sikiliza (< 20)

My Predictions for 2012

December 28, 2011 – Comments (3)

The coming election year portends nothing but gloom with forecasts of a respite from losses for real estate investors, continued punishment for overly optimistic hedge fund managers (Paulson comes to mind here) and increased opportunities for the teachers’ pension funds to continue being the target for ill-conceived IPOs.  Most of the problems of 2011 remain unresolved and Europe still does not seem to have quite gotten over its issues even given the recent bailout offered by the ECB.

That said, I think that few things will change in the coming year. For starters, the clown car that is the Republican Nomination race continues to offer Obama a very fair chance of getting reelected. Unless a credible, smart and human front-runner emerges, we will see yet another repeat of the circus that was the 2008 republican bid.

On the unemployment front, the official unemployment rate is now at 8.6 percent with a labor participation rate of about 62 percent. With most major banks announcing layoffs, Sears closing down stores and the USPS getting ready to offload a good number of its employees, I expect that unemployment will get worse, not better. What’s more, if employment does indeed pick up for some miraculous reason, then the labor participation rate would be expected to increase by a much bigger factor, offsetting any reduction in the unemployment numbers. No, we are not out of the woods yet and 9% may be the new 4.5%.

With Real Estate/housing, the banks have so far managed to avoid a complete meltdown by holding on to shadow inventory and keeping foreclosed homes out of the markets. It’s likely that the banks will continue to offload these homes in bulk, quietly. Housing prices may see a slight increase and foreclosures will begin to taper off with construction beginning to peek from under the covers. For investors looking for opportunities, homeowners should continue to remodel hence Lowe’s may be worth looking into.

Congress, the bane of all mankind is set to make a nuisance of itself right from the start of the year with the debt ceiling negotiations. With the current administration looking to increase debt levels by about 1.3Trillion in an election year, what better way to cause a ruckus? One statistic to watch will be the Debt/GDP level, which is expected to go to 1.15, at least 10-15% over current levels. This does not bode well for the medium term unless the government, which has grown to be the nation’s largest employer, curtails spending.

Most analysts expect Commodity Prices to move sideways in 2012. Precious metals will outperform other asset classes although the bubble created by a flight to safety in gold in the last few years might experience some deflation in the first half of 2012. That said gold will certainly touch $2000 an ounce once everything settles. Oil will certainly rise and I expect $120-130 oil by June 2012 if not earlier. Coffee, corn, sugar and cotton will see declines due to a combination of oversupply in some cases and decreased demand in others [Courtesy: Morgan Stanley Commodities Report]

Financial crimes will continue to get bigger and uglier. The recent collapse of MF Global seems to be a precursor for the danger still lurking in the financial shadows. I expect we will see at least 3 more collapses of similar magnitude in 2012 as the chickens come home to roost and the culprits run out of places to hide and funds to keep their schemes running. Meanwhile the architects of the mortgage crisis will continue to remain enscounced in their sweet nests in the Hamptons.

Europe, that mélange of 36 hour work weeks, unchecked spending and borrowing, banks teetering on the edge of collapse, enterprising Greeks, bickering prime ministers, Icelandic bankers and David Cameron will continue to be a sore on the rest of the globe. Well, look to Italy to pull another trick out of its hat and for France to finally get its comeuppance. The likes of the Scandinavian countries and Switzerland will still offer safe havens for those looking to invest in Europe.

This leads us to Global GDP which despite the continued strength in Asia will decline as Europe takes another bath while the US chugs along slow enough to keep upright but only just. Brazil will continue its march up the GDP ranking having only recently surpassed the UK to become the world’s sixth largest economy. I wouldn’t be too worried about China, which in 2008 avoided the effects of the financial crisis by injecting a rescue plan close to 12% of its GDP. With its large reserves, the only downside will be a narrowing in the country’s trade surplus.

Finally closer to home, expect more counties and municipalities to file bankruptcies a la Harrisburg and Jefferson Counties. This is a slower meltdown but with the federal government continuing to be overleveraged, there is nowhere to hide and the next bankruptcy will be coming to a town close to you, especially if you live on Rhode Island.

A prosperous 2012 to you all, nonetheless.