Wednesday, December 21, 2011

Predictions for 2012 From Economic Doom or Boom

The witches brew created in 2011 will poison the U.S. economy before the end of the 2nd quarter in 2012. The trillion dollar U.S. deficit will not provide enough stimulus to outweigh the impact of:
  • worsening of the debt crisis is Europe
  • contagion effect from Europe infecting the U.S. economy
  • the end of cheap oil
  • the gridlock in Congress and the complacency about the trillion dollar deficit
  • budget cutting in the U.S. at the state and municipal level
  • underfunded pension plans with income projections from fantasy island 
  • baby boomers retiring and selling off acquired assets
The efforts of the EU to solve the debt crisis will fall apart in the face of the huge amount of debt that must be refunded in February. The European debt crisis cannot be solved without restoring growth to the EU  economies. The austerity measures being proposed will shrink EU economies and lead to social unrest and labor strife. The downward spiral of the Greek economy may be the spark that sets off a firestorm of bank runs or sovereign debt auction failures.

In reading the rosy predictions for 2012 from most economists, it seems as if they are oblivious to the fact that events in Europe often move the DJIA by over 100 points in a day. It is mind boggling that they are so blind to the negative impact that Europe will have on all the world's developed economies, including the U.S., with so much evidence being offered by the daily volatility of the U.S. stock market.

The weak earnings reports from Oracle, Intel, and Texas Instruments are just the tip of the iceberg. When fourth quarter results begin coming out in January, they will be far worse than expected.

The decline in the U.S. stock market will start in January and pick up momentum in February and again in April. The first quarter will be a disaster. The weak first quarter earnings reports will drive the S & P 500 down to 900 or below by May, 2012. The tech heavy Nasdaq will decline even more.

The Euro will decline versus the dollar and broach the $1.20 level.

The Yen will decline against the dollar and be within 10% of parity (90 yen to a dollar) by the end of 2012.

Unknowns or Too Challenging to Predict

Interest Rates - The demand for U.S. Treasury bonds at historically low interest rates will slacken at some point in the future. However, it is impossible to determine when and what events will shake investors confidence in U.S. Treasury issued debt. When it does happen (2013 or 2014?), the upward spiral in interest rates may occur at frightening speed.

Price of Oil - The declining production from the established easy to pump oil wells that are wearing out may lead to supply shortages. However, the declining demand resulting from a world wide recession could lead to falling prices. The end of cheap oil is going to be a huge problem before the end of the decade. New sources of oil including fracking and tar sands are expensive and energy intensive and may not grow fast enough to compensate for the declines in established sources of production.

U.S. Dollar - The strength of the dollar in the face of huge deficits and trade imbalances demonstrates how risky the world's other currencies are considered. With the economies in Europe, Japan, and China all declining, the dollar may remain strong in 2012.

Gold - My perception is that gold will breach $2,000 in 2012, but gold is a risky investment as a severe recession or depression may lead to so much forced liquidation of the shiny metal that it holds down the price.

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