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Old 2012-01-01, 02:02   #1
ewmayer's Avatar
Sep 2002
República de California

2DEB16 Posts
Default Mystery Economic Theater 2012

With 2012 currently sweeping across the Atlantic toward the Americas, I am pleased to open the 2012 installment of the now-annual Mystery Economic Theater thread series. By way of reference, here are links to previous installments: 2011, 2010, 2009 and 2008.

The 2011 thread ended up with a bit over 700 posts and over 27,000 views - thanks to all who contributed to the discussion. Note that the 2010 installment ended with over 800 posts and around 18,000 views - so the postcount was down 10% but the view count was up over 30% this year. It is semi-interesting to compare the past 3 years (I omit '2008' beacuse that lumped together the first version of this thread which began in 2007 as as a "Subprime Mortgage Market Meltdown" thread before morphing into a "Global Financial Crisis" thread in 2008):
Year   #Posts   #Views
2009      946   25,641
2010      827   21,345
2011      740   27,720
So the post rate has steadily dropped YoY - probably largely because I've become less egregious of an own-thread spammer - but interest (and I hope discussion quality, although I leave that judgment to others) continues to remain high.

My own Top 10 macroeconomic themes for 2012, with the usual disclaimer of "None of the following should be construed as investment advice" (even if it sounds like such) are below. I apologize for my beginning-of-year orotundity, which requires me to break my top 10 into 2 separate posts.

1. U.S. Politics and Economy: Precisely which Republican cabdidate wins the presidential nomination won't matter, since none of the GOP pack dares profess the kind of non-extreme, considered views needed to appeal to the Great Ignored Moderate Middle, dooming their chances against Obama, especially with the economy showing signs of modest improvement, or at least data which can be spun that way by ever-hopeful economists and the media. That having been said, in a triumph of impeccable coiffure over personal integrity or cluefulness, Mitt Romney will get the Republican nomination. Ron Paul will put up a creditable showing, but if he threatens too seriously to take the lead in the run-up to the nomination he will be subjected to a concerted smear campaign by the powers-that-be (big corporate and financial interests simply cannot let someone like Paul win) and swift-boated into electoral oblivion. Obama will win re-election, helped by "positive surprising" US economic data which will of course be faked and seasonally-adjusted beyond recognition, but as we know all that matters is the headlines. For example, official unemployment will drop to around or even below 8%, even as the number of people actually working continues to drop, as it has each year since 2007. Obama will also benefit from his success in bringing the Iraq war to a 'successful' end [even though Iraq may well slide back into sectarian conflict in 2012] and ending Osama Bin Laden's time on this earth.

2. Housing will remain weak [home prices will drop slightly on a national-average basis in 2012, despite continued record-low mortgage rates], even as the NAR releases always-bullish monthly data. The Fed will print some more (QE-whatever), and the government will continue to spend its way into eventual catastrophe, albeit at a slightly reduced rate simply as a result of the Iraq war effort winding down. (That deficit reduction will be more than offset in the overall picture by the Fed's newest spate of printing, however). Only interesting question regarding the upcoming printing-press run will be whether the Fed will wait for the next sustained bloodletting in the equity markets to fire up the presses, or not. Due to continued "economic suckitude" demand for rental and multifamily housing will remain very strong. This will continue to be spun by the NAR and MSFM as a bullish trend.

3. At the U.S. state/muni level, the tidal wave of municipal bankruptcies many pundits had predicted will not materialize, as many state and local governments have done a surprisingly good job (albeit as judged by the very low standard suitable for such entities) at reining in spending and probably to a lesser extent, raising revenue. Of course many of the measures taken have been short-term can-kicking exercises predicated on a strong economic recovery and return of the housing bubble in 2011 - oh wait, we meant 2012 - oh, wait - so some very tough choices stll lie ahead. There will continue to be a trickle of notable defaults, against a persistent backdrop of public employee unions resisting the cuts to their salaries and outsized perquisites and pressuring their local governments to instead raise taxes or cut someone else's funding, especially 'someone' lacking membership in a powerful public employee union. One particularly interesting topic I intend to follow in this regard is illustrated by now-officially-bankrupt Jefferson County, Alabama, which was done in by an infamous creatively-financed sewer-bond deal peddled by some of Wall Street's Finest to corrupt local officials. In the wake of the BK filing the county has suspended interest payments on its muni debt and is being sued over that. Now, payment of interest on muni debt has long been considered sacrosanct in the investment world, so whether the courts can force such a municipality to raise revenue in order to continue paying off the debt is a key issue, especially in places like Alabama, where such court-mandated tax hikes would conflict with black-letter state law.

4. European financial heads will be in a near-continuous state of crisis-meeting-slash-debt-summit-slash-jobs-summitry. Attempts to "lever the EFSF" and issue Eurobonds (in multiple guises) will all fail, but will provide no end of weekly "hopeful headlines" followed by "diappointing results" for the mainstream media. The word "firepower" in reference to the bailout fund will be overused even more aggressively than it was in 2011. (Google firepower+european+rescue+debt [replace the pluses with spaces in the Google keyword box] to see what I mean - as I write this I get 868,000 hits. I will compare that hit count with what I get a year from now.) Nothing will help prevent Europe from continuing to slide into a deep, deep recession. The big question is, will the EMU survive in its current form for another year? I predict a 50% chance that it does not, either a result of stronger countries like Germany (or perhaps more likely, a smaller fiscally-prudent nation whose banks are not gorged on European sovdebt as are Germany's, e.g. Finland) leaving, or (less likely IMO) one or more of the PIIGS getting booted out. Even as the pols and central bankers continue to call for "greater integration", the end result will inevitably be some form of breakup, only the details and timing are uncertain. One of Merkel and Sarkozy, quite possibly both, will be voted out in the next round of respective National elections (France 2012, Germany 2013). The only way PIIGs debt yields stay in sub-10% "merely mildly catastrophic" territory is via massive ECB printing, so the ECB will print, massively.

5. Japan is facing another year of massive debt issuance, with compounding of interest being an ever-greater portion of its financing. The big question is, will this be the year the Yen finally plunges? That is a tough one - many smarter people than I have predicted the collapse of the Yen on a near-yearly basis for the past 20 years, only to be proven wrong time and again. Japan may still find a way to delay the collapse for one more year, but once the collapse begins it will be epic. The Yen and the various tricks Japan will try to keep issuing government debt at super-low rates (e.g. jawboning its largest trading partner, China, into buying Japanese bonds, perhaps as part of some coordinated bond-swap scheme) bear close watching.

Last fiddled with by ewmayer on 2012-01-01 at 19:50 Reason: 2010 -> 2011; added muni-finance link; geez my speling suked last night
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Old 2012-01-01, 02:05   #2
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6. The BRICs will all experience severely slowing economic conditions, as demand for their exports wanes, and oil prices drop. Ongoing credit-expansion-fueled inflation in India and Brazil may allow those countries to fake the appearance of GDP growth, but all 4 will have zero to negative GDP growth in 2012, in inflation-adjusted terms. The tricky bit here is how to measure inflation, since most governments have made a habit of understating real inflation.

7. Global equity markets will be firmly down (that means -10% to -20%) on the year. The U.S. will outperform, but only in a relative sense, meaning S&P500 down around 10%ish on the year, albeit with many wild swings along the way. Despite the Fed's printing the ECB will expand its balance sheet even faster, thus the Euro will continue to weaken against the dollar, ending the year in the $1.20 range. Gold will have another +10%ish year, also with major swings along the way, finishing around $1750/oz. Silver will underperform Gold (flat to -10%YoY); indstrial metals lke Copper will fare even worse as demand drops precipitously. In 2012 cash will be king, preferably US$-denominated cash. Those brave enough to deal with the market gyrations will likely be looking at US "recession proof" stocks with strong balance sheets and a good dividend yield, and those even bolder may be dabbling in Gold. Interestingly, Gold has now been higher-priced than Platinum for the better part of a year, which some pundits take as a sign of a Gold Bubble. That is possible, but IMO reflects Gold's historic role as a store of value in crisis times, and after the recent 20% pullback any 'bubble coefficient' in the price is certainly much reduced. But don't bet the farm on this kind of speculative play in any event.

8. In corporate news (I will focus on US companies), a year of record corporate profits in 2011 somehow translated into "no meaningful hiring", as corporate bottom lines benefited from the massive layoffs in 2008-2009 and companies continued to use the weak economy to squeeze their remaining workers for more productivity. That trend will continue in 2012, but the erosion of profit margins we saw in late 2011 resulting from high input prices and weak consumer demand for non-discounted discretionary items will take its toll. If companies were not hiring significantly while booking record profits in 2011, they most certainly will not go on hiring binges in 2012, especially against the backdrop of a deteriorating global macro picture. Tech will continue to outperform, with leaders like Apple again having good years. However, for persistent outperformers like Apple the bar is set very high; If either the iPhone5 or AppleTV fails to "shock and awe", the bull market in AAPL's share price may be at an end. Facebook will have a splashy IPO in 2012, but will regret not having gone public in 2011. The Facebook IPO will more-or-less mark the top of "dotcom bubble v2.0: the social-network craze". Other social-network firms will face inreasing headwinds in going public on fast-money terms. Major bankruptcy candidates in 2012 include Kodak and Sears. In Big Finance, there is a good chance of one or more MF-Global-style blowups among the overleveraged hedge funds. "What happened to the missing MFG customer funds?" will be on many minds; I predict the trail will lead to JP Morgan's door but our feckless financial regulators will once again fail to discern any prosecutable offenses in the whole scam.

9. China Hard Landing: China's massively overheated property market and credit bubble blown (with government backing) in the past few years continue to collapse in on themselves. There will be behind-the-scenes panic in the central and numerous debt-ridden regional governments. Desperate measures will be attempted to prop the bubble up, without success. Real economic data will be lied about to an unprecedented degree in official releases in an effort to mask the true scale of the debt-bubble collapse. Demand from China for industrial commdodities will plunge. That will have ripple effects in places whose economies have been benefiting disproportionally from Chinese commodity demand, such as...

10. Australia will slide into a deep recession (possibly a depression), as its own property bubble - which is much worse than the U.S. was in 2007, in terms of price/income ratios deviating from longterm trends - collapses. Aussie retailers are already feeling a major slowdown in consumer spending. This is only the tip of the iceberg.

[You've heard of 13 being called "a baker's dozen"? Well at MET Central we similarly call 11 the "Nigel Tufnel Ten"]:

11. Oil prices will drop significantly - not to the same degree as they did in late 2008, but by at least 20-30%. The major wildcard there is the possibility of middle east conflict causing oil prices to again spike. With the deteriorating situations in Egypt and Syria, Israel getting very worried about the ever-nearer-term threat of an Iranian A-bomb and increasing saber-rattling between Iran and thr U.S., the threat of a serious conflict breaking out is very real. If that happens, oil could easily rocket back toward its recent Summer-of-2008 bubble highs, and would make for a very tempting short.
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Old 2012-01-01, 12:09   #3
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Originally Posted by ewmayer View Post
The 2010 thread ended up with a bit over 700 posts and over 27,000 views - thanks to all who contributed to the discussion. Note that the 2010 installment ended with over 800 posts and around 18,000 views - so the postcount was down 10% but the view count was up over 30% this year.
There were 2 2010 threads?
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Old 2012-01-01, 19:42   #4
ewmayer's Avatar
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Originally Posted by Uncwilly View Post
There were 2 2010 threads?
I meant 2011, clearly.

Also, another commonly used euphemism for what I call the Nigel Tufnel Ten - that is, the number 11 - is the "banker's dozen".

After y'all recover from your respective New Year's hangovers, do be kind enough to post your prognostications for 2012. They need not be Top Ten lists, but we do encourage them to be "gosh darn interesting".
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Old 2012-01-01, 19:48   #5
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I don't know about prognostications, but I can give some (probably incorrect) wild guesses.

If Mitt Romney is the Republican candidate, the economy will start improving, Obama will take credit, and win re-election.

If anyone else is the candidate, the economy will tank.
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Old 2012-01-01, 21:12   #6
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A few of my WAGs (Wild Ass Guesses).

1. US Equity markets will have a tough time. S&P goes into triple digits before year end.

2. Europe has major recession as uncertainty drags on. Greece sees another renegotiation and ECB keeps buying Spanish and Italian paper through banks.

3. Euro goes below 1.20 before QE3 is announced.

4. Gold hits $1800 in the next 3-4 months and then stays rangebound for most of the year.

5. Huntsman-Paul beat Obama-Clinton (j/k)
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Old 2012-01-01, 21:16   #7
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Originally Posted by Prime95 View Post
The Florida AG is also fighting hard against this. She firmly believes that NO penalty should be paid at all!! A stern talking to is all that's required. She fired the 2 lead mortgage fraud investigators.
Barry Ritholtz had a post about this some time ago.
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Old 2012-01-02, 13:35   #8
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Default is all I can find.
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Old 2012-01-03, 18:01   #9
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For George:
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Old 2012-01-03, 18:46   #10
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prediction? hmmm... just one for now : the world NOT gonna end the 21 december.
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Old 2012-01-04, 14:57   #11
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Mar 2010

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Let me write what I expect in 2012:
1. Obama will win.
2. Euro will appreciate with respect to dollar. Low inflation in eurozone.
3. Greece will be kept on the brink of bankruptcy, but nothing like bankruptcy (or leaving eurozone) will happen. Paying huge interest rates for its debt, situation of Greece will worsen.
4. There will not be a real winter in Europe, as it was in previous years. Unfortunately, this becomes a rule.

But this is New Year, not a very good time to think about economy.

Last fiddled with by literka on 2012-01-04 at 15:01
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