Time for controversy!
Well, sort of. Today we’re going to talk about the proposed Keystone XL pipeline. It’s weird. I’ve watched this thing transform from one of those overwhelmingly supported, “hey, that sounds pretty smart” ideas to a highly politicized talking point.
But first, special thanks to whoever forwarded our 10 Predictions for 2012 to President Obama! I know that rhetoric is rhetoric, but it was neat to hear him explicitly mention natural gas in his State of the Union address. I don’t recall the last time I heard anybody address the entire country about how natural gas needs to be a significant part of our long-term energy plan. I hope he’s serious about urging Congress to get moving on this.
Anyway, I think this year is a huge one for the natural gas story. I just heard a terrific interview with JPMorgan’s senior economist Jim Glassman who dropped a stat that natural gas, on a thermal equivalent basis, works out to about $18/barrel in crude oil terms. Those are the kinds of data points that get people listening. And this is the kind of disconnect in the market that gets companies thinking seriously about how to convert some of these power plants to gas turbines and short-haul trucks to cleaner burning natural gas engines.
The natural gas story doesn’t directly tie into Keystone XL. But in a broad sense, it hints at the kind of thing that might be possible when you have a broad infrastructure in place where it’s easy to pump this stuff around. I also get a kick out of the political games that are played over issues like this, but that’s just a function of my having zero personal investment in either party.
There is a significant economic component to this story, so it’s something that investors need to watch. I’ll get to that in a bit.
But first, to set our scene…
FADE IN:
The REPUBLICAN PARTY, egg dripping down its face after playing bad poker over payroll taxes and somehow snookered into getting labeled the party that supports tax increases, slinks down in its chair, brow furrowed and lips puckered. THEY are determined to get revenge in the next match.
INT. OVAL OFFICE
President OBAMA and Democratic members of CONGRESS are laughing hysterically. HARRY REID is playing HAIL TO THE CHIEF on a grand piano. It’s all very weird. But jubilant.
EXT. CAPITOL HILL – NIGHT
CUT TO INT. HOUSE CHAMBER
CLOSEUP JOHN BOEHNER
(growling)
Guys, we need a plan.
REPUBLICANS are working in a frenzied state. The clock ticks on into the night. CONGRESSMEN loosen their ties and open their collars, wiping sweat from their brow. In the back of the room MICHELE BACHMANN is eating pizza. Nobody asks what she’s doing there or why. The Pizza was paid for by MichelePAC, which has no direct affiliation with Michelle Bachmann. Honest!
CUT TO
JUNIOR STAFFER
I’ve got it! I’ve got it!
JOHN BOEHNER
Go ahead, son.
JUNIOR STAFFER clears his throat. All eyes are lasered in on the staffer with a boyishly devious grin. Even Michelle Bachmann is paying attention.
JUNIOR STAFFER
This Keystone XL pipeline is a home run for our backers and constituents. And for the American people. Mr. Speaker, sir, do I have permission to speak openly.
JOHN BOEHNER
(eyes darting left and right)
Go ahead, son.
JUNIOR STAFFER
This pipeline will create real jobs — perhaps as many as 20,000. Engineers to design the structure, laborers to lay the pipe, steelworkers to manufacture the materials. And that’s to say nothing about all the peripheral jobs this project will create — staff at barbershops, convenience stores, and payday loan outlets. We’ll need to open more bars and Buffalo Wild Wings, too. Then we’ll need people to maintain the pipeline. And it will also reduce our dependency on the Middle East for oil. With the Keystone XL, we’ll be able to get a lot more of the oil we need from North American sources. That’s good, right?
CLOSEUP JOHN BOEHNER raising his eyebrows.
CUT TO RICK BERG, Congressman from North Dakota.
RICK BERG
(really, really excited)
Hey guys! NORTH DAKOTA hooks up to Keystone too! My state is making more oil right now than Ecuador! And Ecuador is an OPEC member! Maybe NORTH DAKOTA should join OPEC!!!
JOHN BOEHNER
No foolin?
NORTH DAKOTA
(boomingly)
Damn straight, John.
JUNIOR STAFFER
Anyway, let’s hurry this project up. Let’s put a 60-day deadline on it and sneak it into this payroll tax extension bill. If OBAMA approves the project, we win and get fat donations from our backers. If OBAMA rejects the project, then we get out our pitchforks and accuse him of being a JOB DESTROYER!
JOHN BOEHNER
Nobody likes a JOB DESTROYER.
NEWT GINGRICH
(louder)
Yeah! Nobody likes a JOB DESTROYER!
Cheers erupt through the HOUSE CHAMBER. Nobody wonders what NEWT GINGRICH is doing there. Wasn’t he supposed to be in South Carolina? Everybody is too excited to notice.
NORTH DAKOTA
(boomingly)
Wait, there are states where people have no jobs?
EXT. UNITED STATES CAPITOL BUILDING – Early morning.
The sun rises.
FADE OUT
—
This isn’t about solving problems that matter for most people. It’s not about a bunch of really intelligent guys sitting down over beers and trying to figure out which energy policies generate the most benefit for the nation as a whole with the fewest costs. It’s a game.
To borrow a phrase from HBO’s latest hit and one of the most engrossing book series I’ve read, this is the Game of Thrones, the only game that matters. This game is about getting your man into office and keeping him there so he can enact policies that benefit certain interests that have a lot of money. So long as you’re smart about it, helping people who have a lot of money make even more money is a pretty good way to get paid yourself. And isn’t that what we all want, anyways?
Not just a player, but a grand-freakin'-master.
To quote my favorite character in the series, Lord Petyr Baelish, the Master of Coin, “In King’s Landing, there are two sorts of people. The players and the pieces.”
It’s not always obvious who’s who, either. Obama is clearly a player. Same with Hilary Clinton. Karl Rove was of the great players of the last 20 years. George W. Bush was one of his greatest pieces. John Boehner, failing time after time with the impossible task of wrangling a diverse party base under a unified strategy, is a piece of both the right and far right, which may as well be its own third party. And you guys all remember Chris Dodd, right? Co-architect of the half-assed attempt at financial regulatory reform and one of the primary forces behind the SOPA legislation? He’s a total piece – first of the banking industry and now of the MPAA.
Most of the people on Wall Street are players. And an awful lot of the people in Washington D.C. are pieces. More often than not, it comes down to money.
Unfortunately, we, the people, are all pawns. We are pushed around the board by interests and powers that most of us cannot or don’t bother to comprehend. We are told stories and we paint ourselves red or blue. This helps us feel better. It brings us comfort to be surrounded by pawns of the same color and who sing the same songs. It’s fun to yell at the other guy. But in the end, none of this matters. We are all carved from the same marble.
Just the facts
The reason why this game is important to understand is that it sometimes gets in the way of doing things that help us pawns out. In the case of the Keystone XL pipeline, the benefits it provides to our country are meaningful. There are certainly costs, but when you make a 2-column pro/con list, it gets really hard to oppose this thing unless you’re a fringe environmentalist who places principle above all else.
Keystone XL is a 36″ diameter pipe that will run roughly 1,700 miles from the tar sands of northern Canada, through the shale oil fields of North Dakota, and all the way down to the Gulf of Mexico where the big refiners are. It doesn’t magically make more oil appear, nor does it involve drilling in an environmentally-sensitive area. All it does is make it a whole lot easier and cheaper for crude oil to get where it needs to be so that we can turn it into useful stuff like gasoline and other distillates. Once it’s rolling, it’ll move around 800,000 barrels per day.
Currently, we import around 4.8 million barrels of crude oil per day from OPEC. You can see that 800,000 barrels/day isn’t a one-shot kill, but it’s a significant step in the right direction.
There’s a good chance you don’t find the geopolitics of oil as exciting as I do. That’s cool. I’m a weirdo. But if you do care, here’s the thing: OPEC doesn’t really matter so much to the U.S. anymore, and it’ll matter even less if this pipeline gets built.
No longer will the U.S. be a piece occasionally played by rickety governments and unstable oil powers.
Keystone XL isn’t going to keep Canada from developing its oil fields. Canada is sitting on a (black) gold mine and they know how important that asset is to their future as a nation. The Players all understand this even if the Pieces don’t. If this pipeline gets shot down, the only difference is that Canada will ship more crude oil west to Vancouver where it will get on a tanker and sail to China to be refined.
As I mentioned, the primary objection to this pipeline is environmental in nature. But when you accept the fact that Canada isn’t going to slow down the development of its oil sands, there’s an argument to be made that the environmental impact would be even more negative if all this oil has to get on a boat and then be refined by the Chinese. I can’t say for sure, but my guess is that that China’s refineries don’t exactly need to adhere to the same environmental standards as those along the U.S. Gulf Coast.
Yet after all this, 47% of Americans are opposed to the proposed pipeline. If you’ve ever needed an example of Americans deriving their personal values from their political party rather than developing those ideas through independent thought, here it is.
Just the concerns
There’s no question that this is going to benefit Big Oil. It benefits TransCanada, the company that wants to build it. It benefits the refiners who will be getting easier, cheaper oil. This is a project that these guys are all pushing hard for and paying a lot of money to lobby for.
Part of me feels a bit of philosophic objection to that whole idea — I don’t like super-powerful special interests either. I daydream about how great it’d be if my car was powered by a Mr. Fusion and emitted only drinkable spring water as waste. But the fact of the matter is that I have to put gasoline in my car and there are only so many places I can spend money. Personally, I’d rather that gas be cheaper rather than expensive. And if that means projects that help Big Oil, then, oh well. I wish that I and 250 million other Americans had the luxury of being able to afford to take a moral stand here.
While there are definitely some philosophic and semi-environmental concerns about the project, the benefits to the economy and our infrastructure are unquestionably positive. This project will create jobs. It’s not a panacea, but it’s a big project and emblematic of the type of focused infrastructure spending that economists, Republicans, and Democrats all seem to be in support of — at least when they’re not playing games with each other. And this isn’t even a government project, either! Your tax dollars aren’t paying for this thing. TransCanada is paying for it.
It’s not just about creating jobs, though this has certainly been one of the main aspects of the project to be politicized. It’s about keeping the cost of gasoline low. Like it or not, gas prices are a major expense for most households. When they rise, it acts as a tax on the middle and lower class. Energy prices are a major input to the health of the U.S. economy. Every single post-WWII recession was preceeded by a spike in crude oil prices.
Here are some fast facts about how the price of crude oil affects consumption:
- Every $10 increase in the price of oil translates to a roughly 25 cent increase in gasoline prices.
- Every one cent increase in gasoline prices represents about $1 billion of consumption.
- So every $10 increase in the price of oil nicks GDP growth by roughly 0.2%.
With the U.S. staring down a long-term growth frontier of about 2% per annum, I cannot understate how important low, stable oil prices are to the economy.
While oil prices are calculated on a global scale based on global supply and demand, there is still something to be said for where one buys it from. Take a moment and step outside of all your political & economic bias, and ask yourself a simple question.
Would you rather buy more of your oil from Canada & Mexico — who are already #1 and #3 on our list of importers — or more from Saudi Arabia, Venezuela, Nigeria, Columbia, and Iraq, who round out the other 7 of our major suppliers?
Let’s make a deal
Before I wrap this up, I should mention that a deal is going to get done one way or another. Don’t worry about that. The need for such a pipeline is too great. Behind the scenes, it’s pretty clear that Obama really isn’t opposed to this project. With a wink, he invited TransCanada to simply re-apply, hopefully buying him time until after the election and to conduct proper review.
Look, these are just all moves in the game he has to play. It’s disappointing that they have to play such a politicized game when we pawns would all be much better off engaging in collaborative problem solving. But it is what it is. I didn’t design the game. I just watch it.
I’m curious to see what happens when top-level Democrat players eventually come out in support of the project, when they conduct their own analysis and come out and say, “You know what, this pipeline ain’t so bad.” Will 47% of the country still be opposed to it?
Democrats, when Obama changes his position about something, what will you do?
And Republicans, will you embrace Obama for doing so?
The investment angle
As I mentioned, there’s an investment component to this.
Over the last decade, the energy sector has been a top performer. I think this trend is very long-term in nature and could continue for the next decade or so, at least until we embark on the next secular growth boom. When that happens, it’ll be time to lighten up all your energy stocks and load up on sectors like financials or consumer-discretionary that are leveraged to the health of the economy and contingent upon expanding levels of credit.
I’m not sure there’s an alternative energy trade here, though I can see how someone might be fooled into thinking that the failure of this pipeline would be good for solar or wind stocks. I don’t see this pipeline mattering to that one way or the other. And as I’ve always said, over the long run, there is no world where alternative energy investments succeed and traditional energy investments do not succeed. Conversely, there are plenty of endgame scenarios where alternative energy investments fail and traditional energy investments thrive.
Also, when Keystone XL is finally approved, expect the spread between NYMEX Crude and Brent Crude to narrow. Another side effect of this pipeline is that it will free up the oversupply of oil in Cushing, OK, and make it easier for oil to get down to the Gulf.
All of you regular readers know that Brent Crude is the oil price to watch, not NYMEX. NYMEX Crude is artificially low. In any case, if this pipeline does ultimately get approved, there may be a trade that investors can put on that would benefit from a narrowing of that spread. Theoretically, the two oil prices should be almost exactly the same, and indeed for most of their history, they have been. A more efficient oil transportation infrastructure will help those prices converge to where they really should be.
The REAL story
Ultimately, this is a cultural story. And as always, the real story is the story behind the headlines and the raw fundamentals. This is not a story about creating/destroying jobs, helping out Big Oil, or saving the environment. This is not even a story about “I feel this way and those other guys feel that way and screw those jerks!”
The story is that if something is going to come along that is legitimately and obviously beneficial to the economy and to our infrastructure, and we’re still going to resort to playing games, badmouthing, and finger-pointing, then we have much deeper problems as a nation.
This is the story that should disturb you, and it’s a story you won’t find in any of the headlines. I know you didn’t need yet another example of how unfathomably dysfunctional our political culture is right now, but here it is.
I wish I knew how it ended. My knowledge and experience are so small compared to what they need to be in order to really make sense of it all.
Perhaps it ends like…
CUT TO Every lobbyist in the world
Raucous laughter.
FADE OUT.
It’ll be a quick newsletter this week.
We’ve got some cool things on the docket for the next month or two. I’ll be releasing some special, focused articles, some of which should hopefully start popping up in other magazines and websites. I’ll be doing a big update on real estate, which always seems to generate a lot of reader engagement. I also hope to have another interview or two this quarter with some colorful and fascinating individuals. I’m really excited about this stuff and I think you guys will enjoy it.
In the meantime, to supplement today’s relatively (thankfully?) meager offerings, check out a more in-depth piece I wrote for Seeking Alpha about some things investors should look at if they’re interested in natural gas.
Where’d the Vol. go?
Volatility continues to leak out of the marketplace.
We talked about this a month ago, just after the ECB announced that it would lend over $600 billion. This is what I wrote at the time:
I’m cautiously optimistic that the period of being forced to guess and trade around the European news headlines is behind us. Barring additional whammies that pop up out of nowhere, I’d expect a period of generally lower volatility in the weeks and months to come.
For what it’s worth, I’m still cautiously optimistic about this period of generally lower volatility hanging around for a little while longer. If you’ll recall, at the time the market was really freaked out about a banking crisis over there. That risk has clearly subsided.
This week we also saw the IMF boost its lending capacity by another half a trillion dollars. Isn’t it funny how casually we use terms like “half a trillion dollars” these days? This is all part of the strategy of establishing “firewalls” to prevent it from devolving into a panic-driven banking crisis.
Banking crises are the really scary things. Markets can cope with recessions and earnings misses and one-off bankruptcies. But they can’t handle full blown systemic panics. That’s when everything goes down, when people starting pulling as much cash as they can out of ATMs, and investors sell indiscriminantly, unsure which companies are solvent and which are not. It’s past the point where standard and even non-standard policy measures have any effect. Crises like these are where worst-case fundamentals intersect with worst-case pyschology and create a negative feedback loop with long-lasting costs.
But the ECB seems to have found religion. Industry scuttle suggests that they’ll also be cutting rates at a future meeting. I don’t know how much of a tangible effect an extra 50 basis points will make. But the point is that it’s an indication that they’ve gotten with the program.
It’s a huge mess over there. It’s going to be messy for a long, long time. Nobody knows exactly where the pieces will wind up in the endgame.
I think the appropriate investor response is caution. It is possible to formulate a good long-term strategy. It involves owning the stuff that’ll still be standing strong a decade from now and avoiding the stuff that lives at the heart of all the fear and uncertainty.
If you own stocks with clean, transparent balance sheets, companies with powerful brands, and businesses in the sectors that will grow alongside GDP & population, you’ll probably be OK. If you build out a diversified portfolio that also includes assets that generate cash flow and would benefit from a little inflation, you’ll probably be OK.
There’s a way that you can do even better, but it involves a substantial degree of skill. Investors who know how to apply a medium-term tactical approach to their investing should be able to wring out a few additional points of excess return from the market. It’s difficult, and it’s the type of thing that’s best done with the help of a financial professional, but it’s possible. The tactical approach boils down to overweighting quality assets when they get abnormally cheap and lightening up towards a more conservative asset allocation when the market gets relatively frothy. This is the kind of thing that some elite hedge funds do too. It’s difficult and it takes skill, but there is plenty of evidence to suggest it works.
If I’ve said it once, I’ve said it a million times: the era passive investing and index strategies is over. The next decade is all about relative value and getting more flexible with both your tactics and your strategies.
A Toddling Economy
Those of you who read the big 2012 forecast know that I am particularly bearish on the economy right now. I think it’s going to be a really slow year.
There’s a lot of stimulus that’s coming out of the market right now. Consumers are skittish about all the uncertainty in other parts the world as well as in our own backyard. Nobody knows what policy is going to look like for the next 4 years, not with such a hotly contentious election looming. Businesses are historically cautious with expansion and hiring, mostly because of plain ol’ weak demand, but also because of poor visibility on regulation and future taxes.
Unless the economy finds itself on clearly firmer footing a month from now, I do expect the payroll tax cut to get extended (again) since it’s such a political hot potato. I know that temporary tax cuts and rebates are one of the most popular policy solutions to goose demand. But this is where you clearly see what’s wrong with them. At some point, they have to be taken away.
We simply cannot continue to have the Social Security withholding rate be 4.2% instead of 6.2%. It was fun to put all that extra money into people’s pockets in 2010. It moved the economic needle and, frankly, could have singlehandedly been the difference between recession and no recession last year. But it was designed as a temporary package. As permanent policy, it’s not just unsustainable, but ridiculously so.
So when do you reverse that? How do you take something like that away?
Same thing with the 2001 Bush tax cuts. Those were designed to be a temporary policy move as well. But now that we’re at the point where they were supposed to run off, we are encountering massive difficulty rolling them back. Some people groan and question if it would have been better if we’d never handed them out in the first place. In retrospect, I think it’s now clear that there may have been some better ways to spend that money.
Regular readers know that I’ve got a toddler at home. She’s almost 2. Temporary policy doesn’t work with her. If I give her a Dum-Dum and tell her, “you only get one and this is a one-time thing,” she eats it and comes right back for another one. When I tell her, “No. No more Dum-Dums,” she throws a tantrum. It’s a good thing my role as father isn’t an elected position. She would have thrown me out of office a long time ago!
Maybe it’s a little bit harsh to compare the psychology of the American economy to that of a 2-year old. But it’s true in a lot of ways.
We got a pretty tasty Dum Dum in 2011 with the payroll tax cut. The plan was to take it away in 2012. But it doesn’t look like we’re going to be able to do it. Nevermind the political ideology that always fogs up the debate about tax policy. We actually have rational and fundamental reasons for handing out even more Dum Dums. Taking them away will have a significant and quantifiable impact on the economy. It could be the thing that tips us from being close to a recession to officially in one. We’re on a Dum Dum diet!
Anyway, this payroll tax thing is a big deal. Keep your eye on this and keep your eye on how Congress goes about addressing it. I am certain it’ll get extended and equally certain that there will be plenty of political gamesmanship to go along with it.
Despite all this economic caution, I think there will be some good places to buy the market this year. I’m relatively optimistic about the end of this year and into next — you know, as optimistic as one can get in a world where standards of living and consumer behavior have permanently changed for the worse.
Here’s that Natural Gas article if you’re hungry for more analysis.
If you missed the first part of this, no problem. I have your link. Last week I talked about the basic macro backdrop and described what I thought might happen with the economy and the stock market.
I’ll get straight to part two.
3. The great gold run is over.
I know I’m going to get a ton of hate mail on this one. There are a lot of people on this newsletter who really love gold. Sorry everybody.
There’s certainly a chance I’m wrong, of course. Gold has gone straight up for around a decade now and it might keep going up for another year or two. But at some point it has to stop. The downright-nasty technical action that we saw in the second half of 2011 is telling me that this may finally be that point. I don’t like the fact that that action coincided with stories of major investment funds selling gold to raise liquidity and I don’t like the fact that so much of the strength has come from the retail side via things like ETFs.
I also don’t like the fact that the major problem with gold as an investment — it doesn’t generate yield, grow, or pay a dividend — is being challenged in an environment where a massive and increasing number of investors are demanding yield and growth. The fact that gold’s major advantage — its neutrality as a currency — is also being challenged during a time when people are finally giving up the “Dollar is Toast!” argument is equally concerning.
I don’t know how to assess gold beyond that and simple technical analysis. Gold doesn’t work the way that traditional assets do; you can’t look at its financials and crunch things like the price/free-cash-flow ratio. Gold doesn’t have a balance sheet or an income statement.
It’s simply a price, elegantly defined by Jim Grant as [1] divided by [the world's faith in Ben S. Bernanke and the like].
And here’s the problem, the dark reality that I’m not sure everybody’s ready to hear: the Dollar is becoming a legitimately safe store of value again. The world may not have a lot of faith in institutions like the Fed, but given what we’ve seen in the last few years and the consequences that have (and have not) come to pass, I’m not convinced that we’re going to lose any more faith in our central bankers than we already have.
There was a very similar chart pattern in gold back in 2006. After that exponential spike and sell off, prices flattened out for a few quarters. Using that as an analog, I think a relatively flat year for gold prices represents a best case for 2012. More likely, I think gold actually closes down on the year for the first time since 2000.
If you’re bullish on gold, here’s something to keep your eye on. If gold closes back above $1700 and doesn’t follow up by making a new, lower low, then I’m wrong. That will be a sign that the epic bull trend is still intact.
For right now, gold appears headed straight for the 1450-1500 range. I can see it spending some time there, figuring out what it wants to do. If that range holds, it could be a base for a continued advance. If it breaks, then anyone still buying into the gold bull story needs to sit down and ask some hard questions if they haven’t already. Markets can and do move to points at which one must question one’s original investment thesis.
Before you fire off that nasty email, remember that gold still warrants a place in an investment portfolio. By this point all you readers should understand the real reason why investors should own it. Say it with me now: own gold because it’s different.
It’s been a nice run in gold. Pat yourself on the back if you’ve participated. Now is the time to either think about taking some off the table or making sure that your portfolio won’t go -poof- if gold corrects significantly. The last thing you want to do is make the same mistake you did with real estate and stocks and think this awesomeness goes on forever.
4. China slows down. And this causes major debate.
I wrote a little about this last week, but I want to further formalize this prediction. I think it will be an important story in the coming years and I’d hate to see investors get caught flat-footed.
My biggest beef with investing in or around China is that it’s so darn difficult to know what exactly is happening. On top of that, it’s an economy that analysts seem remarkably divided about.
Independent of what will happen in China, we can all come to some sort of agreement at what has happened in China. We know there was a boom in credit and bubbling real estate. We know there’s a creepy shadow banking system over there. We know that internal consumption lagged big time and we know they still lack the social safety net and incomes to prop up a consumption-based economy. We also know that none of this can continue indefinitely.
2012 will be a year where we start to heatedly debate where China will wind up. It’s impossible to get any sense of where China will be in 20 years, or even the next 5. So many outcomes are in play.
This is the chapter where they either make the transition towards becoming a modern economy, or go down some sort of alternate path. There are two dimensions to this problem, each with unique ramifications.
The first is that we aren’t even sure they’re going to make it. What got China here isn’t going to get them to where they ultimately need to be. They have to make an epic, decade-long transition from an economy based on low cost manufacturing and export to one that’s sustained by internal consumption. They also have some pretty serious demographic headwinds looming that underscore the importance of successfully executing this hand-off. Population growth has slowed to a near standstill. Sometime in the next several years, the working age population will peak and then enter long period of steady contraction. And by the middle of the decade their population will be very top heavy. Trends like that are challenging. Just ask Japan.
The second dimension is that if they don’t make it, we have no idea what will happen. We know their current economic model satisfies the criteria of “unsustainable,” but we don’t know exactly what will happen if they can’t change it. Does it devolve into globally-interconnected chaos? Does it erode quietly and internally, behind the Communistic curtain? Is there… a revolution? Nobody knows. I think we all just hope that they do make the economic transition so we don’t have to worry about the alternative.
It’s a troubling landscape for investors. It’s no longer enough to simply subscribe to or reject the basic China narrative.
Anyway, you’ll hear a lot about a “soft landing” vs. “hard landing” in China this year. I think it’ll tilt toward the harder side, though we won’t have a clear handle on the real damage for years. By the end of the year, I think the consensus view on the Street will be “it turned out China was worse than we thought, but we aren’t sure exactly how bad.”
5. The real estate bottom becomes more clear. Housing starts to heal.
I don’t want to spend too much time on this one. Much of the rationale is similar to that which I laid out a year ago. Real estate is a very slow moving thing. Also, I’m going to do a more in-depth newsletter in the coming weeks on the current state of the real estate market. Stay tuned for that.
Basically, this is what a bottom looks like. Last year we made new lows in the major indices, and on a nominal basis, I don’t think prices get much lower than that. We’ll stay here for a while, though.
In the last year, Residential Investment has picked up. For the first time in a long time it actually made a positive contribution to GDP. It’ll stay small this year, but it’ll slowly grow in the years to come.
This is a big time leading indicator for the U.S. economy. I’ve been writing for sometime that the economy won’t embark on another sustained growth boom until we start building houses again. When we are building 1 million new homes per year instead of 300,000 that will be the all clear signal.
I think that 2012 is the first year where basically every metric of housing improves, if only slightly. I think sales pick up, I think prices rise a bit or at the very least, show more obvious stability. Construction should pick up a bit and you’ll see an increase in building permits. If you don’t believe me, check out a price chart for DR Horton, Toll Brothers, or Lennar. They’re at or threatening 2-year highs. Even the laggards in the sector rallied something fierce in the second half of last year.
Never forget that stocks are forward-looking things. What do they see that you may not?
I’m of the belief that American psychology was permanently altered from the housing bubble and collapse. The damage it caused was so great that entire generations of people will behave differently and think differently about housing than the generations before them. But it’s not destroyed. People still have to live somewhere and whether they own or rent, a free-standing dwelling with 3 bedrooms and 2 baths, a backyard patio, and a garage is a very desirable thing.
For investors who know what they’re doing, I think there’s opportunity out there. When you’re assessing whether houses in a region are expensive or cheap, relate prices to incomes. After that, relate average rents to average mortgage payments. Real estate isn’t about price appreciation anymore, and won’t be for a long, long time.
In my opinion, that’s good. That’s boring, as it should be.
6. The Dollar is strong.
I alluded to this last week. The Dollar has become a legitimate safe haven again.
The bear trend is officially behind us.
If you’re not on board with this idea yet and are still clinging to the hyperinflationary fear meme that was circulating a year or two ago, it’s time to come to terms with the current reality. The massive amounts of money that was injected into the system didn’t cause the nasty inflation that many were expecting. And it won’t any time soon, either. All those Dollars went into the banking system and they just stayed there. They were not lent out into the economy where they would create a surplus of Dollars and uncontrollably rising prices.
None of this is to say say that inflation won’t become a problem many years down the road. It could happen. We’re now living in a world where all sorts of extreme outcomes are in play. I just view it as a very low probability event.
In fact, it wouldn’t surprise me at all if the Dollar had a fantastic year. This is one of those trends that I could see staying in place for another 6-18 months. Money will continue to flow out of Europe as things over there deteriorate. There will probably be some flows out of Asia, too, at least the parts of it that are correlated with risk. You can bank on a continued flight out of the Australian Dollar as they start scratching their heads over what to do about their massive housing bubble and the fact that Chinese demand is cooling. And in a globally unstable and uncertain environment, why would capital want to hang around in South America?
All that money has flow somewhere, and I think it flows into the U.S..
Not just the U.S., either. I think North America in general looks strong relative to other continents. I can see the Canadian Dollar and Mexican Peso also doing well next year. If you still want to get some international currency exposure, those might be some places to look at.
7. Mitt Romney is the next president of the United States.
For someone as cynical about politics as I am, you may be surprised that I follow this stuff rather closely. Maybe I shouldn’t. Maybe I’d be a happier individual if I didn’t. But I do stay on top of politics because certain aspects of it matter. And I enjoy talking about it because I like following big trends in culture and business.
The odds of this happening are decidedly lower than 50%, especially with the primaries still going on. While I wouldn’t say this qualifies as a contrarian prediction, I will acknowledge that relatively few people are willing to go on record about it. So perhaps the fact that I’m willing to venture a guess this far in advance is worth something.
My reasoning here is petty basic. Obama’s goose is cooked. I had secret hope for Obama, but the simple truth of the matter is that he turned out to be something completely different than what was advertised. Fraud, even in its mildest forms, really irks the American People. We hate feeling ripped off. Even the staunchest Obama supporters should be able to agree that, while he may have tried his best and accomplished a few important objectives, what we got in the last four years wasn’t anywhere close to the “change” that was promised.
(And before you fiesty Dems send me a bunch of hate mail for criticizing your man, know that I have equally negative things to say about the childish games the Republican party has been playing in Congress for the last two years. Those guys are at risk of getting thrown out too.)
As far as I can tell, the dominant strategy for incumbents boils down to sling mud. So expect a lot of that in 2012. The problem is that I’m not sure how receptive fatigued voters are going to be an exhaustingly negative campaign. Also, if it’s Romney that Obama’s up against, he’s going to have a harder time playing the mud-slinging game. Nobody in the Republican field has demonstrated more resilience to attack than Romney. Gingrich, Perry, and Santorum each almost certainly lose against Obama.
It comes down to that annoying word we seem to hear every four years, “electability.”
Honestly, I can’t wait to see what kind of campaign Obama is going to run. Ultimately, he has to do two things to win:
- Apologize to his base who would never under any condition vote for anyone with an “R” beside their name, and remind those people to actually come out and vote for the guy sporting the “D.”
- Convince everybody in the middle that it’s better to go with the devil they do know than the one that they don’t.
I think he fails on both accounts provided it’s Romney that he’s running against. And when it comes down to it, I think the Republicans realize this too and send Romney up there as their party champion.
Full disclosure: I don’t have a dog in this fight. I didn’t vote for Obama, McCain, Kerry, Gore, or either Bush. I’ve been registered as a Libertarian since high school, well before it was cool, and then later uncool, to be a Libertarian. I’m not hardcore about it; I don’t live at the extremes of libertarianism. I just lean a little more socially liberal than mainstream Democrats and a little more fiscally conservative than mainstream Republicans.
The cool thing about being registered as one of the weirdo political parties is that you don’t get any political junk mail or “vote for me” phone calls. But Ron Paul sends me stuff even though I’ve never voted for him either (but might).
It’s a low probability event, but I could easily see a scenario where Ron Paul is the next president as well. His popularity is surging at the right time. He almost won Iowa, and if Romney’s home state wasn’t Massachusetts, Paul may have won New Hampshire outright. As much as it bothers me to type this, voters are still hungry for change. Paul is the only guy who could both win and conceivably deliver the change. Polls and primary results show that support for Paul is strongest with younger voters, 18-39. Don’t write the kids off. They were the ones that put Obama on the ticket over Hilary and they were the ones that ultimately pushed him into office.
Depending on the social mood that develops in the first part of this year, Ron Paul could have a legitimate shot. I think he has a much better chance than nearly everyone gives him credit for. If Paul is heading the Republican ticket, then this could be one of those most interesting presidential races that any of us would see in our lifetimes. The stock and bond markets would have a lot to say about a Paul presidency, but very little about Romney.
8. Natural Gas has a great year.
This call is driven one half by fundamentals and one half by the political atmosphere.
How long has it been since you’ve looked at a price chart for natural gas?
It’s pretty darn ugly. You might be wondering just how low prices are going to go. I’m scratching my head too. Fundamentally, things are a little out of whack right now. We’re consuming only marginally more natural gas today than we were back in the 1970′s — less if you adjust per capita. And production has increased quite a bit in the last few years.
December Nat Gas future are priced around $3.75. That’s not to say that that’s where the market will be trading at the end of the year. But at least there’s still contango after a two year bear market.
I think that nat. gas could become a pillar of the presidential campaigns. It obviously won’t be as important an issue as the health of the labor market, but our energy policy matters. People do care about it. And ultimately, elections involving incumbents are about one thing: is the country on the right path? How we satisfy our energy needs is part of that path.
Let’s face it, natural gas is the low hanging fruit. We’re making a ton of it and we have the technology now to make a ton more. It’s all domestic, too; the U.S. is the “Saudi Arabia of natural gas.” We are a net exporter! Natural gas is dirt cheap and versatile. I mean, we are interested in energy sources that are cheap, plentiful, secure, and relatively clean, right?
But who knows. Congress punted on the Keystone XL pipeline, and that would have made crude oil cheaper, more plentiful, and more secure. So maybe that’s not what we really want? It’s always tough to say what drives these markets and the politics behind them.
Industry insiders have been bullish on the future for natural gas for some time now, but I think 2012 is the year where the general public gets a little more interest. It seems so obvious. The major oil companies got on this trend a long time ago. They either started investing heavily in natural gas research & production or gobbled up other companies that were already doing that. Apparently, they saw the writing on the wall.
There’s an interesting story to be told about natural gas. We haven’t had a reason for doing so until this year when voters will be hungry for actual solutions to a less expensive energy future. This is a legitimate source to power our homes and maybe, maybe power our trucks.
Politics and policy aside, I think all this talk could kick start a little speculation. I think natural gas could easily have a double digit year. Here’s how it has performed in the last few election years:
2008: -13.1%
2004: +26.2%
2000: +157.6%
1996: +77.2%
1992: +3.5%
1988: +11.2%
This could shape up into a neat trade that I haven’t heard a lot of people talking about. If you’re on board with this idea, there are a ton of different ways to play it. I’ll explore some of these in a little more detail later this month. Make sure you’re subscribed via email if you aren’t already.
9. Interest rates rise
You may wonder why I keep doing this. You may wonder why I am such a glutton for punishment.
I wish I knew. I can’t help myself!
I just happen to think that the trend is up in interest rates this year, not down. This has nothing to do with my predictions for last year or the year before. Independent of everything I’ve said in the past, I think that the current and future fundamentals suggest higher rates. Not dramatically higher, but higher.
Consensus forecasts for the 10-year is around 2.5%. I think that’s low and I some point this year, probably the second half, I think we could see a move towards 3%.
I know there’s a lot pushing against this prediction. The Fed is still fighting to keep rates as low as humanly possible. Investors are still extremely skittish and looking for places to hide.
And why on earth would I call for low economic growth and rising rates? Because it could be the kind of thing that’s juuust crazy enough to actually happen. I see this year boiling down to disappointing, but psychologically manageable, economic growth. I think we come to terms with what we’re up against and some of the fear leaks out of the marketplace, giving a bid to rates and the stock market.
I think this is the year we all realize that it really stinks out there, but also that the odds of another 2008-style crisis are lower than we worried they were.
10. Groupon Exposed!
If Groupon is a $12 billion company then I’m the King of Spain.
I rarely talk about individual stocks because of the regulations and such, but I would like to talk about Groupon. I believe that 2012, just it’s third year of life, is where it’s revealed for what it is. It’s not a fraud, though they did get plenty of grief from the SEC about questionable accounting practices. I just think the company’s current business model is non-viable. Sometimes it really is that simple.
This is a space with zero barrier to entry. It’s a race for zero margins. It’s a battle of increasing risk and expense.
I think Groupon takes a lot of heat in 2012. I think it’ll be a hair-raising ride for investors. Groupon is getting heavy pressure from chief competitor LivingSocial, and in the coming year they’ll have to also respond to Google, Amazon, and Facebook. To stand up to those guys, Groupon is faced with a nasty Catch-22. In order to grow, they have to increase marketing costs or reduce what they charge merchants. But if they increase marketing costs or reduce what they charge merchants, their earnings take a hit.
One the one hand Groupon is faced with “impacted growth.” On the other hand, “impacted earnings.” Companies with strong balance sheets, good cash flow, and powerful brands can manage those challenges. A freshly IPO’d stock like Groupon, whose current multiple is contingent upon both more growth and better earnings, seems destined for a spanking.
I could probably go on all day about all the reasons I think it’s a terrible investment. In fact, my friends & family on my Facebook feed have been listening to me rant about this for almost a year now (sorry guys!). The bottom line is that this company’s existential crisis could come as soon as this year. The market will probably not react favorably.
FULL DISCLOSURE: I don’t have a position in Groupon, nor does my firm have one. I also use the service! Though I have zero loyalty to them or any of their competitors. To me, a deal is a deal.
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That’s what I see for 2012. I guarantee I’ll be right about some and wrong about others. I just wish I knew which. Stay tuned and let’s find out together.
What do you guys see? Let me know on our Facebook page or send me an email.
When it comes to making predictions, people, and especially market analysts, fall into two basic camps.
The first is the camp that takes itself and its predictions very seriously. More often than not, money is involved. Or ego. These people are either paid by their employer firm to predict the future or their services are purchased by individual investors. These guys hate being wrong. Because when they’re wrong, nobody loves them. They lose customers or get fired. There’s a lot at stake! And the problem is that they’re faced with an impossible endeavor. No man can truly know what tomorrow brings, and if one does manage to guess it right for a few days in row, it’s only a matter of time before he’s wrong.
The second is the camp that doesn’t do them. These guys know that predicting the future is impossible. They avoid the act altogether, and while sitting on the sidelines, they laugh at the futility of those in the first camp.
The problem is that investing is a necessarily speculative endeavor. By definition, any time you make an investment you are expressing a view about the future. Even parking your money in cash is a way of expressing the view that none of the investments on the menu will be worth the future risk. So denying the reality of speculation is every bit as ridiculous as thinking that someone really can predict the future with accuracy and consistency.
This is why investing is so damn hard. It involves synthesizing two diametrically opposed philosophical worldviews.
I think this necessitates the existence of a third camp. Folks in this camp understand that adopting a forecast is necessary, but they don’t take it too seriously. They keep an open mind about it, accepting of the fact that it could be totally wrong. Should that happen, the best they can do is change their opinion and get with the new program as quickly as possible. These guys make predictions (and investments) and neither beat themselves up about it when they’re wrong nor get too excited about it when they’re right. The goal is to learn.
Our annual predictions are an important endeavor for me. I have a lot of fun with it — but maybe that’s just the scientist in me. I enjoy formulating a hypothesis, testing the results, and discovering not just whether the hypothesis was right or wrong, but why it was right or wrong.
So dust off those Zoltar hats and let’s do this!
I’m going to do things a little bit differently this year. I thought it might be helpful to illustrate more of the process for how I make these forecasts. Just because it’s impossible to predict the future doesn’t mean I throw this stuff out there willy nilly.
The Baseline
Here is a sampling of some of Goldman’s predictions for 2012. This should serve as an effective proxy for the consensus.
- 2012 U.S. real GDP up 1.8%, and global GDP up 3.2%;
- 2012 S&P 500 operating profits of $100 a share;
- year-end 2012 S&P 500 price target at 1250;
- 2012 inflation of +1.7%; and
- 2012 closing yield on the U.S.10-year Treasury note at 2.50%.
I have a few different things to say.
The Broad Environment
I’ll start by framing the economic backdrop. I think this is one of the easiest things to do, and when you start at the top, the rest of process almost writes itself. Keep in mind that every year crazy things like the Japan earthquake swirl out of nowhere. These are the things that are impossible to predict and when they happen you have to be prepared to go back to your baseline forecasts and ask if they need to be revised.
Thematically, I see four major issues shaping the environment in the year to come.
The first is Europe. I know this was a big deal in 2011 and it was a big deal in 2010. Guess what. It’s going to be a big deal in 2012 too. Sorry about that. The European Union is one of the biggest, boldest economic experiments in the history of humankind.
It seems fitting that the whole thing was conceived and installed during the 1998-2001 frenzy of global euphoria. In retrospect, that was probably the only kind of environment where anybody would be crazy enough to embark on such a wild endeavor. Imagine if the European Union didn’t exist. Would anybody be trying to create it today? I hiiighly doubt it. That should tell you all you need to know about the EU.
Europe’s in a real jam right now. It’s not complicated. The root problem is very simple. There is a whole lot of debt that isn’t worth what a lot of people are hoping it’s worth. The solutions are where things get tricky. So far, nobody has come forth with any good solutions and the reason is that there aren’t any. They all involve pain.
The good news about Europe is that I think it becomes less of a major global story as the year goes on. 2012 will be the year where it slowly leaves the headlines but remains a significant fundamental issue. In this sense, their sovereign debt crisis will follow the same path as our mortgage crisis. People will come to terms with it and lose interest in the headlines. In the background its effects will continue to be felt.
The second thing to watch is the election. Like it or not, 2012 is going to be all about the election. Again, sorry about that.
As with Europe, the election is a big deal for a legitimate reason. This is going to be one of the most important presidential elections in a long time — not because who’s running, but because of what’s at stake. We’re at the point where the U.S. needs to change its trajectory or else the whole thing may spiral out of control.
Do you guys remember that scene in Back to the Future III where the locomotive has to push the DeLorean up to 88mph? If Doc and Marty didn’t get the train up to a certain speed by the windmill, then it wouldn’t be able to stop in time and the whole rig would fly off the edge of the ravine and they’d be stuck in the Old West forever. Well, the U.S. structural imbalances are past the windmill right now. We’ve got to shake things up or we’re going to fly off the ravine. Train crashes are never pretty.
I wouldn’t say that the market has taken on a view of the election yet. But it will. It always does. Once a Republican candidate is selected and we get closer to fall, the market will have something to say about how it feels about each candidate. If it looks like it’ll be a close race, you’ll probably see a little extra volatility. If, by September, the election appears to be a foregone conclusion, the market will price in its moves and that’ll be that.
The side effect of this 2012 election is that not a whole lot is going to get done in Washington D.C. this year. These two parties are playing a very high stakes game right now. Nobody’s going to budge on their principles. Nobody’s going to compromise. Not until the election results are in. So don’t expect any significant, market-moving acts of legislation. All of that will be up to the Fed.
The third major issue is the U.S. consumer. We talked a little bit about this guy in 2011, but he’s going to be a much bigger story in 2012.
My thought is that he’s going to take a break and retrench a little more. I think he’s tapped out for now. With all the uncertainty swirling around us, I think he re-enters his cocoon and hangs out for a little while. Nationwide, I’d expect most people to have to make some difficult decisions in the coming year. The consumer is still in a little over his head. His income isn’t rising and he still has more deleveraging to do.
Assuming this plays out as I think it will, I think that consumption takes a bit of a hit in the coming year.
It’s possible that the market is seeing this too. Stocks like Best Buy, Radio Shack, Amazon, Target, and Bed Bath & Beyond have all struggled to various degrees lately. Stocks like Wal-Mart, Family Dollar, and Dollar General have shown tremendous strength.
Anyway, I think the economic data for the first two quarters, and possibly even the first three, will be very soft. But my gut tells me that next Christmas could be a legitimately good one. I wish I had some better data or analysis to base this on, but it’s a 100% gut call. I can easily see a story where the consumer struggles and saves all year and then cuts loose a little bit for the holiday season. We Americans can only be so responsible for so long.
The fourth and perhaps most important issue in 2012 is China. Last year was a surprisingly quiet year for China. The next one will not be.
I’ve been cautious about China for a while. I’ve been quiet and modest about my caution, but lately my concerns have been rising quickly. I think this will accelerate through 2012 and we’ll embark on the biggest national discussion about China since the boom years.
This time, though, the Chinese conversation will take on a different dimension. Rather than taking the form of nationalistic worry over a country on the rise and playing funny games to the detriment of the U.S., the new Chinese discussion will be one about how its slowing down will (or won’t) affect the global economy.
Remember all the rhetoric a few years back about the manipulation of the RMB for trade gain? That’s less of an issue now. The RMB has been slowing appreciating for a while now and the anxiety over an artificially depressed currency is subsiding. I wouldn’t forecast RMB weakness any time soon, but the reality is that, for a lot of reasons, other parts of the world are getting better and better at competing with China.
There are some massive bubbles in China right now. Many are obfuscated because the economy is still largely managed by the government. But the obvious concern is real estate. Their economy will slow in 2012, and the questions will be 1) how much, 2) to what extent does the real estate bubble exacerbate the slide, and 3) to what extent does this impact the rest of the world.
One of China's "Ghost Malls"
So that’s the backdrop. Wild cards aside, I think it’s pretty safe to say that those are going to be the themes that drive the coming year.
From that, we can now make a few more specific predictions.
1. The U.S. enters recession, or close enough to it that the only people who really care are fellows of the NBER and industry geeks like myself.
The Fed is out of gas. Don’t expect much economic help from them. They’ve done what they can, and while I do see a QE3 as a virtual certainty in the next 12 months — whatever form it takes — I’m not sure how much more the Fed can move the needle. If they could have done something with dramatic impact, I think they would have done it by now and it would have had some effect.
Growth is slowing from other parts of the world. Europe is probably in a recession as I type this up. China is cooling off. South America isn’t as awesome as it used to be. Japan is still an economic black hole.
Growth here isn’t looking so promising either. State and local governments remain strapped, grappling with the challenges of slower growth and a new tax trajectory. The Chicago Fed National Activity Index (the neatest economic barometer you’ve never heard of) has started to accelerate towards the downside.
The good news right now in the U.S. economy is that the corporate sector is running hot. Profits are about as big as they’ve ever been and so are profit margins. Consider this: the companies in the S&P 500 have been every bit as profitable in 2011 as they were back in 2007 with a significantly smaller labor force in an arguably weaker economy. There is only one word to describe how these large businesses have performed in the wake of the financial crisis: studly.
The thing about margins is that they go up and down in big cyclical trends. By definition, pockets of the economy with abnormally high profit margins attract new entrants (competition) which then brings down the aggregate margins of that abnormally profitable pocket. The mean-reverting nature of profit margins is a perfectly normal part of any quasi-capitalist economy.
Remember the GDP equation from your Econ 101 class?
GDP = G + I + C + Nx
G = Government Spending
I = Investment
C = Consumption
Nx = Net Exports
From that equation, we know that G isn’t going to get much bigger. Not in an election year and not with the Fed out of gas. We know that Net Exports aren’t going to get much bigger, not with all our trading partners on shaky ground and the Dollar looking rather strong. And it’s doubtful that the I component gets any bigger, not with record high margins and the corporate sector so concerned about soft demand.
So here in the U.S., it pretty much all comes down to the consumer. How much is that C going to grow?
Before you answer that question, ask yourself this one or take it to your buddies at the club: do you plan to spend more in 2012 than you did in 2011, less, or about the same?
My guess is that most people in the middle class won’t be spending more.
At the lower end of the income spectrum, the number of individuals eligible for unemployment benefits has been dropping steadily all year (as the 99 week eligibility period expires). That’s a certain, albeit not economically-important, consumer that’s effectively dropping out entirely.
I know it sounds really silly, but RV sales have collapsed lately. You should take it seriously, though, because there exists a rather strong correlation between RV sales and GDP. It isn’t without reason. Remember, individuals consume based on expectations of future income. When consumers feel great about the future, they make big ticket purchases. When they feel nervous about the future or plan to retrench, they don’t go out and buy a new RV.
I actually think the U.S. economy will be better next year than a lot of places. In a relative sense, I’m actually quite optimistic about the U.S.. But not in an absolute sense.
Recessions, by definition, aren’t known until after the fact. So this could be the kind of thing where there’s a lot of debate by the end of the year regardless of how the data actually read. There will not be a formal declaration of recession next year. But that doesn’t mean that a lot of people won’t be talking about it.
To put a finer point on it, I think the economy next year will be the weakest we’ve seen since the crisis. GDP might slip into negative territory, or it might be between zero and 1.5%. At some point next year a serious debate heats up about whether or not the economy is currently in or is on the brink of recession.
After the latest round of economic data, I’d say that consensus odds on a recession next year have improved from 1 in 4 closer to 1 in 5. Most analysts don’t think we’ll get a recession next year. I think those odds should be closer to 50/50. Consensus forecasts for real GDP in 2012 are around 2%. I think that’s too high.
Last year, consensus was too optimistic. Consensus is now substantially more cautious, but I’m not sure they’re cautious enough.
2. That being said, I think the market could have a good year.
There isn’t a lot of correlation between the performance of the economy and the performance of the stock market. One lives completely in the present (the economy), while the stock market moves around based on what it sees in the future. If you’re trying to forecast the performance of the market this year, I sure hope you’re not looking at the current state of the economy. Any stock market forecast for 2012 is incomplete and without some sort of macro forecast for 2013+.
I think 2013 might be a year of better economic performance. That could be the year that the economy posts its best stimulus-free performance since before the crisis. As the market catches a whiff of that, it could rally at some point this year. Without spoiling some upcoming predictions, I think that real estate gains some traction this year and maybe even begins a slow psychology change as the value vultures get more active.
All of that could translate into legitimate economic improvement 12-18 months from now as homebuilders pick up the pace a bit and create some jobs — jobs that create other jobs too. Housing has always been a major component of GDP and it always will be as long as we have the awesomely powerful demographic tailwind of a steadily growing population. The entire real estate industry has appeared completely dead for years but at some point we’re all going to realize that it wasn’t dead, only asleep.
So this year could be the year when sensitive, forward looking things like the stock market start to smell that. That could then set the market up for a mini bear correction at some point in 2013, which would coincide perfectly with the 4-year presential cycle theory. The pattern doesn’t always hold, but on average, the first year of a president’s term tends to be the worst of the four for the stock market. The market also frequently bottoms right around the year of the midterm elections, so perhaps 2014 is the next really great buy point.
Finally, consensus forecasts have come so far in from last year that I think 2012 could be one where they finally nail the sentiment, but miss both the economic and market angles. I don’t think consensus is bearish enough on the economy and I think it’s too bearish about the market.
If that sounds like the craziest thing you’ve ever heard, make sure you’re on our weekly email list. Every week we talk about stuff that’s a little bit out there. In my experience, I’ve found that unconventional analysis and commentary adds the most value to the discussion. So that’s what I aim to deliver.
At some point in 2012, I wouldn’t be surprised at all to see the market look like a pretty attractive buy, at least on a short- or medium- term basis. I could even see myself getting quite bullish at some point in 2012.
To put a finer point on this prediction, I think the market ends the year higher, maybe even double digits, and I think the low comes in the first half of the year. With better economic hopes for 2013, some clarity about the election, evenascent EU headline risk, and retail holiday cheer, the last quarter or two of this year could make investors happy.
Put your opportunistic buy hat on for 2012. You don’t need to move now, but be ready. This could be a year where people who have the ability to tune out the noise of the headlines, act tactically, and stay focused at the legitimate fundamentals could reap some great rewards over the cycles of next couple of years.
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Click here for part two which features more predictions about gold, real estate, politics, and commodities!
