Outlook: 2012 Q1 update

New year, new projections, and a bit of a review of the previous year.  I will dive right into it.

Employment:  Previous call on this one was not so bad, it has continued to flatten out, although the headline number stands at 8.5%, but the drop in that number has not been because of new jobs, but due to people not being considered as looking for a job (because they have given up).  Dashed green line is the old prediction, and I suspect now I am about 8 months early on the start of the drop in this, so I have revised the prediction (new red line).  I am on track here, and still solidly believe that unemployment will become an even bigger issue going forward.

As you can see with my previous track record, guessing the inflation percentage is pretty poor, but to my defense, it is a wild number that could be entirely made up.  Without going back and tracking down the dates, I suspect the first leg up from mid 2009 to the beginning of 2010 was the impact of QE1, and the second leg up from 2011 to now was the impact of QE2.  Will there be a QE3?  Some say yes, some no, either way I cannot see it mattering much.  If it is enacted, it will be small and I am depicting this as a slowing of the deflation in the 2nd half of this year.  Why no QE3?  The bond holders and rating agencies are about to put an end to the spend spend spend mantra.  Recall that the rating agencies put the USA on watch in July, and the review should come in January, so with the recent bill to allow the tax cut to continue for 2 months into 2012, and the unemployment payments to also continue, look for bond buyers to say enough is enough.

I cannot be too upset with the Dow Jones, the peak was higher and longer than I predicted, but it now really does appear a peak is in and the "look out below" phase should now start in earnest.  For those of you counting, that would put the most recent peak as May 2nd, 2011 at 12,876 which remains below the all time peak of 14,280 on October 11, 2007.  I seriously do not think we will see these numbers again any time soon.  I am very concerned on this, if it does happen, it will be fast and furious.  Please beware.  Most of the people I read these days are at best neutral, and many are leaning towards the scenario I have depicted below.  Even if you are optimistic, a correction of the leg up from 2009 is due. 

As for gold, I have consistently been wrong on this.  I can recall when it was $400 and when it got to $600 I did not believe it.  Now at $1600/ounce it just seems insane to me.  Look at the curve of the price climb, if I were to continue the same arc I would get a circle.  Again, with the Dow I think the top is in, and as an added bonus, banks have become very protective of their cash, and it is very unlikely they will continue pumping money into gold and silver.  Why?  Losses in the stock market will force investors to convert gold to cash to cover positions, and that will drive the price down faster than the stock market.  I would not touch this at all until it is below $600, likely lower.

The super committee has failed, and so the debt continues to rise.  Look for congress to eliminate the automatic cuts, but it will not matter much.  I am expecting another credit agency to downgrade the US debt in Jan or shortly thereafter. The curious thing in my mind is that the debt level did not return to where it should have.  I know they hid some of the debt in funny places to forestall the "decision date" but would have figured that they would have undid that.  The limit will soon be $16.4 trillion without any fuss which should carry the US to the end of 2012.  Again, for every dollar the government spends, it borrows $0.33 of that dollar.  For 2012, there is no budget, else they would have to put on paper that they are spending like mad. 

2012 is the year Europe sees at least 2 countries default (yes, not just Greece).  Why 2?  Because you have to understand, they have all lent money to each other, so when Greece goes everyone takes a hit to their finances.  I will guess that the 2nd country will be Hungry or Italy.  Could be both, but unlikely.  Interesting how Greece, Ireland, and Portugal have been dropped from the Federal Reserve report.  Last I checked, Greece was paying 400% for a 1 year bond (ie people expected default within 3 months).  In the news you will start to learn about a CDS, which is the acronym for Credit Default Swap.  In short, to cover bets on bonds, some banks bought these CDS's as insurance in case of a sovereign default.  When the default does occur, a lot of money will change hands... a lot!!! Nearly all of the European countries have been downgraded recently, including France which will only continue.  Nothing good will come from Europe this entire year.

Consumer credit has bounced since the downturn, much more than I would have thought, and continues to rise as confidence builds.  This will not last forever, as people and businesses become weary of a downturn (ie read Recession) and will shed debt.  For 2012 I suspect things will flatten with the turn down starting at the end of the year. 

The beauty of statistics is that they are numbers on a piece of paper (or computer screen) and with an eraser or the delete button you can wipe them out.  This is what the National Association of Realtors has done.  Lucky for me it has not impacted prices, but sales for the last 5 years or so have been revised down.  Apparently they overestimated the numbers by about 10% which is quite remarkable to me, since it is someones job to gather this stuff.  Anyway, I was a little low in my call, but not all that far off.  I cannot say this was a good call, but nor can I say it was bad.  Look for the upward trend to continue until the summer as the last of the last hurrah's and then things should start moving again... down.  I honestly have little clue who is buying at this point, you either have to be very optimistic, or perhaps not aware of the extent of the trouble ahead.

And there you have it.  Keep your money safe, be wary of your 401k, have some cash stashed away for safe keeping if you can.  When Europe implodes, it will not take long before it explodes and takes out surrounding regions like China and the USA.  The die are cast, just have to wait to see the final numbers now.  Lets hope I am totally wrong and everything turns out wonderful this year... but I am not counting on it.  Good luck to all!

Patrick