With Europe on the brink of financial collapse, the USA spending itself into perdition, China's manufacturing contracting and the rest of the emerging economies in various stages of expansion and contracting what can we look forward to in 2012?
Here are my predictions for 2012. Some are big, bold and brave and some are a bit obvious. We'll see how I go in a year's time.
The pressure on the banking system is now so great that it's hard to see how they can get through 2012 without some sort of financial ruction. The ECB has recently introduced a scheme in which it will lend money at around 2% to banks that are having trouble raising capital. At the same time as it has made 200 billion Euro available European banks have actually deposited 250 billion Euro with the ECB at a 0.5% rate. What does that tell you? That interbank lending is completely broken and they'd rather get near zero interest rates from the ECB than much higher rates by lending to other banks, which they don't trust. Part of the problem is that banks are not forced to mark assets to market so their balance sheets are completely false. If forced to mark to market a large number of banks would be insolvent.
Prediction 1: A number of large, well known European banks will go belly up in 2012. Their governments will engineer mergers with other banks in the same way that Lehman Bros was.
The infamous PIIGS are in even worse shape now than they were a year ago so the outlook for them is somewhat grim. Whether the technocrats that have been installed in Italy and Greece by the Euro elites can undo the rot remains to be seen. What is clear, though, is that there is a major attempt by European politicians to avoid the situation in which any country leaves, or can leave, the EU. Greece's problems are simply a matter of social and political corruption. People have come to expect an easy ride paid for by the government lavishing wages and entitlements on them that they have not earned. For its part the government has simply borrowed and borrowed - especially once it joined the EU and could borrow at the same rate as Germany - and paid off its constituents and cronies. There are no innocent parties in Greece in that regard. Spain is simply suffering from the excesses of democratic socialism taken to their logical conclusion. Government borrowing in order to pay for a plethora of social programs has really killed their economy. Youth unemployment is something like 50% and their housing market crash makes what happened in the US look like a walk in the park. Italy, on the other hand, can get its house back in order with some reasonably simple financial discipline. I was listening to John Mauldin a few weeks back and he highlighted that in France there are around 35,000 drivers (chauffeurs) for public officials in a population of 65 million. With a few million less people that number in Italy is 160,000 and that if they simply got rid of 75% of them then it would take care of 25% of their deficit. Which is pretty amazing when you think about it.
Prediction 2: No country will leave the EU in 2012.
Given that it's an election year Mr Obama will pull out all stops to get re-elected including doing things that will boost his standing in the short term but hurt the United States subsequently. The Republican field of presidential contenders is probably up to the normal standard of years gone by but because we live in such difficult times people are looking for a strong Reagan-like figure and there simply isn't one there. It's odds on that Mitt Romney will take the nomination and enter what will be one of the most contentious, negative election races in US history.
The US Fed will respond to any quantitative easing by rolling out another round themselves in order to maintain an exchange rate of around 1.3 to the Euro. QE3 could happen in 2012 but it's not a prediction.
Prediction 3: In one of the closest races in US history Mr Obama will be elected to a second term.
The validity of the election result will be questionable given the Democrats' penchant for voter fraud and there may be grounds for appeal in certain electorates.
Prediction 4: Republicans won't have learned to correct the type of fraud that saw Al Franken steal his seat in Minnesota and we'll see repeats in 2012.
Prediction 5: The stock market will end 2012 up 20% so the Dow at around 14,500.
Chinese manufacturing is in a contraction at present due to demand for their products from Europe and the USA falling. Inflation, which has been a problem (and was exported to China from the US), is now coming under control so the government will need to look at ways of keeping their export machine going.
Prediction 6: The Chinese will re-peg the Yuan to the US dollar. This will increase their export competitiveness but will force the US to consider countermeasures in the form of quantitative easing and that will lead to an inflation problem again down the track.
Australia will continue to look like it's doing well while at the same time the foundational strength of our economy is stripped away by the most incompetent government in our history. Fair Work legislation will really bite in 2012, industrial disputes will hit a 10 year high, business investment will slow in the 2nd half due to the dual impacts of the insane Carbon Tax and Mining Tax, and the government debt will top $250B (a staggering number when you consider it was zero in 2007 and is due nearly 100% to ill-disciplined spending). The Reserve Bank will be forced to reduce interest rates in order to keep our dollar from appreciating too much against those other countries that are in the process of money printing. In an environment of rising inflation that could spell trouble for the Australian economy in 2013. All of which makes the next prediction pretty simple.
Prediction 7: The next election will be called early, probably in the last quarter of the year.
With many governments increasingly unable to fund themselves they will turn to the only source of funds left that they can access - pension funds. This will be a disaster, of course, but I expect that governments will force pension funds to invest a percentage of their assets - say 25% - in government bonds. If this happens then make sure you have many, many assets to fund your retirement, as you won't be able to rely on your pension maintaining its purchasing power.
Precious metals will continue their volatility in 2012. Gold is heading up and now is a good time to be buying. The current drop in prices is a result of raising cash to meet margin calls and, while there might be some slight downside still to go, I expect gold to top $2000 by year's end. Silver is a bit more problematic but I think that there's at least 10% in it and maybe more so I'll call $35 and see how I go.
Hope everyone has a terrific 2012. Remember to focus on your health and happiness first, as without that you're nothing!
Update: Prediction 8: Nothing will change in Syria. Assad will not be forced out now or anytime soon.
Update 2: Prediction 9: There's a fair chance that if any other regime is going to fall in the Middle East this year then it'll be Iran.