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To me it is mindboggling we still hear financial commentators and others who should know better utter this inane phrase on a regular basis: “Investors hate uncertainty.”
Say what?
If there were no such thing as uncertainty, there would be no need for a pricing system or market whatsoever. There would be no opportunity for speculative profit in markets. There would be no reason to buy and hold an asset based on your expectation that it will increase in value.
Instead you would have been certain one way or the other and all of this information would have been discounted into the price. Why bid? Why offer? It wouldn’t be a “random walk.” It would instead be a Soviet style “stand in line.”
The continuous movement of price IS uncertainty as it is an expression of your best guess about an extremely uncertain future compared to another investor’s. And that is how you profit in markets. You either guess better than the next guy about future events, or you get lucky and your position soars in value based on an event that wasn’t even within the realm of your best set of guesses.
Now that I’ve gotten that summary of the uncertain future out of the way, let me give you my broader fundamental views for going into the New Year and their inherent risks.
The major global macro drivers of the themes I share below are based on two events that tend to be self-reinforcing: 1) debt liquidation, both voluntary and through default, and 2) deflation, based on slowing global demand, rising demand for cash, and debt liquidation. Enjoy…
Theme #1—
U.S. dollar surges
The dollar has entered a longer term bull market and will rally sharply early in 2012, finishing the year higher. I’ve shared many rationales for this in my recent Money and Markets columns, including the nine I gave on November 19.
The risk: Fed embarks on Quantitative Easing 3.0.
Theme #2—
China contracts
China’s GDP growth will slow and fall to below 8 percent in 2012, likely in the second quarter, as its housing bubble breaks, social unrest spreads, and hot money rushes out to hide. My guess is that the money will head to the U.S., which adds to the expectation of a stronger dollar in 2012.
The risk: China decides it is better to risk inflation than unemployment and once again drives massive stimulus from the central committee through the conduits known as the Chinese banking system.
Theme #3—
Greece and Portugal quit
Greece and Portugal say no more and exit the single currency union. Effectively it will mean “game over” for the euro.
The risk: The European Central Bank drops the pretense of hard money institution and commits to buying periphery debt in large quantities. This staves off the grim reaper in 2012; but eventually Mr. Market will exact revenge.
Theme #4—
U.S. expands
The U.S. will lead all other industrialized nations in GDP growth in 2012. However, it will be below capacity growth and considered nothing better than “muddle through.” But this is all a relative game, and U.S. stocks will outperform on the downside.
The risk: Fed QE 3.0.
Theme #5—
Commodities slide
The Commodities Price Index will fall another 30 percent from current levels as the main driver of all things commodities — China — disappoints.
The risk: As with my theme #2, China could react by flooding its banking system with currency.
Theme #6—
Emerging markets get clobbered
Emerging stock markets will be hit very hard on contagion risk as the European central banking system starves them of credit, and the China disappointment adds to the pain.
The risk: The European Central Bank is successful in staving off a deeper banking crisis and liquidity again begins flowing from the center (developed markets) to the periphery (emerging markets). The European bank system is by far the largest single provider of credit to the emerging markets.
Theme #7—
Treasuries hold up
U.S. government bonds will remain supported by a three-legged stool: 1) slowing global growth and safe haven status; 2) deflation as the debt liquidation globally intensifies; and 3) baby boomers shift more and more assets to low-risk investments.
The risks: A swelling U.S. budget deficit leads to Fed QE3 and a hike in monetary velocity.
The question is will governments allow the market to work and clear some of these massive global imbalances?
Given the desire for austerity on this side of the pond, forced austerity on the other, and the law of supply and demand finally working against the Chinese, we could see a swift deep sell off in asset markets early in the year.
But if politicians again do all they can to preserve the old order, they could keep financial assets inflated a bit longer. In the end I think Mr. Market wins.
On that somber forecast for 2012 — Happy New Year!
Jack
P.S. I’ll be following these seven fundamental themes for my World Currency Trader members in 2012. And I’ll be using technical price action so they can profit from events that are playing out in the global economy. To learn how you can jump onboard, read my latest bulletin.
{ 5 comments… read them below or add one }
Why would QE3 be a risk to Theme 4 (U.S. expands)?
Some well reasoned analysis.
A minor point but one people should keep in mind:
The notion of “a random walk” is also poppycock.
Among other modes like Goldman Sachs Beast(computer) located right next to the NY stock exchange’s slower computer, seeing all inputs faster, jumping in front of trades, driving bids as far as they can one direction then the other screwing everyone else in the process, and the true cause of the “flash crash” which likely caused them to reprogram a bit …you have described in your article why markets are rarely random: Intervention. Whether it is the plunge protection team using our money to pump up the markets or QE or other such means or by hook or crook some group of weasels is driving markets well beyond fair price. It is called market manipulation and anyone who would prefer to believe it isn’t happening is in denial. In past years they would blow a bubble in one market at a time, maybe two. In recent years they decided in order to have the market indicators show what they desired, they drove them all much at the same time. Preposterous? Where did QE1 and QE2 go since most are in agreement that nearly none made it out to small biz to create jobs. AIG turned over their windfall handout to Goldman Sachs. Most Treasury Secretaries come from Goldman Sachs. So you have the plunge protection team and Goldman working together for their benefit. How is this a random walk?
OK …… Im sure most of you have heard the headlines in recent weeks about the IMF …..all the PIIGS nations keep saying someone has got to do something about the IMF they want the funds to be shored up so there are more funds to GIVE TO GREECE ,ITALY , PORTUGAL ,SPAIN , IRELAND ITALY , and FRANCE so the EURO NATIONS were to come up with 200 billion EUROS and everything was supposed to be worked out all rainbows and butterflies for 2012…… but then the discontent started to show the U.K. REFUSED THEIR PORTION 30 BILLION EUROS and then the discontent showed from other nations as they balked at their fair share of payment to the IMF ….just to stabilize the fund …….so with the help of the brown libturd OBAMA AND BERNANKE THE U.S. HAS NOW SLATED TO HELP FUND THE IMF WITH CLOSE TO 800 BILLION $$$$$$$$$$$ of our dollars CMON…………..lets face it no matter how much we throw at the welfare nations of GREECE , PORTUGAL, IRELAND, ITALY AND SPAIN THEY ARE GOING TO DEFAULT ITS JUST A SIMPLE FACT……………so on the short term we can see the dollar rally, and were going to see china contract ,their housing market hasnt bottomed yet even with 30%declines but housing in china is looking more and more appealing to international buyers since you only pay taxes on a property once and thats its AFTER THAT ITS YOURS , corporations pay all the taxes over there, and like we all know the only way to keep the E.U. nations together is to just keep funneling more and more money to GREECE, ITALY, PORTUGAL, IRELAND……….. IM SURE SPAIN , FRANCE AND OTHER NATIONS WILL NEED BAILOUTS IN 2012 JUST TO KEEP THE EURO ALIVE ,….. and although the U.S. will lead other nations in growth it will be so minuscule it will hardly be labeled as growth, I see commodities still dropping in price but i dont see china coming in this time to buy commodities as they have in the past driving up prices , so for those of you out there who think there will be a repeat of the last commodity explosion from the past two QE1 and QE2 programs dont expect it even if there is a QE3 dont expect prices to explode this time, and I expect treasurys will hold up simply because they are a low risk safe haven investment . But trying to pass another quantative easing program in 2012 will be hard sell rememeber its an election year , and even the libtards will want to look conservative in 2012 to get elected
Jack,
Whole-heartedly agree with your analysis and overview. Excellent summary.
Hi Jack
If I was a babyboomer mum and dad looking for some long term growth and certainty then I probably wouldn’t like this market. However we have moved on from that and damaged the middle class and now have a casino of multiple trades driven by short term gains. Some people are happy with this. But somewhere in here we have to care about the future of our union.