partner USA in these efforts, all of which require Indian cooperation for any bite.

By 2015 I expect the Iran situation to spin out of control, which will coincide with an oil super spike, if and when it happens.

By 2020 I expect China to win the supremacy battle with USA and massive recruitment of its population in a wordwide army stationed in strategic positions in South America, Africa, Middle East and Asian trouble spots.

USA will join battle and there will be a re-emergence of a cold war for world domination. Unless India joins in the battle on the side of the Whites, China will probably win the war, since its economy is in shape unlike USSR was.

China: Apart from its counter moves to US actions (US moves which appear quite constrained and limited, US seems basically helpless) China will be going full force in building a massive entente against the US led West.

Its main partner will probably be Russia. Russia plus China is a most dangerous combination and US will counter this by probable alliances with EX-USSR republics like Khazakhstan. They will probably fail and a massive Asian entente of Iran, Central Asia, Russia on one side and China on the other side consuming their output seems likely.

China will also build up its Navy and engage with Brazil, Argentina and other South American and African countries.

In its internal politics, China will probably keep succeeding as long as it is able to run its economy properly. Its efforts in the last 2 years have been masterly – possibly they understand economics and politics better than even Anglo Saxons. Whenever Chinese economy falters, chances of robust diplomacy/ war is likely to increase.


India. India faces complete political failure.

Our leaders are ineffective both in Congress and BJP.

Alternatives in BSP, SP and Communists are probably downright anti-national and economically suicidal.

Improvement in political leadership requires reform in Congress and BJP. Both seem currently incapable.

Long term change will probably require a complete breakdown to happen – either war with Pakistan/China, a massive Maoist rebellion or complete economic breakdown. Of these, war would be the most welcome alternative. Complete economic breakdown will probably not result in reforms and would be counterproductive, leading to a failed state and widespread chaos.
Internal: Congress is likely to initiate big reforms and elimination of corrupt and old people. It is more likely to succeed than BJP, whose efforts so far have been laughable.


I anticipate emergence of Arun Jaitly and Sushma Swaraj as the new leadership at center and dwindling of the rest. Possibility of Nitish Jumar as PM is possible if these prove ineffective in next 3 years and if Nitish proves effective. BJP will have to shed its old fashioned fuddy duddy image and become more modern if it is to succeed. If BJP loses next 2014 election it is likely to emerge stronger later on.


Congress needs massive modernization, which it has so far shown great reluctance to do. A lot depends on Sonia’s next move for the party. Long term over the next 40 years, the main trend is likely to be atrophy of regional parties and strengthening of large central parties i.e. Congress and BJP.


The period of breakway and small parties seen from 1990 to 2010 is likely to reverse direction slowly over the next 10 years and gain momentum.


By 2025, I expect disappearance of BSP and SP.


DMK and AIADMK will have to give up opportunistic alliance and chose sides with either BJP or Congress on long term basis and give up a lot of political space to these parties.


UP, MP, Maharashtra, Karnataka and AP are likely to see subdivisions into smaller states.
If India has to prosper, there has to be planned urbanization and setting up of city states. I expect our politicians to fail in delivery of this, which will lead to emigration of the best talent out of the country.


In foreign policy, extreme stupidity and inability to side with the Anglo saxon world will continue.


Pakistan: I expect a status quo in Pakistan which will play off China against USA without taking sides. In case of war between India and China, it is likely to launch an opportunistic attack on Kashmir. It is likely to be a big beneficiary of the oil economy from Iran and Central Asia if it plays its cards right – currently it is being stupid. Ideally it should seek massive investments in oil and oil based manufacturing by getting rid of the terrorists and taleban etc. So far, it has shown as much stupidity as India in making right economic moves. Its political leadership has failed the Pakistani middle class which is larger than India, wealthier and better educated, when seen in percentage terms of total population vis a vis India.

·Demographics.··Chinawill reap the demographic dividend of population control by the simple expedient of deserting its old and infirm and focusing on the young, its future. It will simple allow the old people to die and not worry overmuch about their standard of living. This is a big difference between China and the West, the latter being forced to look after its old. By this simple method, China will overcome the overhang of aging population and march ahead. ··USA will face a slow graying of its population. Baby boomers will become old all of a sudden just 10 years from now and will live into their 90s, putting strain on its economy. Growth in economy will have to come from immigration.

Russia will continue to dwindle in numbers even as its population gets much wealther, same as Eastern Europe.

India will face large scale political disruption as its young population gets impatient with the stupidity of its political leadership. However, every youth succeeding in politics will be corrupted and will fail to deliver anything, this being our national tendency. Real leadership will only come from the 50 something generation – when they realize that our restive population is asking for a change from current corrupt ways, they are likely to effect a change.

Arun Jaitly and Sushma Swaraj seem the only possible leadership which might emerge, who have sufficient intelligence to transform India to suit its young population’s requirements. If the stupid BJP leadership does not recognize their intelligence and continue with idiots like Gadkari, their party will fail completely.

Congress is likely to look for leadership from Rahul. If he fails them, their current anachronistic chaotic party system will also fail. Although Rahul is dumber than most other politicians, he has sufficient support from the party and people – just like Rajiv Gandhi – and is likely to be asked to take over the party with in the next 5-6 years. If he waits longer, he will fail and his party will go into terminal decline.


It is impossible to predict longer than the next 10 years for India because unlike China and USA, where there is effective leadership and stability of thinking and social movements, in India, everything depends on both our parties effecting life saving changes. If they fail in the next 10 years, India will fail as a state and is likely to break up, helped by China, Pakistana and Maoists/Communists


·Weather: The latter part of 19th and whole of 20th century has been exceptionally benign from extreme weather. This window period is now over and the world will return to extreme vagaries of nature in the next 40 years. Anything predicated on good weather – like Indian and Chinese farming practices, will face stress and this is likely to be one of the big negatives for the increase of Indian productivity upgrade above 500$.

·Stocks. India is in a long term bull phase which will last for 50 or more years. There will be cyclical patters within this, but the growth chart will be like the Dow from 1930 to 2000.

China will be similar or even better.

Europe and USA will be flat or show 2-3% growth – any growth higher than this will come entirely from the operation of multinationals.

Russia and Brazil will be the best performers and will rise meteorically. ·

RE. India and China are both in a fantastic long term bull phase.

India will perform better than China because it will be more inefficient in its urbanisation. Any efficiency like the coming of the RE regulator, improvement in land use laws, improvement and computerization etc will initially cause a small term downtrend for a short period which will be followed by a massive upmove as more and more people enter the RE consumption place. Again, India will be dominated by the first time buyers while China will be dominated by the upgraders from small 2BHK (current Chinese all families have 2BHK of 600-1000sf, from which they will shift to 4BHK 2000-2500 sf carpet area which is the norm for developed nations.

USA will depend entirely on immigration for its growth and for the next 20 years one should expect static markets.

Europe will be static.

Brazil will grow while Russia will be a declining market.

Basically RE growth/decline will be based on demographics.·

Bonds: As we recover slowly from the economic crisis, expect rise in bond yields to around 5-6%. Rates will rise all over the world and will be linked to inflation. Robust central bank actions will be increasingly perceived as deleterious to the economy and the trend to have too many rate adjustments will decrease. Within 10 years, inflation control will become the main purpose of central banks and not growth stimulation. In USA, I expect current low rates to continue for a few years, with slow upward bias. This will change to sharp upward bias when there is sudden and extreme inflation. At that point, there will be a crash in the bond market and rates will probably reach 8%. Europe will be similar with more stabe rates than USA. China and India will have corresponding changes too – so in India, rates of 15-17% can be expected when US rates become 8%. Probability of this happening is high in the next 10 years. After this round of rate increase, the rates are likely to stabilize around 5-6% for the long term and same will happen in India.·

Gold. This will be highly volatile. Its value will be in focus for the next 10 years. After that when world returns to stability with steady bond rates, gold will lose its value. Within 20-25 years, it will lose its status as a proxy for money and prices will decline to its production value and consumption value as jewelery. It is unlikely to return to favour for the rest of this century, because a lot of people will have observed its behaviour and would have learnt its ways and would have also burned their hands.

Gold is the classic speculation – something of no value being bid up in price based entirely on the greater fool theory. Those who are stuck in it last – when the gold bubble bursts, will never again return to this metal and will warn all future investors against it.

However in the near future, gold will be one of the best repositories of value – as we wait for the economy to recover and the rates to rise suddenly. Everyone in gold is basically waiting for the sudden global inflation event, as the QE and rate lowering across the world finally finishes. After this inflation event, which will last for 2-3 years and even more in some countries like India, gold will collapse. The better one times exit from gold, better ones returns – selling at the last possible moment before collapse will deliver fantastic returns, sudden crash will wipe out a lot of gains. Since every bubble has many bull market corrections, it will be a difficult to ride this upmove, but basic allocation to gold is essential until the inflation even is behind us.

·Education. The price of education will fall in USA as earning capacity will become more constrained. The difference between the intelligent and highly trained getting 200,000 and more $ per annum versus the stupid and untrainable who will earn 25000 $ per annum will widen. Many Americans in low paying jobs will find that they are better qualified and capable than many in the Asian economies who are less efficient and earn better – these whites will increasingly take up jobs in BRIC countries, which will limit the amount of salary increase one can possibly get in BRIC. In India, tose earning around 25000$ i.e. 1L per month will find that their future growth prospects are being dimmed by whites taking away job opportunities in the 75000$ per annum range i.e. 3-4L per month. The west will lower the bars for education in medicine, currently 12-14 years of training, making it easier for whites to enter medicine in the general practitioner level. Probably, they will make it 8 years of training. This will probably limit the number of Indians who enter medicine in West. General pay for doctors will also fall to 200,000 dollar levels.

In other fields, the entry barrier for education leading to high paying jobs will widen. Initial investment in education for engineering and technical fields will increase to around 150,000 dollars for jobs paying over 100,000 dollars per annum. This will greatly restrict the field for those who are less talented and are unproductive i.e. most lawyers and finance executives, whose pay will decrease and also the entry fee for management education and law education will fall.

Computer will be the top field after medicine in USA, followed by other engineering fields.


In India, focus will shift to better organized fields for education. Engineering and software will be top followed by manufacturing. Management will slowly fall in value as management skills improve across the population regardless of training.

Medicine will see chaos because of the current reservation policy and is unpredictable what will actually happen.

Long term, there will be shift from govt sector to private medical colleges, but fees will fall as earning capacity and capacity to deliver good medical care will slowly come into focus. Regulation of the medical field is likely to improve but only after a widespread failure event.·

Wars. In the long term , all wars will be resource wars. War over oil access is likely to be a cold war between China and USA. War over water access is likely to be border wars between India on one side and China, Nepal, Bangradesh and Pakistan on the other.

PROBABILITIES IN LONG TERM PREDICTIONS
Probablity:

Long term ecomomic direction:

USA static picture with immigration determinant ~ 100%

China rising to 25,000$ production by 2050 ~ 100%

All other countries ~ 100%

India rising to 8-10,000$ by 2050 ~ 50%, main limitation is weather, wars and Maoism/govt failure

Best place to invest: China, Brazil, Russia.

Best possibility of higher return with high risk high reward scenario:India

Wars:

Cold war with China and USA ~100%

Hot war action by USA ~5%

Hot war action by China depends on economic slump.

Since long term rise of China is likely to be marked by many market corrections, every major downturn will increase the risk of hot war from China.

Risk of one Chinese war ~20%. Tisk of second and many wars if one war has already taken place ~100%.

So peace on earth is mainly determined by China rising peacefully and not initiating the first war.

Risk of India having a war with one of its neighbors in next 50 years ~ 50%.

Risk of India China war ~5%,

Risk of India Pak war ~40%,

risk of military action on Nepal and Bangladesh border 5%.

Any India was other than with China will showcase the futility of war and will probably reduce incidence of second war.

Reasons for predictions : We have had 5 wars in last 60 years. Current neighbors more unfriendly than before. Chances of govt failure being percieved as complete collapse of India govt are high. Probable time frame for war is around the time of the extreme inflation event which as anticipated might transpire in 5-6 years time.

Demographic predictions: ~100%

RE for India:

Bull phase for 50 years ~100%.

Following of 7-8 year RE cycle ~100%.

Since previous bull phase of 2004-2008 was extra-ordinarily strong, next bull phase in 2014-2018 is likely to be weak.

However, in caser this RE bull phase coincides with the anticipated hyper inflation event, there will be combined increase in price drastically combined with economic turbulence – so there will be combined high rates and economic chaos preventing new release of vacant property combined with extreme price volatility. It will be very difficult to be able to buy property in this scenario. It is therefore better to complete one’s planned acquisitions before these events transpire. Once we cross this inflation and turbulence event, likely to be over definitely by 2020, once things settle down, one can buy better quality RE with better inflastructure in tranquility. Those planning to buy should buy now or hold their peace for 10 years, wait out the turbulence and then buy. The next bull phase is likely to be quite risky and difficult time to buy.

Gold ~50% chance of things happening as predicted. Other 50% chances are that gold collapses much before massive rise (25%) and gold becomes defacto currency because of widespread currency failures and wars (5%) and that gold maintains current status quo bull phase for extended periods over 50 years (20%)

Predictions for 2011 for India:

Stocks
Chance of a 10-15% correction very high ~70%.
Chance of status quo at nifty 6000~ 20%.
Chance of a upmove to Nifty 6500-6700 ~ 10%
Chance of big upmove to Nifty 7000 ~ 5%.
India will be a very difficult stock pickers market with very few companies.

Advice – SIP investment if longer term. Avoid for short term.

Most likely shorting opportunity for a 15% fall is around Feb-March.

After that, get into metals (Hin zinc, Hindalco) and oil (Reliance) as the best betw for 2011. FMCG: steady.
IT: steady.
Infrastructure: steady.
Pharma: upwards.


Bonds: Chances of falling price high ~100%.
Rates might move to around 9% at least in 2011.

Advice: Avoid Bond funds totally (except liquid and FMP). Wait for March for maximum of the expected rate rises to be factored in before getting into FD/FMP.
Commit 90% of capital to fixed return for best returns, unless following a bigger asset allocation plan.

Gold: Chances of 10-15% rise very high around 90%. Invest 10% of capital

Rupee: Likelihood of steady state ~60%. Chances of rise by 10% around 10% based on USD weakness. Chances of 10% fall of around 30% because of high inflation in India.


Economy: Should grow at 8-9%


Crude: Should show upward bias. If Rupee remains constant as expected, then based on dollar rates should rise 5% which translates into probably 3-4 Rupee rise in petrol and 1-2Rs rise in Diesel. If 30% chance of Rupee falling 10% comes about, then Petrol rise of 6-7 Rs and Diesel of 3-4 Rs. So a miniomum rise of 5% is almost inevitable


Inflation: Will move upwards. Food inflation is probably over. Commodities i.e metals and crude will rise and contribute most to inflation


Politics:
I expect the current chaotic misgovernance of Congress to continue.

I expect Pranab, who is a shrewd finance minister to have no more fiscal profligacy, which is essential for inflation control. Because of his record over last 1 year, I think inflation will taper towards end of 2011.

Jairam Ramesh will probably face stings/ exposures and will be forced out.

BJP shows no signs of growing up.

Crucial year for Mayawati – if she delivers some big things in this year, she will win the next election. Most likely big event should be opening of the Yamuna expressway and sudden announcement of some big projects along it. An airport or two would also be important – she should grandstand for a big fight with center for airport issue.

Chances of Karunanidhi dying and political chaos in Tamil Nadu.

RE: Downward bias.

NOIDA: Expect large scale abandonment of projects in NOIDA because of metals and cement price inflation. Buy only in under construction/finished products in NOIDA. NOIDA prices will be steady with upward bias, because prices already very low.


Gurgaon: Expect poor sales in recent launches – avoid booking for quick re-sale of booking.
Prices will be steady for 2011 with downward bias for plot prices.


Kundli: Expect 10-15% correction. If bought for short term in 2010 middle this is the selling time


Faridabad: Expect 20% price correction in plots. Again, now and the previous 2 months were best time to sell as in Kundli


Daruhera, Bhiwadi: No resales will be possible. People will have to wait for 3-4 years to sell plots.
Small town India: Steady prices with upward bias


Mumbai: Steady prices 50% chance, Fall in price by 20% likelihood of around 50%


Pune: Steady prices with slow construction and poor sales in new launches.


Chennai: Steady


Bangalore: Steady with upward bias of maybe 10-15%.


Kolkata: Doldrums until election results are out.

Invest in RE in 2011 if
Own use only, avoid investment in RE

Part of larger asset allocation plan for 30% in RE. 2009 was the best time to book in new project, avoid it now

If allocating fresh capital, go only for finished products or under construction projects.