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Is There Really a Free Lunch Out There – Part II

Last week as the opening piece for the New Year I wrote Part I of this piece.  In it I focused upon the observation that despite a lot of uncertainty and cause for concern, despite the massive amount of central bank intervention, absence of political leadership, and presence of geopolitical volatility the financial markets seem to be very strong.  I asked the question as to whether there might just be a free lunch out there after all.  I also invited all of you to share your predictions for how a variety of benchmarks would end the year 2014, and promised to share the results as well as my own forecast.

Well, it seems that you’re all pretty optimistic about 2014!  The results from you all are as follows, and I appreciate the broad response:

S&P 500:  2100
10-Year UST:  3.30%
Case Schiller 10 city home price index:  195
10-Year Spanish Bonds:  3.75%
Nikkei 225:  1,700
1 Euro = 1.275 USD
1 USD = 1.025 Yen
Gold (oz.):  1,140

Before I offer my guesstimates I must couch them with the following qualification.  I see the world as being very uncertain and so intensely dependent upon government (and central banker) ability to suspend reality.  Thus, I find that any prediction on the financial market is necessarily a forecast upon government’s ability and willingness to continue to intervene.  I do believe that the U.S. government will continue to do so, and that this will manifest itself in more asset price appreciation.

In fact, I see the U.S. in a relatively enviable spot in the world.  I think that Europe will see some volatility because the common Euro currency creates conflicts that simply cannot be resolved, and the large European banks have become instruments of their nation’s governments.  I think that China will also experience economic volatility, and that capital throughout the world will seek the U.S. as a perceived (relative) safe haven.  I also think that central bankers throughout the world will continue to be committed to easy money policies.  So, with that in mind, I would say that the free lunch of 2013 will likely continue for investors in the U.S. in 2014, although, like Granny, I cannot believe that they’ll last forever without a price being paid.

My forecasts for year-end 2014 are as follows:

S&P 500:  2200
10-Year UST:  2.60%
Case Schiller 10 city home price index:  185
10-Year Spanish Bonds:  4.25%
Nikkei 225:  1,950
1 Euro = 1.45 USD
1 USD = 1.15 Yen
Gold (oz.):  1,375

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