China vs USA

I have written many times before about my thoughts on China's ambitions to become world leader. China has called for end for USD being the world's default reserve currency, been highly (rightfully so) about America's out-of-control deficit spending, and China (through rose glasses) has been trying to present itself as an economic powerhouse ready to lead the world.

The reality? China can't be trusted to have it's currency as the reserve currency, don't forget, it's a COMMUNIST Nation. And China complaining about US debt? If the US currency devalued hard, the USA is one of China's biggest clients, over-night, it's goods become much more expensive. If China wanted to play a bigger role in world economics, it would 100% decouple it's currency from the USD and allow the Yuan to be traded in a capitalist trading pit. But it doesn't since it would cripple China's industry. China would rather try to talk down the USD and get people to buy the Yuan through back-door currency swap deals to gain support.

But China can compromise to take down the USD from it's throne. A UN panel on Tuesday recommended the USD be replaced as world reserve by, what amounts to, a world dollar. Quote from Article:

"An economy whose currency is used as a reserve currency is not under the same obligation as others to make the necessary macroeconomic or exchange-rate adjustments for avoiding continuing current account deficits. Thus, the dominance of the dollar as the main means of international payments also played an important role in the build-up of the global imbalances in the run-up to the financial crisis," the U.N. said.

But the report also took aim at countries like China and Germany with current account surpluses.

While debtor nations like the U.S. are compelled to reduce imports when their ability to obtain external financing reaches its limits, "surplus countries are under no systemic obligation to raise their imports in order to balance their payments."

So the U.N. wants a system where countries would manage exchange rates within a band.

Now China is threatening trade wars! You got to be kidding me, one of the world's largest exporters of stuff wants to start a trade war? It is possible, but this only re-enforces how China can't be trusted as a world currency. I really doubt China will carry through, but if it does it would have a significant impact on the hi-tech industry as it cuts back exports on terbium, dysprosium, yttrium, thulium, lutetium. neodymium, europium, cerium, and lanthanum.

Don't get me wrong, the US has brought this attack upon themselves, at it's foundation China's criticism has merit. But China isn't acting in selfless interest for the world, it wants to take over as leader. But so far, China has been all bark and no bite, lets hope that continues for the next 100 years.

China view change

My long term view is China will be the economy driver of the world, mainly due to the sheer number of people entering into the world economy.

However, China has some significant problems, some so severe I question whether China will be the world economy driver in the next 5 years, or pushed out much further.

Lets look at what we know about China.

1) The information on it's economy is much more blatantly manipulated that the US. It is a communist country where the central government "dictates" published results. The US, while very manipulated, isn't in the same league as China. Dis-information is NOT a good place for investment or relying on world finance. America has it's own disinformation, called MBS (mortgage backed securities) and CDS (Credit Default Swaps).

2) The real estate boom in China makes America look like small potatoes. In Bejing alone, there is an estimated 100 Million square feet of VACANT office space. (Manhattan has 500 million square feet in TOTAL) Further, many spaces are priced at multiples higher than what a upper middle class person in China makes (like a doctor). Example: Apartments go for $800,000, average Chinese salary is 6K. Office space vacancy rate estimated 18% (NYT)

3) China is desperate to take world lead and continues to bash the US at every step. This desire to be world economic leader has it's merits as I have pointed out. However, this has lead China to instruct their banks to lend money and in general be fiscally irresponsible, to the tune of 1 TRILLION dollars since December!

4) China refuses to fail anywhere. This mentality has produced a nation encourages it's banks to NOT WRITE DOWN ANY BAD LOANS. Think US banks are insolvent?  At Least in America we know which banks in the US are insolvent but we pretend they aren't. China, who knows which are.

For a really great long running rant from Zero Hedge on China being down for the count for the next 20+ years click here.

In any event, this is distrurbing, one of my hopes is in the next 2-5 years the world economy would start to turn around due to the emerging markets. With China having millions flee cities due to lack of work, the country facing civil unrest, it is looking more and more like China is not going to pull the world out of the economic funk.

This is good news sort of for America, since the world will be forced to prop up the US. There just isn't a better alternative yet. Reminds me of my voting pattern, vote for the politician you hate less, but you still don't like either choice.

What concerns me the most is what China will do if enough civil unrest materializes to challenge the established government. If I had to guess, China would demonize America as the root of their evils, like all other countries do. I hope this is just a crazy thought.

Bottom line: We will continue to see resource fluctuations and a VERY long term problem in the world.

The myth of China decoupling and saving the world economy

Facts on China
China's Yuan has was pegged to the USA dollar for years, ensuring China production remains a constant significant cheaper than USA production. A year or so ago, China "decoupled" the yuan from USA dollar, but did so in a way to ensure the appreciation would be slow. China has wanted slow appreciation to the USA dollar, since it would adversely affect the symbiont relationship with China and the world.

My Spin
A UK article printed news (click) on China "on the sly" soaking up extra USA dollars. Probably to keep their currency from valueing higher and further hurting their economy. Also the impact of the Olympics to the China political sphere cannot be understated. I'm confident that China did everything possible to ensure best spin of Olympics at any cost.

Now that the Olympics are over, interesting to see how critical it is for China to take USA dollars and own our debt. China now has over 1.8 TRILLION USA dollars. Wow.
Even with China trying real hard to preserve the Asian tiger, some startling stats. Remember, China HIDES facts worse than USA, so I would expect that these numbers are optimistic:

"During the first half of this year, about 67,000 small and medium-sized companies went bankrupt throughout China, leaving more than 20m people out of work," said the National Development and Reform Commission. "Bankruptcies of textile and spinning companies have numbered more than 10,000. Two thirds are on the brink of bankruptcy."

Lehman Brothers warns of a risk that a housing slump and the 55pc equity crash since October could combine with a global downturn to set off a "vicious cycle". House prices have already fallen 18pc in Guangzhou and 9pc in Beijing. Prices are now falling in cities that make up over half China's population.

Now that doesn't sound like a country that is positioned to save world recession/depression. 50% equity crash? Boy I was shorting the wrong thing! Don't get me wrong, when this down cycle ends, I will likely move my investments to Asia, the tiger is awake, and it's hungry. But for now, a bit of reality is in order, and some painful decoupling must occur before China can claim the next 100 years as financial growth leader.

Dollar Rescue Plan (edit)
In a related US dollar news, March 2008 Europe & Japan also put into place to shore up US Dollar and could trigger the plan the next dowleg of US dollar. My Spin: US needs to shore itself up and stop taking the easy way out asking it's neighbors to do the heavy lifting. At some point your friends get tired of your wreckless actions.

Chinese Massage with an unhappy ending

I have wrote previously of the relationship with China and the USA that has helped get the US and in effect the world to where it is today.
Quick synopsis, America gives US dollars to Chinese for goods and services. Chinese government buys US bonds, giving the "cash" to American government and basically sits on US bonds. The cash is in effect returned in the USA to repeat the process.

America is a debtor nation. It could not get to where it is today without a "sponsor" of debt. The world has been enabling our debt habit. Once the cracks starting to appear in the USA, back in 2007-08 there was calls for "decoupling" and that the US may hit a recession, but the world won't. Fast forward today, and the world is hurting as bad if not worse than the USA. Further, China is hurting. It is theorized in Q4 of 2008, China had ZERO growth. That seems unheard of, and further sets up for negative growth?

Through this whole process, China has rattled the cage, to set itself up as possibly new world financial leader. Several reasons why this isn't a crazy proposal. First, China isn't a debtor nation. Second, lets face it, China makes the "stuff" the world uses. That means everyone gives them their money for goods. And lastly, China has about 2 trillion of US bonds it can try to use as a weapon to "hurt" the US if the US crosses them. Obama administration, to their credit, is already providing an alternative to a Chinese financial land-grab, by proposing "international" sharing of power.

So US-China relationship has helped contribute to the long term "prosperity" of the world economy through spending. The relations have been getting a little more tense as the world economy shifts. Obama enters office and starts trying to set the tone with China that the USA won't be pushed around by China. Treasury Secretary Appointee Geithner states "China Is ‘Manipulating’ Yuan"

China in turn is a net seller of US Long Term T-bills in Fear of USA Capital Outflow and Deficits. I find it real interesting that Bernanke said that the Fed may start to buy "the long end of the curve" (longer term bonds) from the treasury at the same time when China is looking to sell those same bonds. Reminds me when corporations "buy back stock" just as major stock holders are dumping.

For now, the US and China continue to posture with each other to see who damages the relationship severely first. Hopefully life as usual continues, with little impact. But the backdrop story of the world economic recession is these two players in this 20 year long dance. The US obviously wants the Chinese to finance the American debt way of life, while China wants to "get what it wants" in exchange for funding US efforts.

Once again, this is yet another reason why I am looking at and playing with (cheap) resources to hedge storage of wealth. Barron's cover says "get out of bonds NOW!", I wouldn't go that far, but keeping in bonds needs to be questioned and slowly shuffle for the door. Then again, Barron's record has been so horrific in the last year, maybe bonds are the best place to be for quite a while to come.

TLT has been dropping, as Obama spending speech winds up, and the bond market usually is credited with seeing the horizon before the equity markets.

Lets just hope as the American's continue pay for Chinese services with debt notes, this all ends happily.

Old video, very funny

Straight Talk - Stock Market
Uploaded by senatork

More evidence China is not the near term solution

Mish's Global Economic Trend Analysis had a good article this past week on China.
I have posted quite a few times on China, and in the last 6+ months, how China is NOT in a position of strength. Sure, long term, between now and 2035 China has a rosy future, but quite a bit can happen between now and then.

My previous blog post Chinese Economy more fraudulent than USA showed plenty of excess capacity in some of China's largest cities. In one city, more excess commercial space (unused) than the entire commercial space available in Manhattan.

But this next video takes the cake. An entire city built without the people of China being able to afford to live in it. Why may you ask? China is operating in the global insanity that the US also follows, as described in Misrepresenting Economic and Financial Data. The explanation in Mish's post on why China has so much overcapacity is China paid people to build the city and other excess capacity, so the WORK DONE can be counted towards China's total GDP!

This is clearly an active distortion of reality, building a city, to not be used, but to count the work, and developed real estate to build up China's numbers is a distortion of productivity.

There is no one country that can save the world from itself. The lies must result in losses, and the cleansing must occur before the next economic cycle can begin.
The good news is, once this downturn ends, the next economic upswing should bring on a fantastic growth period.

Watch this video, to scratch the surface of understanding the mentality of a country to build an empty city, then think about the massive inefficiencies/distortion/over valuation that must be through the entire country of China. Frankly, its incomprehensible.

China positioning to take out Americas Dominance

The USA has lost it's credibility as a world leader on almost every front in the last 8 years.

• As world protector and military leader, its action on preemptive strike changed the US as world protector to world bully. The good will from US attack on 9/11/01 was spent rather quickly on the Iraq War.
• The USA lost its position as world change leader on environment reform, social reform, human rights, education, and other social issues America regressed on all fronts.
• As world financial leader clearly America lead the way for the world into this situation. The World however, is 100% to blame for following our lead rather than questioning the soundness of "new financial instruments". Its easy to blame the US, but apparently much harder for the world to take responsibility for their own actions.
• The US Debt machine is out of control. The US hasn't had ANY fiscal restraint since 2000, and in last few months, easily doubled direct and indirect debt obligations with across the board the government taking on risk. In time of panic, this is viewed as leading and innovating, once the dust settles a more critical eye will be cast onto the US.
• The US dollar in the last 8 years had taken an enormous hit, up until a month ago. In the last month the US dollar is rallying at a parabolic rate. Once this fever is broken, it may be the last hurrah's for the US dollar. The US dollar, until last year or so, has been the standard for trading Oil, Banking, and all aspects of Finance. This has translated that the world has had to "deal" with the dollars weakness on a daily basis for years.

Make no mistake, I am not a "fan" of China. However China has masterfully played its hand in the last 20 years while America has given everything to China without demanding same business rights as they have to America. China has no debt, 1.3 Billion people with an economy growing at 10% (this is their current recession rate), and obviously world military leader.

For obvious reasons, I don't believe the world is looking for China to take center stage to dictate the political tone for the next 100 years. However, the world may have no choice.

China has a closed system, not allowing trading in their currency, allowing no one to buy into their stock markets, real estate, and therefore operate without direct global financial influence.
China, could at any time, change this. They could open their currency and markets to world investments. If this was to occur, the world may decide its safer to "store" its wealth in China over the USA, which would immediately collapse the USD and Bonds.

I am NOT predicting this occurs. This however clearly illustrates that the USA as a debtor nation is very weak, prime for its competitors (or enemies) to take it out without a bullet shot. DEBT IS NOT GOOD, as some have suggested over the last 30 years.
Between the USA's own resistance to providing transparency, allowing private busiensses to recognize financial losses, socializing every business in sight, other countries failing, there is one country with world clout that no one is questioning their strength, China.
America has completely failed at leading through this trying time. This story has not yet fully unfolded. When it has, the 9/11 transformation will pale in comparison to the new world view.

China's banks are now calling for the USA to be dethroned from its position as world currency. China will never let up and will continually attack the US as world leader undermining its actions until it gets what it wants.

I hope I am a complete lunatic on this topic and 100% wrong on this topic. I want the USA to stand center stage for the world for the next 100 years. However, I don't see the actions earning the right to keep the responsibility and center is currently holds. Maybe the next decade the new leadership will rise to the occasion to change the course of America. I can hope, but will prepare for the alternative.
UPDATES on news items for this topic I'll add below
10/27/08 - Case for Chinese Yuan to be world currency

Inflation, Deflation, and global currency wars

America is involved in many wars right now, lets list them shall we?

1. Iraq
2. Afghanistan
3. Libya (See War Powers Resolution, and how law is ignored. )
4. War on terrorism (Bin-laden...recent military action)
5. War on drugs ( Mexico's border is flaring up badly )
6. Currency War
7. Arguably, a global simmering trade war

Wow, thats quite a bit of wars! The first three are relatively easy to grasp by most people. The countries involved are "over there" and we send military to change a political situation.

The next two are a bit more complex, as it is arguably everywhere in the world. The shape and form however to bubble to the forefront when clashes occur. It could be in the form of the bad guys killing people, or a counter attack by the good guys (USA). Again, within reason, graspable.

The last two are very subtle wars, Currency and Trade wars. Each take their own form and shape of political maneuvering, like a very big chess game. Spectators watching may not easily grasp all the various possible moves and 10 moves ahead the players are planning for.

The USA made some very shrewed policy changes in it's day, one of the least recognized is what Nixon was able to do. At that time, the US dollar was the defacto standard for currencies. However, the US dollar was convertible to gold. America had started accelerating it's budget imbalances, and other countries were asking the US for larger and larger gold conversions.

Nixon's administration assessed the situation and realized the world would have no choice, but to support the dollar even if it became a pure fiat currency. At that time, America was a manufacturing and military powerhouse. The shackles of money tied to shiny rocks was eliminated, and America could do what it wishes with it's currency.

The chess play here is simply this. Say, other countries want to trade with America. And lets say that America gives US dollars in exchange for goods at a rate that is "unfair" to the other country. Let's assume America isn't providing valuable goods back to the same country and the deficit is basically IOU's in the form of dollars.

Countries COULD turn around and dump the US dollars, in exchange for other goods and services from other countries. It could even invest that money back into the USA by purchasing assets. But if they did so, that would apply pressure on THEIR FIAT currencies to rise, as their currency would gain strength relative to the over-printing of US dollars.

This you would think is a good thing, and in many ways it is. But the net effect would be that countries exports would go up in cost relative to any other country that is prices relative to US dollars. Over time, as the US deficits spends more, their currency would rise high enough to cripple exports.

What to do? Simple, keep US Treasuries or cash and sit on it. Each year allow your holdings of US dollars to build. Since the global currency system is based on fiat currencies, each currency floats RELATIVE to each other. And since historically (since WW2) the trading patterns have been dependent on US dollars, the world has been forced, and WILL CONTINUE to be forced to finance the US over-consumption and lack of production.

Fast forward to today, and the US is deficit spending 1.5 trillion per year in ADDITION to the revolving bond debt that matures on the outstanding 14 trillion of debt.

Now, lets turn to China!

China's currency does not float, and China aggressively locks their currency to a very specific level to US dollars. So while other countries may somewhat try to keep their currency stable to US dollar trade, they do allow a bit of flexing to help ease economic imbalances. (think Euro hitting all time highs against USD).

China however does not. So what possible effect could this have? China's command economy dictates that politicians set policy to maintain the currency imbalance with respect to the USA. This has the unfortunate side effect of excessive credit and currency in their own country, resulting in inflation.

Inflation in China is high right now, and China has been fighting hard to keep prices stable for it's exports, including to the USA. This relationship has been maintained since Reagan, and is partially responsible for the US corporation exodus to China.

Well today, I see a crack in this relationship. China is allowing electric costs to rise. That will in turn force manufactures to charge more. That will result in prices from China to rise. (think Walmart, or Apple) Apple btw, to their credit is heading this off by diversifying suppliers. And despite the US economy being in a fragile state, we may see prices rise in stores, beyond the recent food and gas price surges.

The situation is of course, unsustainable. But that won't stop everyone from keep on doing what they are doing know. The US will continue to deficit spend high amounts. China will continue to try to keep it's currency stable vs the USA. But once rising prices start snowballing out of china, this game will change in shape, form, size, and velocity.

The global economy will take a turn for the worse as China tries to redirect rising prices back out to America and the world.

We live in interesting times.

Predictions 2012 recap

1 year ago I posted predictions for 2012, lets see how I did.  Text in Italic is original article, quoted.


Roundup:
2012 - 2 miss, 1 partial, 7 hit
2011 - 2 miss, 2 partial, 6 hit
2010 - 1 miss, 3 partial, 4 hit
2009 - 7 miss, 8 partial, 5 hit  (my first year, some crazy predictions!)


2012 predictions
1) The market will end LOWER on Dec 31st 2012 than Jan 1st 2012.  Last year I waffled and said couldn't tell, and the market did end about flat.  This year I am not going to hazard how low the market goes.  It could move higher before lower.  But with the election over by November, pretty much the hype of the next president will be over, and the market can take a nice dive, like it did in 2008.
Complete and utter miss, did not end lower.

2) Commodity prices will bottom in 2012 - there will be a pattern of a low hit in 2012, with the CRB index moving up from that low set in 2012 at the end of 2012.  This will be the setup for a hell of a 2013 that no one will forget.  This index represents commodity prices in USD terms.  (This includes Gold, Oil, and food.) This will be key setup for the inflation issues ahead.
A hit for 2012, we had a distinct CRB bottom mid 2012.  The only question is follow through in 2013 or not. This could be a fake hit, if CRB breaks into new lows in the years ahead.  See chart at bottom on CRB.

3) The worst of China's financial crisis will come to pass in 2012.  A new regime will take over, and plans for creating the worlds largest consumer nation will be center stage.  China's stock markets will bottom in 2012.  In effect, China will throw down the gauntlet at replacing the USA as world economic driver.  The transition will take years.  This setup by China will move from the corners of blogs to mainstream media.  Expect China to take shots at USA like trade tariffs etc.  It will be all positioning for them to take the upper hand in the world arena.  The issue won't be why the tariff is justified or not.  The issue will be China can do it and the USA can't respond in kind.  It will in effect be a test.

A hit.  China regime change happened in November. I am sure everyone is aware of the details, since the largest country on the planet changed government once every decade....    Chinese stock market hit a low first week in December not seen since 2008, and has been on a tear upward since.  Up 10% in less than a month.  There have been multiple contention points with China in 2012 on trade and military.  China is positioning to take over Japanese controlled islands, as it continues to breach Japanese territories on water and air. A tariff war has not started between China and USA, although some tariffs around solar and wind power are in progress.  The New Leadership is trying to reform the corruption, which is required to take over the US as world leader.   Only miss is mainstream media ignores china in USA.

4) The Euro will NOT be the same as it entered 2012.  The nations bankrupt will be either kicked out of the euro, or a new two-tier model created, or a new Euro model that allows printing to finance debt emerges.  The facade of all nations must adhere to fiscal responsibility will in effect be gone.  The nations that need to print, can, either through the euro or on their own.
Utter Miss.  Euro is kicking the can, and nothing has changed, except appeasement and perpetual financial turmoil.

5) US, and Europe will be declared in a recession.  The media has hinted, but this hasn't come to pass.  Although this may be a "gimme" on my part, it is still an important event for the 2013 lineup.
Partial hit.  The recession isn't declared, but its there.  US is in a recession since July, and Europe same.

6) US 30 year bond rates will NOT break out of the channel in effect since 1986.  This is critical, for if we do break out of this, chances are most of my other predictions will be wrong.
A hit!  Another year of 30 year bond rate decline since 1986. What won't go up, must go down...until zero is hit.

7) US dollar will NOT break below the low in 2011 until after August of 2012 (or may not at all in 2012).  With the election, there will be enough political spin to keep the dollar from crashing until close to the election.  This is related to, but not tied to the previous item, Euro, China, and the market movements.
Hit! US dollar has spent entire 2012 above the low in 2011.

8) State and Town bonds will continue to deterioration as high quality choices for investments.  I am pulling back from my 2011 prediction of a significant shift.  Instead for 2012, predict more issues, more bankruptcies, and some interesting court rulings.
Hit, if I stick to the bold line above. Towns are winning right to go bankrupt, but no avalanche yet.  Also all States operate solvent, even if not truly solvent.  However, no state bankruptcies.

9) Since this is an election year, there will be a few TOKEN prosecutions around financial wrongdoing, but overall, we won't see the law enforced like we did back in the Savings and Loan crisis.  Lack of law enforcement continuing is crucial for the 2013 crisis setup.
Hit, really no major push to prosecute for trillions in fraud.

10) The end of the world will not happen, China will not declare WW3, and mass riots in USA will not happen.  In a nut shell, 2012 won't be chaos erupting, but 2012 will be the layup for 2013+ for issues heating up.  My 2013 predictions will make all previous years look tame. :)
Hit, Chaos is at bay, an easy one :)

China and Russia Failing, Economic Global impact

Since end of WW2 the world has been continuously moving to open global trading.   The supply chain issues during COVID highlighted this.  History books will mark the start of COVID as the end of peak global trading.  The truth is global trading was strained and retracting from China started before then.

The result is we are headed to a multi-polar world, with different countries aligning as trading partners.  

Russia

With the invasion into Ukraine, the free world (minus India) has moved away from trading with Russia.  International companies withdrew from Russia practically overnight.  Russia removing itself from global open trade, combined with destruction of it's military arsenal, global banking freeze on US assets, and economic turmoil will continue to take a toll.

The ruble is falling as Russia spends its reserves to maintain Ruble value.  This isn't sustainable as Russia is no longer net importer of US dollars.

China

China raised its rhetoric of invading Taiwan before COVID, and started to take steps by removing westerners from its country.  The hostility of the environment rose, and post COVID accelerated.  Western countries have exited China en-mass for being the manufacturing hub of the world.

Even Chinese companies are exiting China to setup manufacturing outside of China simply to remain relevant.   If these companies didn't take this step, they would have collapsed.

China Yuan is in a freefall, with levels not seen since the start of COVID.  Real estate has declined 25-50%+, and unemployment skyrocketing to over 20%

The result is exodus out of China to leave en mass, with an estimate of 90 million people.

Inflation - here to stay.

The world has under-invested in resources, and resources like Oil will continue to see costs to produce rise.  Since WWII energy has continuously become cheaper.  For the first time in over 80 years we will see perpetual energy costs rise until alternate energy sources become more viable as a major source of energy.

The issue is the Federal Reserve is trying to fight inflation, when the real threat is increasing energy production.  The result will likely be a Fed that punishes companies from investing, including into energy due to higher borrowing costs.  This could become an economic death loop.

Affect on US and world

Money must reside in a place.  People living in these countries, and countries negatively affected by these failing states have the option to move money.   Moving money will also be affected by inflation concerns. Some will choose to purchase Bitcoin or other Crypto, European assets, US assets including stocks.  The net is a stronger dollar and a more robust US stock market.

The Risk

Assuming Russia or China does NOT start WWIII or other global dislocating event, as these countries destabilize, the result will be a less robust global economy.  How this plays out is difficult to predict.  The question out there is moving your assets to protect.

What to do?

INDA is a good bet, as it is a free country that also trades with Russia. It has benefited from the exodus from China to other countries.  India has 1.2 billion people and has low global debt. It does have weakness of depending on imports, and could get caught in a political issue between US and Russia.

Bitcoin historically falls and rises with the US Stock market.  Therefore as a hedge against US market it isn't that good.  Same for Gold, in times of downturn it takes a massive hit.  In times of massive printing or lowering rates it benefits.

The best investment is in yourself, including solar panels by reducing future living costs.  Divesting to countries like India is a good longer term hedge including a rising Rupee or India economy booms.

US stocks over the longer term does actually look better now, with emphasis on Bio-Tech (IBB), AI (BOTZ) , and other new tech sectors.  I believe normal companies will continue to suffer creating a wealth divide of larger money moving to tech. 

The US market could go higher from here due to the global instability, or take a nose dive with the world.  The nose dive I do believe is inevitable just not guarantied the next destination.

Good luck!

All easy buttons pressed, the top is near

I fully believe a generational market top will be between Sept 2nd through January 2022.  With a 13 year bull run, it is immaterial which month the ultimate top is in.  The only reason I am not stating the top is in is first, I cannot know, but second the fear indicator is high, this leaves room for a rally to resume.

Feel free to click on links when provided to learn more.

Inflation or Inflation?

Consumer cost inflation is very high, and likely to continue.  Cheap goods come from China, and they are in an energy crisis.  That means ALL goods from China will have costs go up and export higher costs to the world.  Pair that with transportation skyrocket costs and local production disruptions, everything is destined to go up.    I actually do think some of it is transitory, but most things will never return to 2019 pricing.  Higher prices will cause economic negative impact to profits and growth.

People are demanding higher wages for SOME jobs, and other jobs will see pressure for higher wages to adjust for cost of living.  This will force some jobs to be outsourced or reduce company hiring.

Asset inflation of houses and stock market will be under pressure as people have less money to put into these assets.

China exporting inflation, then deflation.

China is the second largest economy in the world, and their entire country is pinned on the most epic ponzi scheme the world has ever seen, real estate.   Evergrande is the tip of a huge iceberg as we see a domino effect of failures.  The west in pursuit of returns has invested in China's real estate ponzi schemes, and China deflationary collapse will hit world.  Pair these woes with China having rolling power outages and an exodus of foreign companies causing millions to lose their jobs, China is facing one heck of a deflationary collapse.  

Oil, coal, and natural gas.

Fossil fuels are rising in price worldwide.  Europe is facing a crisis on not having enough natural gas to make it through the winter.   While some like to blame 'green power' for this, there is also many countries forcing higher prices for their gains.  Russia is using their natural gas supply as a weapon to Europe, and OPEC is taking advantage of the lower gas production from the USA due to the collapse of fraking.  Further coal China shortages is forcing coal prices outside of China higher as China is ordered to secure fuel "at any price".

USA - All Easy buttons pressed

The US has pressed all the easy buttons to goose the economy since 2008.  Low interest rates, trillions of free money, under Trump very low corporate tax and low tax to 'pull US money' from overseas.  As a result, there is very little easy buttons to press to goose more out of the economy.  Does anyone really think if we enter a recession, lowing 30 year borrowing rates from 3% to 1% will spur material growth?

US dollar IS the global reserve currency

The global reserve currency status is very much mis-understood.  If the US cut back issuing new dollars, it will have the effect of every other currency experiencing a rising dollar value.  This will force other countries to also reduce their spending to keep their currency in a 'trading range' those countries find acceptable for pricing in the global economy.  In effect, when the US cuts new dollars, so goes the world.  If the US increases dollar creation, others are more able to increase their currency creation due to currency pricing compared to dollar valuation.  Countries that fail to curtail a rising dollar, will pay a huge economic price as debt priced in dollars will crush companies in that country.

So if America cuts spending due to fears of debt creation, the world will also cut spending, this means a global slowdown.

US Stock markets are at extreme historically high prices

US stocks are priced for perfection for the years ahead, any realization of missing perfection jeopardizes stock valuations.   Using stock market data between 1928 and 2021, stock are priced for -6% returns over the decade ahead.  

The only way to kick the can, more - Free Money & demand pulled forward.

January 2021 I wrote "So we have a Democratic leadership, free money for everyone.  As long as ... Free money to the people will flow, heavily, to gambling, ala Gamestop style or the market in general.  It will also flow heavily to Bitcoin."

My concern is the free money train is finally going to be over, and there will be a multi-year hangover to deal with.  We have heard the hard line Republicans are taking over debt, and the Democrats I don't think have the will to blow past their objections.  So we are repeating my concerns on January 2021 "I expect Republicans to enforce fiscal discipline much more than they did with in 2016-2020 during 'good times'.  With a crippled economy they will double down the pain in hopes of winning elections."

With free money ending, the fake demand ends, and the poverty stricken America hangover can resume.

If I get this wrong, as I did in January 2021, approval of a  large enough free money bonanza could kick the market out for continuing highs until the free money isn't large enough to sustain the new day traders of 2020.

Conclusion

We are very close to a multi-year high, potentially 5+ years, with a 50% market cut (potentially 80%, but I doubt it)   However monetary action does matter.  if the US resumes free money for everyone the market high is likely quite a bit out.  China stops the worlds largest ponzi scheme from collapsing and resumes inflating the bubble, or OPEC and RUSSIA provide maximum energy output my view would change.

Barring these actions, it is not a great time to buy for a 20% gain, but instead good to take some risk off.

Risk off can be US bonds or diversifying into growth countries like India. Alternately take a chance on a deflationary asset like Bitcoin which may do very well in a deflationary collapse.  Good luck!

China is NOT the savior of the world...yet

America may have lead the world in ficticious financial "innovation, with many other countries following American's lead. But China doesn't want to be outclassed, to me they are going for the gold on economic malfeasance. China is a world success story,but the standard thinking it will be a growth story is in jeopardy. For example, in 2015 the Chinese demographics will start to shift, driven by China's "one child per couple" policy.

But for now, it looks like China has been doing everything possible to ensure their on-paper economic numbers are met. But reality may be a tad bit different. But this video is a MUST watch if you want to know about the state of China. A great quote "China has built a 5x5 office space for every man, woman, and child in china'. Now if that isn't a sign of overbuilding, I don't know what is.



Also see Mish on Nonperforming Loans in China Rise to "Trillions of Renminbi"

2011 Predictions

Each year I do this, I am learning more about mankind. First, it is more apparent than ever to me that people in general always choose the way to avoid pain today, even if it means much worse pain tomorrow.

Unfortunately, my worst fears about this entire situation is coming to bear. The world is not taking effective, proactive steps to avoid an all out disaster in the world economy. Instead of dealing directly with the issues at hand, every step the short-cut to avoid pain today is taken.

In effect, we are kicking the can down the road, and making sure the fix will be much harder than if it was dealt with upfront.

Again, this isn't a dig on Obama, European union, China, or anyone. It is a lesson on humans. Finding true leadership to do the right thing seems impossible to find. Maybe revisionist history presents a false image, and such a thing doesn't exist until no other options are left.

There is a quote by Churchill that sums up my outlook on politics about America..

"Americans can always be counted on to do the right thing...after they have exhausted all other possibilities."

-- Winston Churchill

So with this in mind, my predictions are based upon my opinion that real change to improve the situation will NOT occur until crisis happens. The kick the can policy, started with Regan on China financial relations and the Federal Reserve Bank paper games will continue until it isn't possible. No matter how grim the situation looks, I have full faith for the wrong decisions to be made, if they are available and less painful than the right ones.

2011 Predictions

1) Entering 2012, the public won't look at state and township bonds the same as they do today.
The State and City budget crises are here and now. We cannot get into 2012 without some precedents being set. Due to courts and the kick the can, we will have cities and states entering into bankruptcy-type scenarios but likely not resolved in 2011. The exact prediction is multiple cities and states will enter into financial heart-attack type crisis mode. The Municipal bonds will be in turmoil. Due to kick the can, I don't know if the federal government will step in and back everything or let this play out as it must. Because of these crisis, government unions will get attacked on multiple fronts.

2) European Union will enter into crisis mode in 2011.
The world of international finance smells blood in the water, and they are biting at Ireland, Greece, and eventually Spain. The European union will have to face an all in by Germany and others to stop their collapse in 2011. This of course, will not work. But in 2011, we will have our answer if there is one more big kick the can attempt or not. I don't think the European union will fold in 2011. and the euro will stay in tact. The main reasoning is, there is plenty of options for more can kicking.

3) China will have some turmoil beyond what is expected.
China's policy of currency manipulation and not allowing their fiat currency to float is already backfiring. This policy allows America to do whatever they want, and China has to buy US debt. The severe inflation pressures China is already facing is starting a put-out-the-fire game, where new fires pop up as the central China planners try to put out old ones. I don't think China will melt down in 2011.

Again, plenty of room to kick the can for them also. The stage will be set in 2011 for the main event in 2012-2013. Prediction: The world view of China as leader into the next decade will get tarnished in 2011 as their massive fraud creates havoc for their financial bubble.

4) Canada, Australia, and other countries that avoided a real estate blow out in 2008-2009 will now get their turn.
The cracks are already forming. The world will learn that Canada is not different, and is more like other western countries for financial fraud and reckless loans. Australia and Canada will enter 2012 joining the western world financial turmoil, and lose their status as "better than the rest". At least one major bank in each country will have a crisis moment, resulting in their governments following America in socializing the private debt with public debt.

5) Gold, oil, and other resources will see unbelievable turmoil in prices in 2011.
The price volatility will be amazing to look back this time next year. Individual commodities will get insane spikes as crisis occurs.

I actually have zero prediction if gold will end higher into 2012. By end of 2012, gold will be significantly higher. But since this is a 2011 prediction, I am going with higher, but I won't say 100% or 1%. The politics of 2011 will determine that.

6) Food riots in certain countries will occur in 2011.
As resource prices destabilize, there will be civil unrest as the masses barely able to keep up with their bills have problems buying basic resources such as food and energy. Again, no global apocalyptic predictions. Just setting the stage for 2012-2013 with destabilization.

7) US bond rates stay within tolerance in 2011 as a guess, but if not all bets are off.
If US bond rates break out of the range established since Volcker in the mid 80's all bets are off. Once the US government loses control of it's credit worthiness, the entire shebang is thrown in the air. Anyone who knows how the politics will play out is fooling themselves or you. 2011 will be defined by the ability for the US government to keep its debt rating in this channel. Click here to view. The optimism comes into play as other countries have issues, making the US situation look less-bad.

8) The best place to be, all things considered, will be commodity stocks or related investments for 2011.
But I am not committing to a buy and hold until 2012. Just that as this unfolds, there will be spikes higher before the game changes. The percent gains from now until the "top" in 2011 will be best in commodities.

9) US Dollar and stock market pricing I can't make a prediction on this time. There is so much at stake, so much at risk, so much global tensions building. I can't even guess at how the dollar and the market fares. I can say both will see significant volatility, and the market won't march up back to old highs UNLESS it is accompanied by resource prices soaring. If the market makes new all-time highs, in nominal terms of living standard, it is really a new low.
SPX won't go lower than 500, or higher than 2,000 in 2011. Best I'll do for a prediction. ;)

10) More countries will fail or enact protectionist measures, exasperating volatility.

Well, thats my top 10. Pretty freaking scary really. Notice in 2010 predictions some make a comeback for 2011. Mainly since things are playing out slower than I expected. I am still bullish on commodities, but recognize as the crisis unfolds, resources will be volatile.

2011 will be volatile, and it will set the stage for 2012-2013 when things will get ridiculous.
So enjoy 2011! :)

China Yuan

There is so much change going on in the world, its near impossible to track the 20 different directions the world economy is being pulled in.

One of my previous posts, I have stated that this downturn will likely end with China emerging as a world financial leader, and America's position diminished.

The USA has enjoyed since the end of WWII that the US dollar has been the defacto currency. This has helped the dollar have a relatively high value compared to other currencies. Up until a couple of years ago, ALL oil trades where done in US Dollars, for example. Now that the US has basically pissed everyone off, politically and financially, the world is questioning the status Quo.

And China, has dreams of taking over as world leader, and as I have previously blogged, has been taking pot-shots at the US at crucial times.

Almost every currency in the world can be bought and sold on the world financial markets. For example, If I wanted, I could put all my savings into Euros. However China has has a closed financial market. You can't buy Chinese stocks, you can't buy Chinese Yuans, but the Chinese can buy the free worlds financial if they want.

If China is to take over as world Financial leader, they MUST allow the world to buy their financial stuff, and the first step is their currency.

Today, China took a small, but HUGE step to opening up their currency. China will allow certain close countries to trade currencies with the Yuan.

China has huge issues, political, corruption, social, but they have three things on their side. ZERO debt, huge production capacity, and a huge market, 1.3 Billion people.
With those three things, many countries over time may become more desperate to move away from USD and onto Yuan.

Chinese representative in this move stated "the likelihood of the United States issuing more money in the near future adds to the depreciation risk in US-dollar-denominated assets and trade settlements."

Clearly China is positioning to take out the US, as the US becomes more bankrupt. Lets hope the world doesn't run from the USD to the YUAN, for the world's sake, and mine.

This is yet another reason why I like bottom-fishing for cheap resources for a long term play. There is no such thing as absolute wealth, and currency is by far not certain to keep its value over time. Gold, oil, and other resources "CHEAP" are a great long term hedge. In a deflation situation however, all resources should continue to get cheaper, unless the dollar collapses, inflation hits the US, or world events change the situation.

China's Fraud economy and US Dollar valuation

Mish of the Global Economic Trend Analysis blog has recently posted a series of articles about China and US Dollar valuation. Mish frequently posts about these topics, but the recent series of articles together does a great job of framing a global complex system to the heart of what drives the China economy and US debt machine.

I highly recommend reading for everyone, since the US and the world are in a twisted economic death grip with China. Please keep in mind Mish tends to present that gold is money, and for this reason, I try to keep skeptical of Mish's analysis. Such a fundamental wrong viewpoint (in my opinion) runs the risk he mis-analyses global currency stress.

Articles to read, in order

Speculation, Investment Scandals, Fraud, and China's Hard Landing; Miracle of Chinese High-Speed Rail will be Reduced to Dust; Peak Oil Doomsday Clock

China Holdings of US Treasuries Revised Up 30%; An Unsustainable Model

Timing the China Property Crash

US Dollar About to Lose Reserve Currency Status - Fact or Fantasy?

And to my surprise, China is facing possible civil unrest?

China Cracks Down on Mid-East Style Protests With Water Canons; Police Blanket Shanghai, Beijing; Internet Search for "Egypt" and "Tunisia" Blocked

China ups the ante on systemic losses

China, as it has been well documented on this blog, has been hyper-inflating it's economy by plowing money into real estate development. The unbelievable bubble they are building has resulted in entire cities being built without anyone living in them.

China's own reports of economic data is alway suspect, and skewed to place it's financial situation in the best light possible. If China would only realize the best way to replace America as a world power ISN'T to act more reckless than the USA, but instead to act more trustworthy.

Alas, lucky for me as an American citizen, China is proving that they are less responsible.

It has been revealed that over 1.5 trillion dollars is estimated to be at risk by local Chinese governments who have mis-invested in the hyper real estate bubble. According to Chinese government law, local government is not suppose to engage in such speculation.

But with China's great economic success, it is also accompanied by great excesses and mis-investment. One can only guess the spectacle that will start to unfold if China starts to realize 1.5 trillion in US dollar terms losses by local governments. Will China join in with the European Central bank in raw printing to fund local government losses?

Between European Central bank allowing Ireland to perform raw money printing, China with unbelievable levels of mis-investment, and US with over 13 trillion dollars in debt and rising quickly, something is going to pop.

And if it does, it will be one hell of a deflationary collapse, or a currency collapse, it remains to be seen how this unfolds. I don't know why people bother reading suspense novels, just reading the world economic news provides more intrigue than any novel.

Reality is the greatest form of entertainment.

Thanks to Bob schulties for the link

Why Natural Resource assets is better investment than US Bonds

My friend John Chinnock posted his view why US bonds are the safest place to invest in this time of economic uncertainty back in October 2010. I have been thinking of a response since then, like a second job perpetually coming to the forefront as I stole bits of time out of my life. My poor wife sometimes has to deal with my focus drifting to the ether of thought of global financial doom. Hopefully I can soon put this blog to bed, as I brain dump the culmination of my learning the last 4 years about world financial pressures, peak oil, natural resource problems, and global demographics.

The truth is, my time would be better spent focusing on two items, my job and my family. I need to keep an eye on the financial picture, but at a healthier distance. My goal is to reduce time spent to 4 hours on a Sunday night, to update my view. Watching each step daily is counterproductive to my immediate financial wellness and happiness.

So this post is a step closer to bring my view to an articulated summation, culminating with key metrics to watch over time. My goal is to stick to these key metrics, and provide periodic updates as I burn those Sunday night hours.

On to why Natural Resources is the right choice for investing.

Global Economic shift

The USA has about 300 million people and is by far the largest consumer of world resources. It is dependent on energy from foreign sources, manufactured goods from china, and food from south America. The consumption of Americans has become a surreal iconic image in the world view. I am part of this iconic image, being a fat, over-consuming, indulgent American. I haven’t taken an oath of poverty, and I have benefited from this resource consumption imbalance.

But times are a changing. China and India have about 2.5 billion people compared to the US at 300 million. I believe the goal of Reagan back in 80’s was to awaken this demographic in a hopes to help perpetuate global growth. I suspect his administration first spotted the demographic imbalance ahead as I described in my post titled “Demographics is driver to economic growth”.

I am of the belief that the awakening of the economies of these two countries will forever change the future of American’s quality of life. I have posted this already on why, please see post “China V America” on why.

The upshot is, as China and India population grows with improved economic wealth, the US cannot possibly maintain the same percentage of world resource consumption. I don’t think it is a far stretch to expect 2.5 Billion people to consume more than 50% of all resources produced. Heck, I could see those countries DEMANDING 90% of the world resources, as economic powerhouses of consumption, taking the crown away from the 300 million US citizens.

Whatever the evolution of resource consumption is, I can’t imagine it will be good for Americans lifestyle. For the consumption of fewer resources will come in the form of more expensive resources. After all, I doubt Americans will consume less, if they can afford more!

This global price pressure for resources will be a perpetual theme for the rest of my life, barring some sort of global calamity or technological revolution changing the need for resources.

The question then becomes what resources to invest in? Frankly, here you should apply your own thought and seek advice other than me. However, I can’t help but give my spin.

Oil – Peak oil is real and is here. The concept is the wells pulling out of the ground are continuously decreasing in volume produced. This is a fact of all oil wells. Historically, the world has started new wells to keep up with this decline in oil production, and to exceed total output. But the problem is the larger wells are accelerating in the decline. New oil isn’t cheap to get. It has to be in more expensive areas to pull, like in the deep sea. It also may not be as “clean” and need more processing. Two critical facts will make oil more expensive to produce and demand is not curbing. Already America is demanding more oil than the economic peak of 2007! China and India are unstoppable forces of increasing consumption. This race to consume more will soon hit the wall of production, oil at 300 a barrel in USD will be seen in the next 10 years. Maybe 2011? Who knows.

Energy in general – Due to peak oil, investments in alternative energy, natural gas, coal, nuclear, and other related industries are all good. As oil becomes more expensive, other energy becomes more viable and will be consumed more as shift way from oil becomes required.

Precious Metals – I have blogged many times, I do not believe gold is money. I therefore do not like gold as an alternate currency. It is frankly, insanity. Gold as money works in a mad-max world. I will not spend my life planning for mad-max. However India and china cultures are in love with gold. As 2.5 billion people can afford to spend more disposable income, one common theme in both cultures is buy gold! And of course, the alternate reason is there are plenty of people who do view gold as money. For whatever the reasoning of people purchasing, I expect gold gold gold to the moon. I can easily see gold at 5,000 an ounce in US dollar terms. Silver and others are in the same boat, but for just simple reason that as India and china grow economically, demand will rise for all resources, including silver.

Mind you, the road may include a gold price collapse, for it is the ultimate ponzi scheme. If the world financial markets fall, I could see gold hitting 1,000 an ounce. I doubt we’ll see it fall any lower, as the buyers in such a fear market will step up, as they did in 2008 at around 800 an ounce.

For in times of fear, people buy what they know as a value store, rather than what they don’t know.

Food – Food embargoes where experienced in the 2008-2009 economic crisis. Once the flow of funds and credit dried up, countries where quick to cut off exports on food needed to feed their own populous. The world inter-dependant on feeding each other is a precarious situation. The moment food is viewed as a critical resource to keep a population happy, exports will be cut like a chain reaction.

Example, Americans gets its fruits from south America in the winter. If the supply is cut off for whatever reason, Americans may need to cut exports of their excess winter food production to other countries to stock shelves with alternate nutrition. This could cause a chain reaction and crisis. Luckily America is well positioned, as we net produce more food than we consume. We may need to go on a diet, but I don’t think we will go hungry as a nation.

The tight food supply combined with bizarre weather patterns continuing to evolve, and food storage reaching unprecedented lows by world governments, has placed the global food chain in a precarious position. A decade ago large food deposits had to be kept in the food chain, minimizing price shocks due to supply disruptions. With advancements in shipping and computerization, the food chain is more real time and can amplify crisis costs.

Rare Earth Elements – Although akin to precious metals, rare earth elements deserve their own category. Rare earth elements are materials mined that are located in very limited known locations. Currently China manufactures about 95% of the global rare earth elements. In an attempt for China to control world manufacturing, and to keep internal resource costs down, China has announced limited quotas for exporting rare earths. Further, China has used exporting rare earths as a political weapon against Japan, to in essence blackmail the Japanese government to comply with Chinese desires.

Rare earth elements are used to make solar panels, ipads, some cell phone components, some batteries, and many high tech items today. Companies have announced plans to re-architect manufacturing to use alternative materials than rare earths to minimize the grip China has. That is easier said than done. Some things in life cannot be made any other way (for practical use) than a specific material. Try to build a house without wood or plastics or make a computer chip without silicone. It can be done, but it may not be practical or economically affordable. I’m sure its possible, I’ll check back in 30 years to see how progress is going on your project. Point is, to simply state the world can work around this issue is naïve. Rare earths will continue to grow as a critical resource for high tech solutions. There are new mines being built in reaction to the reality the world has realized it is in. I for one am watching a stock called AVL. If it hits 5 bucks again, I may do some crazy buying and be a core position.

At a high level, rare earths used 100 years ago… I doubt anything worth recognizing. Last year? The threat of not getting rare earth materials to Toyota for their electric cars was enough to cause the Japanese government to cave to China’s will. The use of rare earths are on a upswing, an I believe, we are witnessing its infancy of recognition of the materials importance.

Currency - As several recent posts have articulated, America is playing a very dangerous game with it's currency. Currency valuation is faith based (fiat). So by definition of a fiat currency the majority believe the USD is stable, and not headed for a crisis. And typically the majority are on the wrong side of investments. As a fiat currency, faith in the USD must remain strong to maintain value. Hussman funds has in detailed describe the toxic financial chaos, the USD is poised for devaluation due to currency abuse. I have posted how the Federal Reserve Bank, a private institution may tap US tax dollars to cover it's losses, circumventing the constitution. Also how US Bonds is based on a mathematically proven model that cannot be sustained, based on exponential growth. Logic above aside, the indicator I am watching for USD trouble is when US bond rates breaks the trend established in 1985. A canary in the coal mine may be Japan, as their credit rating is starting to degrade, as their debt levels approach taking the crown in the world.

Please keep in mind, my view may be a little slanted, as I see currency needs a rebirth, away from asset (gold), or Fiat, to a new, more pure system. This reality will occur as computer systems assault the current people based currency system , responding quicker and more violently than can they can react to. Technology will break the current system and require a new monetary system as the fundamental flaws become exposed. It is possible to save the existing system, if rule of law returns and the system is made whole again. I doubt this will occur without a crisis.

Goal

The goal of choosing resources isn’t to become a multi-billionaire, although that is possible in any investing, worse odds than buying a mega-millions lottery ticket. The goal is to maintain purchasing power for your lifestyle. Natural resources are needed by everyone. And investing in companies related to natural resources tend to have an amplified effect on their earnings. For the companies valuation isn’t just about their production and sales THIS year. It is also forward looking on all the resources in the ground they have rights to yet produce. Their valuations can soar as a multiplication effect of the price of fossil fuels, precious metals, and rare earth minerals. Food isn’t likely to have any amplification effect, but could have some crazy spikes.

Summary

So to invest in the future of a economic growing world, I can’t see how natural resources across the entire spectrum of energy, food, precious metals, and rare earths, can be a loser over the next 10 years. And if we do arrive at some sort of mad-max world financial crisis, natural resources are always needed. I can’t say the same for UGG boots or US bonds.

As an added bonus, if the USD does suffer from loss of faith as a currency, which I do view as not likely in the next 2 years, being in natural resources protects purchasing power.

So whether resources go up in price in reaction to currency problems or just plain demand, I would find it impossible to flip from bonds to oil at 200 a barrel or gold at 3,000 an ounce. The charts would look like its over-priced ready for crash. I would be like a deer in headlights unable to move out of bonds. For this reason, I recommend everyone have a core position in natural resources across all areas while prices are in historical ranges. Everyone has to decide what they are comfortable with, 25%? My goal is 75% in natural resources or more.
For the remaining investments, please consider fixed income CD's, please see post Best Strategy for Fixed Income Savings for more information.
In another post, I’ll assemble ETF’s and individual players worth considering in each sector.

2012 Predictions

Last year, I think I scored pretty good on the predictions.   For full list of scoring click here.  Scored better than 2010 predictions, but I didn't fare that bad either that year.  2009 predictions was funky, i wasn't very clear on the predictions, making it hard to judge.

So here we are, lets see how I do this year.  Let me state this upfront, my assumption that Ron Paul will NOT be the republican candidate.  If he gains support, my entire prediction scheme will be way off.  The reason is simple, Ron Paul, although not exactly mainstream or well balanced, does represent fiscal prudence.  Even if he cannot accomplish much without congress backing, the mere electing (or thread of being elected ) should move markets in 2012.

Its a pretty big opt-out for my predictions this year.  But Ron Paul generally speaking doesn't look like he will gain public support, so its probably not going to come into play.

2012 predictions
1) The market will end LOWER on Dec 31st 2012 than Jan 1st 2012.  Last year I waffled and said couldn't tell, and the market did end about flat.  This year I am not going to hazard how low the market goes.  It could move higher before lower.  But with the election over by November, pretty much the hype of the next president will be over, and the market can take a nice dive, like it did in 2008.

2) Commodity prices will bottom in 2012 - there will be a pattern of a low hit in 2012, with the CRB index moving up from that low set in 2012 at the end of 2012.  This will be the setup for a hell of a 2013 that no one will forget.  This index represents commodity prices in USD terms.  (This includes Gold, Oil, and food.) This will be key setup for the inflation issues ahead.

3) The worst of China's financial crisis will come to pass in 2012.  A new regime will take over, and plans for creating the worlds largest consumer nation will be center stage.  China's stock markets will bottom in 2012.  In effect, China will throw down the gauntlet at replacing the USA as world economic driver.  The transition will take years.  This setup by China will move from the corners of blogs to mainstream media.  Expect China to take shots at USA like trade tariffs etc.  It will be all positioning for them to take the upper hand in the world arena.  The issue won't be why the tariff is justified or not.  The issue will be China can do it and the USA can't respond in kind.  It will in effect be a test.

4) The Euro will NOT be the same as it entered 2012.  The nations bankrupt will be either kicked out of the euro, or a new two-tier model created, or a new Euro model that allows printing to finance debt emerges.  The facade of all nations must adhere to fiscal responsibility will in effect be gone.  The nations that need to print, can, either through the euro or on their own.

5) US, and Europe will be declared in a recession.  The media has hinted, but this hasn't come to pass.  Although this may be a "gimme" on my part, it is still an important event for the 2013 lineup.

6) US 30 year bond rates will NOT break out of the channel in effect since 1986.  This is critical, for if we do break out of this, chances are most of my other predictions will be wrong.

7) US dollar will NOT break below the low in 2011 until after August of 2012 (or may not at all in 2012).  With the election, there will be enough political spin to keep the dollar from crashing until close to the election.  This is related to, but not tied to the previous item, Euro, China, and the market movements.

8) State and Town bonds will continue to deterioration as high quality choices for investments.  I am pulling back from my 2011 prediction of a significant shift.  Instead for 2012, predict more issues, more bankruptcies, and some interesting court rulings.

9) Since this is an election year, there will be a few TOKEN prosecutions around financial wrongdoing, but overall, we won't see the law enforced like we did back in the Savings and Loan crisis.  Lack of law enforcement continuing is crucial for the 2013 crisis setup.

10) The end of the world will not happen, China will not declare WW3, and mass riots in USA will not happen.  In a nut shell, 2012 won't be chaos erupting, but 2012 will be the layup for 2013+ for issues heating up.  My 2013 predictions will make all previous years look tame. :)

There ya have it, 10 predictions.  I covered  the market, commodity prices, currencies (US and Euro), interest rates (bonds),  corruption trend, China, and a tongue in cheek of end of the world stuff.  If the end of the world does hit, then you can email me about such a failed prediction. :)

Recommend reading Mish's predictions that can be found here.

Karl Denninger's 2012 predictions below