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Nine Reasons 2011 Could Be a Repeat of 2010


Many pundits in the business media are signaling that the economy will perform much better in the coming year. Here, a look at why that's unlikely.

Editor's Note: This article was written by Robert Barone, head of Ancora West. Barone currently serves on AAA's Finance and Investment Committee which oversees $5 billion of investable assets.

Many pundits in the business media are signaling that the economy will perform much better in 2011 than it did in 2010. Here are nine reasons -- forecasts, if you will -- why 2011 will look a lot like 2010.

1. US economic growth will remain anemic. There is still a small probability that there will be a double dip in 2011. The recent policy shifts by the Obama Administration to continue the Bush-era tax rates and to reduce the Social Security tax on individuals for a year makes a double dip less probable, albeit this is occurring at the expense of fiscal discipline, something the bond vigilantes clearly do not like. David Rosenberg, the Gluskin-Sheff economist, has stated several times in his daily blog that he thought 2010 consumption has been buoyed by folks who had stopped paying their mortgages but remained in those homes "rent free." Rosenberg has opined that a high percentage of what used to be their mortgage payments likely found their way into consumption. So, a significant rise in "Strategic Defaults," as discussed above, will likely have a similar impact in 2011.

But it is because of the job situation that economic activity will continue to be anemic. Job creation is all but non-existent. The headline monthly jobs report emphasizes the number of jobs created. That number is estimated by the Bureau of Labor Statistics (BLS) from a survey of large businesses called the "Establishment Survey." We've all come to realize that in this economic environment, it is the small businesses that are suffering most. So the "Establishment Survey" of large business appears to be biased to the upside. The "Household Survey," on the other hand, comes from a large sample of US households and is probably a much more accurate gauge of the health of the labor market. In November, the number of jobs in this survey fell by 173,000 after falling 330,000 in October. According to the BLS, in the 12 months ended in November, the number of employed people in this country rose from 139.132 million to 139.415 million, or by a grand total of 283,000. Furthermore, we've come to look at the BLS data with a jaundiced eye. According to John Williams of, who is an expert in the way the BLS measures the data, "the overstatement of the level of payrolls as of November, 2010, is about 610,000 jobs" (see Shadow Government Statistics -- Commentary No. 337). Mr. Williams also indicates that "BLS continues regularly to overestimate growth in payroll employment by roughly 250,000 jobs" each month due to its biased assumption that in today's economy, small businesses, which are not in its samples, are actually adding jobs -- an assumption that we know is not accurate.

In addition, the policies pursued by all levels of government for the past two decades have finally caught up to small businesses, the major job creator in the US. With reduced income and cash flows, many such businesses can no longer bear the tax, fee, and administrative burdens imposed. In many localities, it is a nightmare to fulfill all of the government-imposed requirements, file all of the paperwork, deal with the bureaucracy, and pay the fees just to open a small business. Then there is the ongoing plague of fees, restrictions, and regulations, many of which have arisen because of a few scam artists like Bernie Madoff, or simply because of a failure on the part of the regulators in the first place. The American people are bearing a great burden in terms of cost for the actions of a very few. And instead of really fixing the issues with straightforward solutions, every individual and every business is simply taxed or regulated in the name of political correctness. This applies all the way from airport security to the newest set of Dodd-Frank regulations, to the daily pronouncements of federal and state bureaucracies in the form of ever-more-burdensome rules.

Big businesses have their own bureaucracy as anyone who has ever tried to call one knows. The internal staff is paid to cope with all of the rules, regulations, and burdens. With small businesses closing in record numbers, the market penetration of big business is rising. With small business being choked to death, even in an anemic underlying economy, like that in the US today, big business has been able to prosper. The overall economic pie in 2011 will be about the same size as it was in 2008 when measured by GDP, but big business' share of it will have grown significantly. This view goes a long way toward explaining large-cap corporate profitability and rising equity prices alongside of high unemployment and overall anemic private-sector growth.

2. Housing will continue its downward spiral. In 2011, foreclosures won't be about those who lost their jobs or just can't afford the payments anymore. "Strategic defaults" will mount and accelerate in 2011. The trend is already beginning. It is no longer a stigma to walk away from an underwater mortgage, even if you can afford the payments.

3. Mortgage "Put Backs" will become a national issue.
FNMA and FHLMC purchased tons of low- or no-doc loans from Wall Street that likely were not entirely "truthful." When Congress finally addresses these two bankrupt behemoths, it will be hard to ignore this issue and stick the losses onto the taxpayers, especially after the results of the just-past elections. The large Wall Street institutions, which sold the majority of these "fraudulent" loans to FNMA and FHLMC, are likely to be held responsible. Remember, it was Wall Street's greed that led to the housing bubble. Now that greed is going to come back to haunt them.
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