During the first week of 2012 I made several predictions about stuff financial bloggers are supposed to know about. Some of it I got right, a lot of it I didn’t, but overall I think I probably did better than most mutual fund managers out there! You can read the original article and some interesting predictions from others in the comment section here. Looking back, there are always so many thing that appear commonsense in hindsight, but during the first week of January last year, facts like Rick Perry and Herman Cain would each lead the Republican primaries are some point, or that the Euro crisis would continue to muddle through were very difficult to see. Anyway, don’t be too harsh on my results, I figure if most pundits out there can be wrong the majority of the time I should get a little slack just by holding myself publicly accountable right?
1) Volatility Stays High
With more and more investors creating illogical market momentum that is almost completely based on headlines and overreaction to certain metrics, the market will continue to be volatile. The allowance of high-volume trading (ridiculous) means that these irrational momentum shifts will continue to be exaggerated, which of course creates the feedback cycles we seen in 2011. The 24/7 news media then sensationalizes everything and the end result is that everyone believes that the sky is falling, or we are in the middle of the next bull rally.
Result: Mostly Wrong
Although there has been some volatility, the S&P volatility index (VIX) began the year at roughly $23 and is now at roughly $17. Aside from a brief spike up to $26 in June, volatility hasn’t been too crazy this year. On the bright side, this whole fiscal cliff thing has all the makings a great media storm that could prove me half right before the year is out – yay!
2) Western Recovery Sputters Along
The funny thing is that even though the day-to-day volatility will be high, the overall performance of the Western World will continue to be mediocre at best. The Eurozone will definitely be a drag on the consumer market over the next few years, and while the USA is looking up, it can’t shoulder the consumer load alone. As we continue to come to grips with our addiction to debt, and stabilize our brutal demographic problems, I think the forecast for the West will be pretty much the same over the next 3 years – mediocre 2-3% growth.
Result – Mostly Right
If anything my prediction was slightly rosy. Depending on whose charts and predictions you look at, 2-3% growth would be considered extremely optimistic, if within the realm of possibility these days. Things continue to look up in the USA, and their housing market is now solidly on the rebound. However, things in Europe, along with political gridlock in the USA, and a slowing China make 2% growth targets seem great, but only when compared to the recessions we just emerged from.
3) Germany Bails Out the Euro Zone – Recessions Narrowly Avoided
Germany will bail out the Eurozone, not because it wants to from some moral interest (although there is some merit to the idea that many Germans still carry around guilt from their history), but rather because it is in their own self-interest. The German economy is heavily based on manufacturing. Right now, the Euro is being severely depressed because of all the other countries dragging it down. This means that Germany can sell all of its products at a reduced rate (similar to what China is doing with the Yen, and what Canada used to do with the CAD relative to the US Dollar). It also means that the countries that are geographically closest to it can afford their goods. If Greece goes off of the Euro for example, no one in Greece could afford to buy German goods (still priced in Euros) and the Euro would get a little bit stronger, making it harder to sell their goods around the world. A recession is technically defined as two consecutive quarters of negative growth. The Eurozone as a whole might approach this infamous title (Greece certainly will realize it), but it will ultimately avoid it. As a side note, many people in Germany will score political points criticizing the use of German tax dollars to bail out its Eurozone peeps (I can sympathize), even though they know it’s the best thing for the long-term. The membership for extremist groups will continue to grow within Germany and within much of the Eurozone (youth unemployment rates can be scary things… just ask an African dictator).
Result – Mostly Right
Depending on whose data you’re using the Eurozone as a whole basically finished at 0 growth for the year. Some places have two consecutive quarters of -.10% or -.20% growth which would technically constitution a recession. That being said, the Germans, French, and the rest of the infamous Euro Troika have effectively kept bailing out the Eurozone. Despite Greece’s fall, and debt-related scares in other nations, the Euro is still together. As a side note, Google “Greece Golden Dawn” for more information on how formerly “extremist” groups are now looking more and more mainstream and popular in several European countries.
4) China’s Foot Comes Off the Gas Pedal
China will continue to pull off rates of growth that make us Westerners jealous, they just won’t be record breaking. I get a little more nervous every time I read more information on China’s housing market and the speculation going on there. At the same time, I believe that the ability of their central government to dictate policy without question is a huge advantage (look at the progress they have made in the fields of infrastructure and renewable resources). Europe will continue to limit their growth ceiling. Look for 7.5-8% growth in 2012.
Result – Correct
Every statistic I’ve read puts the growth rate in the range I’ve predicted (even though it dropped to 7.4% for the last quarter). I love reading the hugely contrary reports that come out of China on a weekly basis. Because of how their government operates the economic numbers are at best inaccurate and at worst specifically manipulative, so take all of this with a grain of salt.
5) Currency Wars Continue
Speaking of China… the race to the bottom of the currency pot will continue. China is bound and determined to give themselves a competitive advantage relative to that of the USA’s manufacturing sector and it appears they will devalue their currency as much as they need to in order to keep it (no matter how much US officials complain). The thing is, I don’t believe the USA has a lot to lose by following suit. By printing more money, Barrack and the Fed can say they are doing their best to help the economy, they drive the dollar lower (great for fixing that pesky trade imbalance) and the debt becomes more manageable since inflation will help take care of it. The only problem is…
Result – Mostly Wrong
Despite all the tough talk and rhetoric in the elections of both the USA and China, the Chinese have actually allowed the Yen to appreciate a substantial amount this year. Although apparently not enough for Mr. Romney.
6) Inflation Will Rise
So with countries printing money left and right, and a growing global middle class putting more pressure on food production, I think we’re in for some good ole inflation. I’m guessing 3.5%.
Result – Wrong
As Sam pointed out when this column was first written, who even follows this inflation thing anymore? Apparently inflation is a thing of the past. The BoC left their overnight rate unchanged, and almost any measure has inflation below 2% in most of the Western World. The gold bugs tell me the train is still coming down the tracks, but I’m not so sure anymore.
7) The S&P 500 Finishes Up 3-4% After Late Rally
So after all is said and done, and many news people have declared that both the end is near, and the new rally was going to make us all rich, the US will merely do ok. While 2011 seen very modest gains (essentially even) I believe the USA will do a little better in the coming year. Housing costs will see slight improvement in some areas (market saturation by foreclosures will continue to be a problem in other locations), unemployment numbers will shrink somewhat, and businesses will finally begin to spend some of the money they are sitting on. There is still lots of sideways movement and deleveraging to go before the boom times come back, but hopefully the worse is behind us.
Result – Mostly Wrong
The stock market did quite well (over 12% as of writing) in a year where all the experts including yours truly felt that it would be a little more of a struggle – big surprise. As soon as everyone starts predicting the good times will be here forever just remember to run for the hills! The only reason this answer isn’t completely wrong is that the vaunted fiscal cliff might yet take the shiny off of some of those gains in 2012.
8) Record Bonuses For Financial Sector Continue Against All Logic
Bailed out companies that do very little to add to the standard of living of anyone will continue to give out hundreds of millions of dollars in bonuses every year. I’m a capitalist at heart, but this just kills me. I know it’s the free market, but this seems like a way bigger deal to me than taxing “the 1%” who have added value to society. While some finance people add true value through venture capitalism and other pieces of economical infrastructure, all of this financial engineering (and the scale of it) is absolutely ridiculous.
Result – Was this one ever really in doubt? Record profits in the Canadian banking sector prove how effective an oligopoly can be given free rein!
1) Canada and Australia Stay Hot
Canada continues to have a lot going for it eh! Our current political environment is nice and efficient relative to our American cousins, our commodity-driven economy looks to be in fine shape. The banking system is on top of the world because of straight forward regulations, and we have that whole health care thing figured out (well.. kind of). Oh, and our debt is fairly manageable and it isn’t owned by our natural rival… so there’s that. Our Commonwealth buddies down under have much the same outlook and will continue to ride the Chinese wave.
Result – Half Right
While decreasing energy prices have cooled Canada’s economy a little bit (the TSX was slightly up on the year at the time of writing), Australia’s overall economy continued to thrive relative to the rest of the Western World. Commodities and a growing business partner to buy them from you seems to be the order of the day right now. If “saying hot” doesn’t really describe these two economies, it can certainly be said that these old colonial cousins continue to be better off than most.
2) Mitt Romney Is the GOP Presidential Candidate
The only GOP candidate that doesn’t send most political moderates in the USA screaming in the other direction is Mitt Romney. The funny thing is, I honestly believe he and Obama have way more in common on a values level than either would like to admit (this should be a good thing, but boo! for polarization). Romney will likely have a hard time looking himself in the mirror some days as he will have to bash his own healthcare plan (which was a great idea) and take more extreme right wing stances than he would have ever imagined. The GOP doesn’t like him, but their vitriol for Obama will send those evangelicals into the arms of their Mormon Savior. Unless…
Result – I know my USA Politics
What can I say? I had a crystal ball on this one…
3) Ron Paul Makes Noise About A 3rd Party Candidacy – But That’s It
This will likely be the last time we see Ron Paul on the big stage, which is too bad because I love his commitment to Libertarian values, his consistent message, and the outside-the-box thinking he always brings to the party. Since this is probably it for he and the following he has worked so hard to build up, I think he will briefly consider running as a 3rd party candidate (this guy should be the true face of both Occupy Wall Street and Tea Party and what they claim they stand for, but I digress) before bowing out to the traditional format of the USA political system. It’s too bad, how great would his contribution to debates be?
Result – Yup
Love RP’s performance in the debates, and I was cheering for him in Iowa and Maine, but sadly the political machines have no time for his “extreme” views.
4) Barrack Obama Wins Re-Election
Once all the attack ads have continued to drive people away from our political system, and the ballots of the baby boomers have been added up, the incumbent POTUS will stay in the Oval Office. Mitt will have a hard time motivating his base, and the gifted orator will convince just enough people to give him one more chance at change. Yes We Can! But not if…
Result – Yes I Can!
5) Political Gridlock Will Continue To Be The Biggest Obstacle For the USA
The political polarization in the USA is a serious issue no matter which Party you traditionally support. There is plenty of blame to go around, but until “We The People” quit listening to attack ads, get more involved in the political process, and quit looking at compromise as a dirty word, we get what we deserve (as someone who holds both Canadian and American citizenship I get to use “we” going both ways). Re-drawing election districts among partisan lines, and terrible “infotainment news” programs that are essentially propaganda machines are two huge contributors to this. The Republican-controlled House will continue to make life difficult for Obama, but it will be interesting to see what happens when he wins in November.
Result – Hello Fiscal Cliff!
6) The Keystone XL Pipeline Will Not Begin Until 2013
Republicans claim that Obama will be forced to make a decision on this huge development in the next two months. I abhor that we are playing politics with this potential game-changer of a project (I still don’t understand why we don’t build our own refineries in Canada, but that’s another topic), but that’s exactly what is going on. Obama can’t alienate his base in an election year, but he desperately needs these jobs (along with the rest of the country). He will find a way to prolong it (Washington seems great at doing this) and then approve it once he is safely ensconced in his second term.
Result – Maybe I should stick to USA predictions in 2013
The Keystone XL pipeline has become a symbol for both sides of the environmental conflict, and the idea that it will ever be considered on its actual merits now seems ridiculous. I think it will get done in 2013, but I continue to wonder why we don’t increase refining capacity in Canada? I know it’s expense, but imagine all the positive spin-offs that couldn’t be outsourced!
7) Tibet… What Tibet?
Anyone up for criticising the big bad bully these days? Whats-a-matter guys, doesn’t anyone care about human rights abuses anymore? Not as much as we care about Yen and Greenbacks apparently. While monks are literally lighting themselves on fire in protest to the heavy-handed approach the Chinese government has taken, we aren’t seeing anyone complain these days. “Please China… may we have some more.” We need China and their growing middle class desperately to keep everyone afloat while the Western world gets their debt-ridden house in order, and the emerging markets stabilize. No one will be paying visits to the Dalai Lama or saying anything to piss off the biggest holder of US debt.
Result – Correct
Not only do we not hear anything about Tibet these days, but we are selling our state-owned resources to China s well. I’m not saying this is wrong (I truly have no idea), but it is interesting what price we are collectively willing to pay as a country to have our morals and values reflected in our foreign policy (apparently not a very high one). Yay Northern Gateway pipeline!
Well, I wouldn’t depend on me for specific growth forecasts (then again, I’m likely about as close as most mutual fund managers), but the USA election looks as if they were reading right from notes. Much like the current Canadian outlook, I could’ve been better, but I definitely could have been worse as well. Did 2012 turn out like you thought it would? Stay tuned for this years’ predictions!