Dec 28, 2011

 

To my readers,
 

 

I expect 2012 to be both challenging and profitable. My New Year plan is to focus on the ever-changing economic and investment climate, and help my subscribers to profit from it. As news events warrant, I’ll still share the occasional free My Take commentary, but if you’re not already subscribing to Market Update, please consider a trial subscription. There you will find in-depth commentary together with my personal stock trades and stock and news alerts that will help keep you on top of world events as they happen.

 

 

Happy New Year! Here’s a look at what’s ahead…

 

Past "Looking Forward" articles included the recent Looking Forward: A year In Transition, and Looking Forward: A Year of L. But really, little has changed since I made the following statement in 2008…

 

I believe economic recovery will come in the second half of 2009. The reason is not the government stimulus plan, but the healing of the credit markets. I think we will see prices rise to the 2 to 4% range. This amount of inflation is no small matter in today's context. We have come off a year of deflation where prices fell 1.5%. I believe the recovery will be cut short as the artificial government stimulation ends, which could only be temporary at best by any economic theory. The economy will fall once more, and no serious amount of money will be available to prop it up this time.

 

I have for some time envisioned a double dip in both the stock market and the economy where both turn up, then turn down again and then simply level off. At best we should be left with an L-shaped recovery for as far as the eye can see. Whether we have a double dip recession, or an L-shaped economy, there is no getting around the fact that we are about to hit a mountain of debt accumulation that will serve as a wall against any return to the robust growth of the last 25 years. That era is over.

 

I expect gold to move gradually higher over the years as the economy stagnates, inflation increases (albeit at "low" levels) and foreign governments continue to diversify into gold and other strategic commodities at an attempt at monetary prudence and independence. I would not be surprised to see gold fall near term when the realization sets in that the nature of our future is not runaway inflation, or robust world growth, or the dumping of dollars, but a more stagnant future of unfunded liabilities, higher taxes, greater borrowing, and greater control and regulation over the economy.


Again in 2010 I said…


 

I think the GDP will initially do very well in 2010 but eventually fall back to trend between zero and a positive 2% growth for years. 2010 will be a year of transition. As the artificial stimulus comes to an end so will the artificial spurt of growth. To expect the government to come up with another stimulus package of any consequence, try as they may, would be wishful thinking. The government would have to increase spending more than the last spending program to get a new economic boost and that's not going to happen. The government is out of money. (And then referring to the Euro Zone I wrote)…Then there is the debt crisis. Not the one we had--the one yet to come.


 

In A Year of L I quipped that while I expected a period of flat growth, I was willing to make a very large bet with Ben Bernanke that the GDP in 2011 would be closer to 2% than his prediction of around 4%.  I added, “I’m actually looking for a better second half in 2011, but there are still great dangers out there and housing, and the European debt crisis, will be a drag on world growth for years to come."


 

Looking forward again, 2012 is the year we could see the resolution of several unresolved problems--for better or for worse. I think Europe will be forced to accept, at least in principle, the necessity of a bank of last resort. They also have to attain fiscal unity to survive. If they fail, we will likely see the breakup of the Euro Zone.


 

Hopefully the direction the US will take will also become clearer, as the nation uses 2012 to debate and then vote on its future. A referendum one way or the other would lead to resolution. Failing that, the continuation of divided government would lead to a continuation of the status quo for some time. Either way, we should have a good idea of what to expect.


 

For the first time since I began witting these forecasts, I find it impossible to make a projection. My past forecasts have been accurate and were all based on economic policies proposed or implemented by government. But looking to 2012, there are no policies proposed! There are only possible political reactions to events and ongoing problems. Only when we see the resolution of the problems plaguing Europe and the US will we be able to once again make accurate projections about the economy. And let’s not forget China, yet another unresolved problem to be reckoned with. And yet another resolution dependent not on economics, but on China’s political leaders.


 

We are just no longer talking about economics. Instead investors are trying to discern political moves in a world where reactions to events set the agenda. And that leaves us at the mercy of "policies on the fly" type economics. I’m guessing there will be no major policy decisions made in this country until after the election and well into 2013. And abroad we are at the mercy of panicked reactions and confused policy makers. So how do you project the future based on non-policies? You can’t. To those that try, well, good luck.


 

Forecasts are at best a risky proposition even in “normal” times. Last year for example, some of the more sensational forecasts made headlines, but didn’t come to pass. Among the most widely circulated was the call Meredith Whitney made on 60 minutes predicting a crash in the municipal bond market amounting to hundreds of billions in losses. In reality this year has had less failure than normal, and municipal bonds have in fact been a very good investment for most.


 

How about PIMCO's Bill Gross and his notorious call to sell US treasuries and buy European ones? As interest rates fell to all-time lows, Mr. Gross was forced to apologize to his clients. And let us not forget Bob Prechter's sounding off about a 5000 Dow and crashing gold prices. Famous investor John Paulson lost big in 2011. Last but not least is Peter Schiff, who predicted a hyperinflationary depression, crashing dollar, soaring interest rates, and advised his clients to get out of US investments, short the dollar, and buy Europe and the Euro. How’s that working out for ya, Peter?


 

So, with an even less transparent year ahead than the one we just survived, excuse me for not spouting off predictions. I believe non-policies should be met with non-forecasts, and until policy makers do their job, there is not much I can offer.


 

 

A look back at my performance in 2011:
 

I sold a third of my portfolio in March, another third in April, and in May I went to 100% cash after reaping huge profits from selected resource stocks.


 

I shorted gold at just above 1900 and with summer approaching began buying back the stocks I’d sold. My market performance for 2011 was better than most. Having switched my emphasis from gold stocks to silver stocks for a time I was able to cash in on the huge silver run, selling near the high. Having side stepped the major fall in resource stocks, I’m in a good position now to profit from the next move up or down, which either way should be major.
  

Expect a coordinated international response if the ongoing Euro crisis continues. Once the governments of the world reveal their strategy we will finally know which way to lean as investors. There will still be plenty of money to be made at that point, whether they take the inflationary road, the deflationary road, or actually do what is necessary to solve these chronic problems.


 

The wrong choices could throw the world into chaos, leading to a recession, depression, or a breakdown of the monetary system. The correct choices could lead to a 2000 point rally in the US stock market with many stocks doubling from present levels. Like it or not, the future, the economy, and the markets, are in the unstable hands of our world leaders.

As we leave 2011 behind, I am encouraged however by the recent move by the ECB to lend banks money to refinance their short-term debt. This is a move in the right direction. It both relieves the immediate pressure on the banking system and buys them time to resolve their more fundamental problems. Let’s hope they use it wisely.


 

I want to close on a political note, which is a first here, since Looking Forward commentary in the past was always devoted to economic forecasts…


 

I cannot overstate how important the next election will be.
 

We are voting on no less than the future of America. Philosophy will be the most powerful weapon used by both the republicans and the democrats. And they will battle over precisely what the proper role of government is. My views on this issue are clear. If you don’t already know where I stand, please read my articles The Gauntlet and The Nanny State

The recent democrat victory over the present payroll tax fiasco is a warning to fiscal conservatives of what will happen if they concede the moral high ground to the progressive left. The left will win. For each policy proposed that aims to give something to someone, we must ask, “at whose expense, and by what right?”


 

Either individuals have a right to property or they don’t. Either government has the right to take it from them by force (taxes), by theft (inflation), or by fraud (deficits), or they do not. Either we have the rule of law or we have mob rule. All Americans need to be defended. Do we truly have individual rights or not? Are we all endowed with certain inalienable rights, including the top 1% of wage earners, or are they to be our new persecuted minority? Rule of law needs to apply to all citizens equally.


 

And we can’t take our eye off the ball, economically. If Obama got every cent of the tax increases he wants to extract from the rich, it would only bring a small amount of revenues to the treasury next year. We borrow 40 cents of each dollar we spend. Even with all the money he proposes to take from the rich there would only be a one cent reduction (39 cents of each dollar) in the amount borrowed. The deficit is estimated to increase from 1 trillion to 1.5 trillion, that’s 500 billion dollars just next year! How is that going to be paid for? Certainly not out of the hides of the rich. This is the key issue we the American people must face when we go into voting booths this November.


 

Obama’s strategy is clear: blame the failed policies of the past, i.e., reduced taxes and de-regulation for the present slow growth, high unemployment economy. In other words, blame capitalism. His “solution” is more regulation and higher taxes. He proposes Obamacare, Dodd-Frank, and a green energy policy as solutions to our problems. Obama wants to tell us which light bulbs we can screw in, which cars we must drive, and which health care we must have. Our choice is between freedom and individual responsibility, or the controls and dictates of government.


 

The central issue is freedom versus statism, but the fundamental economic issue is one of how to pay our bills. Instead of trying to figure out who we should take money from, we simply need to live within our means as a people.


 

By this time next year we will know whether we have chosen class warfare to solve our problems or have decided to exercise fiscal discipline and individual responsibility. Let the intellectual battle for America begin.


 

-PN
 

Available on a subscription basis Market Update includes in-depth weekly market analysis, stock picks, real-time trade alerts, and commentary on what developing economic stories mean to us as investors.