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More 2012 economic predictions

The U.S. stock market lurched up and down, twice each way, last week, closing at its worst so far this year. Then bad news at the first of this week, boosted the Dow above 13,000 again, merely because the news wasn’t as bad as expected.  Then the market dropped today because two companies were a little worse than expected. An erratic stock market can be one that is about ready to crash … like a lurching car may be running out of gas.

I see these jumps up and down on small bits of news as a market running on fumes of optimism, which it squeezes out of any scrap of good news it can find. Those fumes create nothing more than a surge in the engine, and then a whiff of bad news brings the engine back down. Expect the market to be in for a rough ride, as the major investors have pulled away from market trading so that day traders are responsible for most of the action, and they are far more reactionary, far more speculative.

Stock markets are not the leading economic indicators

Stock market results are the caboose on the economic train. They’re interesting to note in order to see how the nation’s investors choose to gamble their money and where they think the economy is going, but the day traders who come from the ordinary masses obviously don’t know where the economy is going at all. They are not banking on trends. They are reacting to the news of the day.

For example, Goldman Sachs reported Tuesday that its profits were way down. The overly exuberant market took this as good news because analysts had expected profits to be even lower. The only good news for the market in that story was that the bad news wasn’t worse. ( “U.S. Stocks rally: Dow back above 13,000” ) The stock market had already priced in the anticipated bad news, so it went up when the news wasn’t as bad as anticipated.

If the masses had been able to accurately see where even one tiny part of the economy was going — Goldman Sachs — the entire market would not have priced down prior to Goldman’s report as far as it did. If the market was priced based on accurate understandings, it would not have jolted upward just because Goldman  announced Tuesday a huge drop in profits. The absurdity of the market leaping upward on news of huge profit declines in one of Wall Streets biggest and most aggressive firms only shows how wrong the market was in what it anticipated prior to the announcement. The market, in other words, has very poor vision. It is a dumb bear rummaging in a garbage can, excited that the meat today is only half as rotten as yesterday’s.

Or maybe the market is a dumb bull. (With all these ups and downs it’s hard to know what to call it.) In another example yesterday, Spain sold treasuries at interest that was 50% higher than the last auction they had of the same instruments. That, too, opened the gates for a run of the bulls in Tuesday’s U.S. stock market. The market received a 50% spike in interest rates on Spanish debt as bullish news. In fact, some market experts spun this as “interest rates fell compared to the day before,” but that was comparing apples to oranges on types of security. Compared to what these same securities sold for at their last auction, they were up 54%.

I don’t think anyone is arguing or can argue that the Spanish bad news was also priced into the market like those company reports mentioned above. That couldn’t be. On Monday, the U.S. stock market was mixed right after Spain had its worst auction up to that point in time. In other words, the market did not drop much after the first round of bad news, so there’s no room to argue that the market had priced in any anticipation of more bad news by Tuesday. The market had hardly changed since the bad news from Spain started coming in.

What happened was that investors were afraid this Spanish auction was going to be as pricy as the one on Monday. When it wasn’t as bad on Monday, the day traders got a hit of adrenalin and bid the market up in relief. They were not correcting a market that had priced in more bad news than expected. They were merely reacting on a hit of adrenalin.

The actual event may not have been as bad as expected, but it wasn’t priced in. Rather, investors looked only at the one bit of good news in this story and colored the rest to suit their hopes. They saw that Spain experienced stronger demand than expected for its debt auction in that it sold more notes than it intended to. I think this is mass hysteria of the ecstatic kind. No one should have been surprised that adding 50% to the interest you’ve been paying on past auctions of these securities would increase demand. In my view, a 50% hike from one auction to the next is terrible news for Spain!
So ignore the market. It’s a “push-me-pull-you” kind of beast that has the head of a bear on one end and the head of a bull on the other. If you’re wondering why investors would be so much more excited about the increase in demand for Spanish bonds than cautioned by the great heave in interest, so was I. I can only think it is simply that investors want to be excited. They are listening selectively for any scrap of good news and tuning out the rest. So, again, the good news for some was only that the bed news was not as bad as they had feared. There was no genuinely good news.
Tuesday provided even a third example of this, which I can use as touchstone for my statement above … to see if it is golden: The housing market reported that construction starts on new homes were substantially down, going from February to March, yet Tuesday’s stock market went up after hearing that because the news included a silver lining: permits for future construction were up by almost as much as housing starts were down.
Now, to a clear-eyed soul like me, that is entirely more bad new. It reads like this: “Permits for new home construction were not up by enough to compensate in the future for the significant drop in new-home construction now.” If every one of those March permits result in new construction this month, it will not be enough to offset the drop in new-home construction just reported for last month.
Moreover, I turn my glass eye (the one that does not choose to see based on what it wants to see because it is not alive with feelings) over to the books from the period just reported and note that new home construction jumped up when interest rates hit their lowest point since the Great Depression. A mere 5% hike in new home starts when interest rates across all sectors of housing finance roughly match an all-time record low is not very meaningful. That bump will only last as long as the deep bottom on these interest rates. In fact, most people who are going to build probably jumped on cheap interest as soon as it hit that record mark. The jump of people in caused interest rates to sharply spike back upward. When rates comes back down again, there will not be as many people who have been waiting to jump in.
What stock market experts and other economists reported as a good sign of stabilization in the housing market and sign of “recovery,” I see as nothing more than a glitch that happened because of a once-in-a-lifetime event in the financial markets. I don’t suppose that low valley in interest rates will remain a once-in-lifetime anomally, however, because the Great Recession is likely to bring rates down like that again. It is the true nature of an actual economic depression, which this is, that the economy jolts up and down with poor employment figures while interest rates continue for years pressed against the zero mark. In fact, I’m banking on interest dropping back aground there soon by waiting a little to take out my remodel loan, rather than getting in on this week’s cheap rates.

© Ian Grant

So, what is the gold standard for future economic predictions?

The above market confusion is why you need to look someplace like The Great Recession Blog to figure out where the economy is headed. If you follow the pack from Tuesday’s market, you’re following the blind masses because they’re listening to the same experts who never saw this recession coming! As I’ve said before, the market is only a gauge of where people think other people are going to put their money from one day to the next. My definition of the stock market these days is a gathering of lemmings speculating on the behavior of all the other lemmings.

From an economic standpoint, not a market standpoint, Tuesday’s news was nothing but bad news. You may want to note that this market volatility comes after a three-month rally that most economists and reporters were saying was a strong indicator of economic recovery. Those same people said the same thing last winter and spring, and it all fizzled out then … as it will now. It’s the same pattern. The bulls lead the year with optimism, then the year proves to have its own tough hurdles and the vapid optimism fades away.

That’s why you didn’t hear me sounding concerned that my economic predictions for 2012 were going to be wrong while we had three months of the stock market going up, jobs improving, bank profits looking good, industrial economic indicators looking up, etc. I predicted to friends last spring, prior to starting this blog, that all of the euphoria back then over “economic recovery,” as if it was happening, was froth that would settle by late spring and turn into a miry swamp by the end of summer. It certainly did, and I’m predicting the same thing this year.

I counseled friends last spring to buy gold while it was hitting around $400 an ounce, which seemed high to some at the time. When it hit a thousand, I cautioned that it might be good to back off gold a bit, but that it would go up a lot more by summer’s end. Gold settled back to about $800 from its initial shock of breaking the $1,000 barrier and then continued upward.

I suggested friends buy gold because I was absolutely certain China was buying it, not just because I thought that’s where the money would flee as the economy got rougher (though I was sure that the gold bugs would continue to swarm to gold, too). If any friends listened, they surely did far better on gold last year than in the stock market. (I don’t give specific investment advice on this blog, as I am not licensed to do so. That was just a general statement of what I thought would happen, and it did.)

My point is that most of the press and most of the stock market experts were wiping their brows and talking about the early spring economic thaw of 2011 as good news — a “sign of recovery.” Experts on every news channel actually thought we were finally on our way out of this mess. I, on the other hand, ran against the pack, as I often find myself doing and continued to say the stock market was going to plunge down by the end of summer, and that happened, too, exactly on time. I’m not always that precise on my timing, but I’ve been just about spot-on with the eventuality of everything I’ve predicted, and you can be, too.

When I said gold was going to skyrocket because I was certain China was buying quietly buying it and moving out of U.S. dollars, news came out near the end of the year that China and Russia had become big buyers of precious metals as they moved their sovereign treasures out of U.S. holdings.

When I mentioned the gold standard for making economic predictions, however, I was not talking about my predictions for the price of gold last year. What I meant was what economic indicators does one use to know where the economy is going that are as good as miner’s touchstone for assaying whether something is a gold nugget or fool’s gold.

Key economic indicators I look at when I make predictions

I held my position, in opposition to everything I was reading in the press during the first quarter of 2012, because I’m not basing my predictions on the so called “leading economic indicators,” like new home purchases and new home construction starts or how long the stock market has been climbing or whether jobs have been going up or down for five weeks. Many of those things are more reactionary than predictive. They tell me where things ARE, but not where things are going. I put such headlines in the sidebar more as a way of reporting how events are moving in the directions I predicted earlier than as something readers should grab ahold of for signs on where we’re going. I also put things in the sidebar that reflect what everyone else is thinking so that I can comment on that in my recap at the end of the week.

In other words, I do not latch on to each new glimmer of hope, such as a flash in new home construction. The best economic indicators in a flacid economy come from seeing the major rocks in the river ahead or impending landslides that have the power to change the course of rivers. I’m looking longterm and looking at fundamentals — cracks in the land that show it is ready to slide before it does.

Let me give a quick parable: When I moved to Seattle long ago, I was walking along Seattle’s Magnolia Bluff. I looked down and saw houses built along a road at the bottom. After surveying the situation for a few minutes, I said to the person walking with me, “Within five years, those houses are going to be pushed into the sea below them.” In almost exactly five years, the houses were, indeed, pushed into the ocean or buried. The timing may have been half luck, but the certainty of their destruction had nothing to do with luck.

When those living down there were so happy to be living with their wonderful ocean view ahead of them (like the rosy view some have of “economic recovery”), how could I predict such certain disaster for them? Simple: fundamentals. This was not a rock cliff. The cliff was made entirely of dirt, sand and clay and was about eighty feet high. Dirt, sand, and clay don’t like to remain vertical. That was fact one.

It was further obvious to me that the shelf the homes were built on was nothing more than the cliff of years before that had crashed down into the ocean, creating a ledge where its rubble had piled up. Fact two. Someone had built a road on top of this ridge of rubble and developed it. In more recent years, the bottom of the cliff was trickling out in dirt clods onto the road at its bottom and people had shored up the bottom with railroad ties to keep the dirt from dirtying their street. (The bottom was falling out) That clearly indicated the cliff was moving bit by bit in the direction of the homes that were all built on the other side of the street. Fact three.

Moreover, the ground on top of the cliff where I stood (on a dry summer when the ground was stable) was sloping down toward the houses — another possible indication that the cliff was moving their the cliff was moving their way. In my view, all it would take was a massive rain or an earthquake to get the cliff moving faster, and that is exactly what happened five years later. Several bluffs in Seattle collapsed that year during a days of heavy rain.

So, the “investors” that the movers and shakers of the city thought were smart investors were hosting parties of other smart investors in their multi-million dollar homes along the waterfront, but how smart were they when they could not even see that the cliff towering over them was leaning their way and was made of nothing but dirt? They were only seeing the view in the other direction that they wanted to see. It turned out there was a far bigger mover and shaker than the big-wigs who were enjoying the view with them during their summer barbecues.

So, from a basis of looking at fundamental facts and movements, rather than just lovely ocean views, I offer the following 2012 economic predictions in addition to those made earlier (or as refinements to but not revisions or reversals of anything I’ve said earlier):

The China syndrome in 2012

What does it mean when reports came in Tuesday that China has increased its purchase of U.S. treasuries for the first period in months? Does it mean I was wrong a year ago that China was moving away from U.S. treasuries for good? (“China Adds U.S. Treasuries for Second Month on Reserve Growth“) In my opinion it means China is very smart. China is moving its money back into the U.S. for the short term, but not because it has a rekindled long-term interest to stay invested in dollars. It is dying to get out of dollars and to see the yuan become the international currency or see some other truly international currency created. For now, however, it sees dollar-based U.S. treasuries as the last safe-haven left.

That reinforces everything I believe about where Europe is headed. China is moving away from European investments. It’s not selling off its gold and converting back to dollars. Rather, it has so much surplus to invest that it cannot buy gold fast enough because the precious metals market is too small. It would rapidly drive up its own prices for gold if it invested all of its surplus there. (Just as it did last year.) In that case, it could become a victim of its own gold bubble once it stopped buying, as the prices would plunge when its massive buying ended. So, it sucks up what gold and other precious metals it can, like a dredge sucking up the riverbed nuggets. Yet, it is trying not to drive the cost of gold way up because it wants to buy much more of it before the cost rises. In the meantime, it invests its excess in sovereign debt funds. It sees what is happening in Europe as worse than what is happening in the U.S., so it has switched from European treasuries to U.S. treasuries.

Many are speculating about whether China will have a hard landing. My first prediction here today is that China will have a softer landing than the rest of the world’s major nations. It will be a “landing,” as in a settling. China’s not going to keep rising like it has been, but some reporters are failing to note that the decline that China reported recently was intentional. China has been trying for some time to slow its economy down a little to get runaway inflation and the China housing bubble back in check.

China’s advantages are slowly falling away as labor costs increase, and its market is going to be increasingly diminished by the deepening recession in Europe. So, it is not invulnerable to decline. Still, it has a huge fluffy bed of cash to land on. It enjoys the enormous luxury of stimulating its own economy without taking on any debt at all.

The exception that would result in a hard landing would be if economic settling raised a peasant revolt, but there is not a lot of evidence that such an event is brewing … or if power clashes among the elite erupted into some kind of civil war. Barring some internal conflict like that, China should settle easily into the mire of the Great Recession and will continue to be the nation all others look to for financing and for bailouts … at least for this year and probably the next … maybe all the way to the distant end of this convoluted economic depression.

Additional U.S. economic predictions for 2012

My second prognostication to add to other 2012 economic predictions I’ve made earlier this year, will go here because it is related: The U.S. will not see its interest rates rise on the national debt in any significant way this year, even when its credit rating gets downgraded by one or two of the big-three credit-rating agencies. China and Europe combined insure the U.S. against this. The euro crisis is a windfall for the U.S. in terms of the cost of its credit, though the fall of Europe will hurt the U.S. in other ways. The U.S., in spite of how bad its situation is, is likely to remain the safest haven that is capable of selling huge amounts of notes and bonds, and China needs a huge seller of bonds to soak up its cash. That support from China will, however, ebb in time as China’s economy settles and it has less cash to bank in foreign markets. (So, longterm, the U.S. is in a boatload of trouble, but not this year … in terms of the cost of its debt.)

These first two predictions are, in my view, the safest and simplest predictions to make. I’m sure almost all readers will find them safe bets, too. But I thought I should wind up my pitching arm before letting the ball go.

The U.S. has some other problems that are coming home to roost this summer besides European worries that will hit it (which I get to below). First, another round of graduates will add to the TRILLION-dollar student loan bubble that is about to burst. With one third of those loans already in default, as reported earlier, the problem only gets worse when another round of graduates come out of college to find no jobs. (That’s not a prediction, just a known fact.) How much more pressure can the student-loan bubble hold? Many of the loans in default are guaranteed by states and the U.S. government, which will have to start making good on these loans. The defaults spread across the age spectrum and are not just a problem for the young. This will certainly add to the strain the U.S. is under.

Then the Volker Rule will hit this summer, too, which seriously changes how Wall Street can place its major bets. I have no idea at present what this will do, but it will be a game changer. In the long term, I think it is the right thing, but I’m saying that it will create big adjustments that will hurt the kind of economic activity Wall Street is used to. The banks are moving to make those adjustments even now, so it may not hit like an impact, but it is an additional pressure that is coming at a time when student loans and Europe will also be adding pressure. Thus, the early economic spring of 2012 is going to grind into the dog days of summer for the U.S.. My third prediction in this followup to earlier ones. Expect a long, dry and dusty summer economically.

While I cannot predict the behavior of individual people like Ben Bernanke and his cohorts, I strongly suspect there will be another round of quantitative easing in the summer of 2012 to ease the long hot ride with some liquidity. The Obama administration will certainly want to see it, and the Fed is not immune to back-scene political persuasion.

2012 predictions for Europe and the euro zone

Prediction four: The heat of summer will look like the heat of hell for Europe. Money will flee Europe over the course of this year, including European money. (Hence the windfall mentioned above for the U.S.) Yesterday’s higher-than-expected demand for Spanish bonds came almost entirely from Spanish banks. Foreign investors avoided touching Spanish debt like it was the flesh of a corpse. Spain’s economy is moribund, and the size of that economy is many times the size of Greece’s. Moreover, Spanish people have far greater personal debt than most people in most nations, meaning its banks are at high risk because their populace has such a heavy-leaning debt overhang. Spain is suffering through a four-year collapse of its housing bubble, but prices have only come down about half what they need to in order to erase the earlier bubble prices and come back to reality. So, the beleaguered banks have more bad news to come. Meanwhile the Spanish populace is convulsing in the streets of Barcelona over austerity that new budget changes will make even worse, and Spain’s unemployment is nearly 25%, which will become higher with austerity measures. Simply put, Spain is going down because it has no capacity to save itself.

Each time Spain’s interest rate goes up on its debt, the likelihood of the interest rate going up again increases. Somewhere shortly above 6%, I think from what I’ve seen that national-debt interest rates twist themselves into an upward feedback loop unless a nation receives massive external intervention. (I.e., high interest piles on as more debt, which lowers credit ratings, which usually assures even higher interest in the next round.) Now, Spain may not go entirely down and out of the euro this year, but it will take all of the remaining capacity of Europe to provide that intervention in order to save Spain from utter economic collapse.

So, prediction five follows from number four because it is its fraternal twin: Spain will consume the last of Europe’s ability to save the euro. The basis of that is simple: it took half a year of intense wrangling for Europe to manage a temporary fix for Greece, and that problem was small by comparison to Spain. It was all European leaders could do to get their heads around managing the Greek debt crisis, while the rest of the world wondered if they would succeed. Their final solution still required lenders take a 70% write-down on their investments. Many of those creditors hold Spanish debt, too, so their capacity to take another big cut has already been greatly reduced by Greece’s controlled default. In other words, Spain will land hard, and the euro zone will reach the end of its euro-rope with it.

Europe’s banks, which floundered along the bottom with quantitative easing are beached now that the big money stimulus is gone. They can’t absorb much more loss. That leads to my sixth prediction in this followup: Europe will engage in more quantitative easing. Q.E. seems to be all the world’s politicians know, and once markets get a snort of this crack, they demand more the second the economic high wears off. Q.E. is certainly the only tool European leaders have found in their toolbox. The heat on Europe’s leaders will be so intense this summer that I think more Q.E. is inevitable in Europe.

In my opinion Q.E. creates a worse set of problems down the road, but it buys more time for the present dinosaur economy. The fact that it solves nothing can be seen by looking at each time it has been used in the U.S. and Europe. In the end, the Great Recession is still there, even bigger than it was before. Q.E. feeds the snake so that its mouth is full and harmless for the moment, but the snake gets bigger because of it. If none of Q.E. was used for bank bailouts, but only for creating jobs with projects that need to be done anyway, it might work (because, at least, the future gets something for its money, and unemployment is resolved for the present); but that is clearly not what is happening.

The European economy is dead in the water already, and it has several national housing bubbles that are ready to burst. At least, two of the nations in the euro zone are solidly in recession by everyone’s accounts. All others are either in and don’t know it yet or are, at best, hovering on the edge. The austerity being forced on nations that have no way of managing their debt without making the drastic cuts that creditors demand means certain economic atrophy in the months ahead.

Europe is in for a world of hurt in 2012 that will set a bleak stage for 2013.

gold coins in a box

Getting back to that gold standard

This time I mean actual gold. Ever so briefly, I will say, as prediction seven, that things look good for gold. Gold has settled down for a while, as I thought it would after hitting a formidable psychological barrier of almost $2,000 per ounce. I suggested it would do the same thing when it broke $1,000 and settled to around $800 for a short period; but gold is bound to test the $2,000 barrier again. China and Russian are already banking on it. The goldbugs of this world are banking on it. Some of that money fleeing Europe is also going to be looking for other safe havens than just the U.S., and gold has traditionally been the safe-haven of last resort. I think it will be a rough ride for gold, but there is no reason for gold on average to go lower than it is now and many forces on the horizon to push it up. I think it is bottoming out right now as people reaped profits from earlier purchases to let things settle from the $2,000 mental barrier.

The Iranium Reaction in 2012

I’ve already written a lot about Iran this year, so I won’t repeat what I’ve said here, except to summarize: You can count on the Iranian talks not going anywhere, while at the same time counting on Iran to try to make it look like they might be going somewhere. The U.S. will seize what appears to be progress and hold off on any military strike against Iran on its part if it can until after elections. It is anybody’s guess as to whether Israel will court U.S. affection long enough to hold off until the November elections; but U.S. assurance that it WILL help is a lot of incentive to bite their lips and wait. War is definitely on the horizon because Iran wants war in the Middle East, especially with Israel involved. It’s leaders are guided by religious delusions of grandeur. That means sometime soon — most likely 2012 — the price of oil is going up, adding further pressure against all the economies of the world.

Mayan 2012 prophecies and Icelandic volcanoes

The perfect storm is brewing all around the world.

Ask yourself this: What happens if not all but most of what I’ve predicted above happens in a year when millions of people think the Mayan calendar has predicted the end of the world or end of an age? Have we not clearly seen that the stock market is based far more on feelings and speculation about what others will do than on actual business values or understanding of economic forces? There are currently half a million monthly searches on Google for “Mayan calendar” and terms like “Mayan prediction.” There are four-million searches each month for “end of the world.” Half a million of those have “2012” in the search phrase.

Here is a plausible scenario: Either war does break out later this year with Iran or that volcano erupts in Iceland that is ten times more powerful than the one that shut down flights in europe. Moreover, the el-nino summer brings a lot more global-warming disasters like the huge upsurge in tornadoes we’ve seen in the U.S. due to the unseasonal heat. A handlful of these things happens while the European economy is clearly in the greatest drought its been in since The Great Depression and the U.S. economy is sweltering under similar heat. So the lovely early spring turns into a sweltering summer that feels like it will never end. What kind amplifying effect in the fall will the mythical year 2012 have in the minds of the masses who are experiencing all of this?

That’s where the stock markets of the world could actually have meaning for our economic future in what they do. They could crash under the strain of all this, which would lay the economy out flat. Anyone can say they “could”, so I’m not marking a stock market crash an actual prediction, but 2012 has the markings of an economic apocalypse that will create a new world for us to live in by 2013. With so many massive cracks in the landscape, my last prediction in this post is a little shy of an economic apocalypse in 2012: Some combination of the above predictions will give way in a landslide by year end to make the beginning of 2013 look a lot worse than the beginning of 2012.

Twenty-twelve will not be the year when the global economy turns the corner and begins to finally recover, in spite of the many economists who have gleefully thought through the first four months of this year that it is recovering and who thought that last spring, too. They have gleaned every glimmer of hope they can to hold onto that hope. Instead, this is the year when all hope for reviving the old economy begins to crack and fall away. The next president of the United States, be he the same one we already have or another, walks onto a stage much different than we’ve seen in a very long time.

Does that scare me? Does it cause me to dig a big hole in the ground, fill it with food, and put a lid over the top? Not in the least. I have faith that God will see me through anything I need to go through because he has in the past. I’ve lived in desert circumstances in my life and know that I can find water and good places for repose even in life’s deserts. I believe I see clearly what many others simply do not want to see because I’m willing to see and accept reality as it comes. I’m willing to do that because I believe God can even use hardship for my good … to strengthen my fiber and strengthen my community by causing us to pull together. I believe one can have a good life even in times of hardship.

Please don’t misunderstand me as saying the above predictions are from God. They are not. They are just what I see with my normal human eyes because I’m not afraid to see the bad. You can see such things coming as readily with your eyes. Nor do I lean toward seeing the bad like those who have been saying for thirty years that we should all dig bunkers into our backyards. Many people, however, filter the news for the hope that they want and tune out the rest. I may be less popular than the economic gurus who scratch people’s ears with what they want to believe, but, in the end, I think the predictions I’ve laid out will stand the test of time. They are not mystical in origin. I just see the dust storm that is just out of site ahead because I look up and read the signs that are everywhere … the dry, hot breeze that is picking up, the tiny bit of dust already in my eyes, and the amber sky.

 

 

Just for fun: