| Predictions for 2012 – Part Two |
|
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.
—
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.
|
— Feedback@TheDraconian.com Subscribe to the Newsletter by Email Read the Legal Disclaimer — |
|
