2012 Predictions: Just a Dice Roll

Looking back at Econintersect’s 2011 predictions, I was rather pleased with their accuracy.  Predictions are not to be taken that seriously as they are an extrapolation of today’s knowledge – and introduce significant opinion to reach a particular conclusion.

The upcoming 2012 has unusually high uncertainty in play – and this uncertainty boils down to one word: “Europe”.   Of course there are the usual potential hotspots: the Middle East in general, Iran, North Korea, and the South China Sea sovereignty – but I choose to believe these will continue to simmer or cool.

Depending on the day, everyone’s optimism and pessimism ebbs and flows.  Europe tends to be a pessimistic subject as it simply does not appear to be a well managed situation – and its seems temporary control is only gained each time the train is about to fly off of tracks.   Lack of economic management in Europe is the primary reason this 2012 forecast is pessimistic.

Oil. Only a war in an oil exporting country will push oil prices over $100 because of a cooling global economy.  Oil prices should be ending the year in the $85 to $100 range, and falling below $85 if Europe has a recession and China’s growth falls below 5%.

Inflation. Staying with last year’s prediction, inflation will only be an issue in economies growing more than 5% – potentially only India and China.  Yet both China and India are taking steps to contain inflation, and likely inflation will not be as much of an issue in 2012 as in 2011.

Europe. Any European prediction is a dice roll.  Honestly, there is no reason European outlook needs to be too pessimistic – except that the mechanisms to control a modern economy do not exist in the EU monetary or fiscal policies.  These policies are being created on-the-fly between parties who do not see the same solutions, and have differing priorities and needs.  Time is not Europe’s friend.  Hopefully, the train will stay on the tracks – but because “luck” eventually runs out – a trigger event (likely in the banking system) is statistically predicted.  The European Union is already in recession in parts, and will be deep in recession as a whole by the end of 2012 regardless.  Our “guess” is that the Eurozone will remain intact, but there is no accurate way to game potential scenarios to make a prediction on how to make money from the chaos.

USA. Europe will govern the outcome of the U.S. economy in 2012 as a contagion caused by a European banking crisis would affect business income, and create a major contraction in investment.  It is likely the Fed will trigger QE3.  GDP will be negative at the end of the year if Econintersect‘s Europe prediction is correct.  Real unemployment (employment to population ratios) will improve slightly even though the GDP is negative.

Asia. Asia should continue to expand regardless of Europe.  It is possible that the Chinese GDP could contract because any slowdown in construction has a major impact on GDP, and India’s growth will moderate due to monetary policies to fight inflation.  Definitely 2012 will provide some headwinds to the Asian tigers.

Currencies. The dollar will dominate most currency pairs.  If a trigger event occurs in the Eurozone, look to see the Euro fall toward (or even under) par to the dollar.

Commodities. Fed QE3 would send precious metals up sharply.  If there is no QE, precious metal prices, as well as other commodity prices, will drift lower.

Economic News this Week:

The Econintersect economic forecast for December 2011 predicts weak but improving economic growth.

ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown.  Although Econintersect data is not recessionary (one month look-ahead) – we take this recession call seriously.  This week the actual level of ECRI’s WLI index improved slightly – but as the graphic shows below, the index has been in a range between -7.4 and -7.8 for the last seven weeks. However, this index is still indicating the economy six months from today will be weaker.

Initial unemployment claims grew 15,000 (from 366,000 which was revised up from a preliminary 364,000 last week) to 381,000. Looking back, the last time initial unemployment claims were this low was in February 2011.

Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 400,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

Overall the data this week continued to show a weakly improving economy. This week had no significant releases – but pending home sales offered hope that the real estate market would end the year on a high note.

Weekly Economic Release Scorecard:

November Pending Home Sales:  Continues to indicate expansion of real estate
December Conference Board Consumer Confidence: Up strongly, still recessionary
October Case-Shiller: Home price decline 3.4% YoY, some signs of abatement
Mario Draghi: A look at Goldman Sachs ties to the Proposed ECB President
USA Debt Crisis: Is this crisis building because of an ignorant choice?
USA Taxes: Is the USA cutting the correct taxes?
Chairman Mao and Warren Buffett: More alike than different
Portfolio Balancing: A relook at balancing stocks and bonds
The Market Ahead: A pessimistic look at 2012 markets
Good Global Investments in 2012: Forget the BRICs
Europe: There will be no magic bullet, a solution will evolve slowly
Market Movers: News that makes stocks move
Economics:  Falls short of generating a civilized society
A new Tango:  China versus India-Japan-US?
Banker’s Behavior:  Does it rise to illegal activity?
European Central Bank: Does avoiding moral hazard lead to austerity?
North Korea: Will the new leader provide new opportunity?

Bankruptcy this Week: Ahern Rentals

Failed Banks this Week: None

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