Hopes, Fears and Preparations for 2012

Prepare for the worst; hope for the best…

Gold, stocks, oil…little movement yesterday.

Michelle Bachman decided to drop out of the race for the White House. Pundits, pollsters, and gamblers predict that Romney will be the Republican’s man.

Iran told the US to get out of the Strait of Hormuz. “And don’t come back,” it added. Apparently, investors are betting that the threat wasn’t serious.

But that’s the problem with predictions and forecasts, too. You never know which ones will come to pass. For all we know, Romney could be charged with pedophilia in New Hampshire tomorrow…and all Hell could break loose in the Mideast.

“Prepare for the worst; hope for the best,” was always good advice. And here at The Daily Reckoning it is the foundation of our investment approach. We never know what will happen. So, what we want are investments that don’t depend on knowing. We depend on ignorance, in other words, and the kindness of strangers. We want investments that are already so cheap unexpected setbacks and unforeseen disasters won’t hurt them.

If you buy a share in a company because you think the price will go up, you are betting that you can see into the future. A bad bet, in our opinion. The unknown unknowns are likely to work against you. Better to buy a share that you want to own — whether the price goes up or not.

Likewise, the time to buy an oil stock is not when you expect war with Iran. Better to buy an oil stock when no one expects war. Then, the unexpected can only help you.

And how about gold? Buy it when people predict it will go lower, not when they expect it to rise. Of course, you don’t know where it will go. But when people think it is going down, odds are…it is cheap.

Our predictions for 2012 are not necessarily what we think will happen, but what we think we SHOULD think will happen. They are a part of our preparations for the worst.

For example, as we explained yesterday, we don’t think gold is going to go up this year. It’s been up every year for the past 11 years — the most durable bull market in recent history. It’s ready for a rest.

Even so, we should probably expect it to go up again. Because the danger of thinking it will go up are far lower than the benefit of thinking it will go down. We don’t know where gold is going in 2012…but the rest of the monetary system could slip into chaos and calamity at any moment. Gold is the only thing we can depend on.

Likewise, stocks could go up. Or, they could go down. If they go down, they could lose 25% to 50% of their value this year. That’s how much they’d have to lose in order to get down to real bargain levels. That’s who much they’d have to fall to complete their rendezvous with a real bear market low.

On the other hand, what are the odds that they will gain 25% to 50% in value? Not good, dear reader.

But we’re not the only ones making predictions. Todd Harrison at MarketWatch offers “10 themes that could evolve as the year unfolds.” We add our comments:

1. Interest rates

Policy makers have done everything humanly possible to maintain a zero-interest rate policy with hopes of spurring lending and encouraging spending. As 2012 progresses, market forces will begin the migration toward higher rates, which will negatively impact bond markets.

Maybe. Maybe not. The G7 economies have $8 trillion in debt to rollover in 2012. Logically, with so much debt on offer, you’d expect the price to fall (yields to rise). And maybe that’s what will happen.

But where’s the surprise? Could it be that interest rates will continue to sink…and bonds will continue to rise? Falling stock market prices could push investors to the safety of US bonds. The worse the action gets in the markets and in the real economy, the higher bond prices could rise. Interest rates could be lower at the end of the year, not higher.

2. Europe

There is a light at the end of the Autobahn but with $200 billion in debt maturing in the 17-member euro zone in the first quarter alone, the overseas dynamic should get worse before it gets better.

Keep an eye on the Germans. If they allow the issuance of euro bonds, stock markets around the world will react favorably as obligations are (again) pushed into the future. Absent that, expect to see plans mapped for a slimmer European Union.

Yeah. European banks are stuffed with debt from insolvent governments. Governments are stuffed with debt from insolvent banks. Proposals on the table include plans to issue more debt by governments…or more debt by the banks. It’s fun to watch, but there’s no light at the end of the tunnel.

3. Real estate

It’s impossible to catch the bottom of a housing cycle but investors with a 10-year time horizon will hunt for bargains — and find them.

With mortgage rates at all-time lows, seeds of the eventual recovery will begin to sow. This will be a prolonged process, but every journey begins with a single step.

What? We don’t know whether the housing market has reached a bottom or not either. But at least we won’t give you this “journey begins with a single step,” mumbo jumbo. Journey to where? Is MW saying that housing will be higher 10 years from now? We wouldn’t bet on it.

4. Brinkmanship

If you thought the partisan bickering was tough to swallow last year, brace yourself as the presidential election edges closer. I offered in 2008 that the enormity of the economic condition was bigger than any one man or political party — and that remains in play.

While I am a registered independent, my sense is that President Barack Obama will secure a seat in the Oval Office for four more years, and rumblings from the Republican contingency will reverberate in kind.

Probably right. The likely Republican candidate, Mitt Romney, made his fortune on Wall Street. Voters won’t like that.

5. American icons

I’m dusting off this theme as it was predictive in 2007 (Paris Hilton, Lindsay Lohan, Britney Spears) and the tides have turned anew.

Jon Corzine, the Kardashian sisters, Penn State, Rudy, Willie Gault and the NBA brought this dynamic back in 2011 and it will pick up steam in 2012. This, of course, will pave the way for the emergence of a new wave of heroes which will represent and reflect the next generations of leaders.

We have no idea what he is talking about.

6. Geopolitical strife

Extending a theme that was first introduced in 2007, the tricky trifecta of societal acrimony, social unrest, and geopolitical conflict is seemingly entering its final phase.

Whether it’s the Middle East (Iran), Asia (North Korea), or cyber-terrorism, the collective strife could come to a head this year. While the specter of this is indeed daunting, it will move us one step closer to our social recovery.

We struggle to make sense of this too. What’s ‘collective strife’? What’s a ‘social recovery’?

7. Markets

Financial asset performance will be dependent on policy makers. “Free” markets — those without outsized government stimuli — will deflate. “Modified” markets — those with bearded socialism or nationalized assets — will act better, but arrive with profound costs and unintended consequences.

Yep, we’re on board here. The zombies will do better than their prey. They’ve got the feds feeding them resources.

8. Rating agencies

Moody’s, Fitch and S&P were big news in 2011, particularly after S&P downgraded the United States credit rating.

You can agree or disagree with their process — or opine they over-compensated after fumbling the first phase of the financial crisis — but my sense is that their status and usage will diminish considerably as new standards emerge for rating the worthiness of financial assets.

Could be.

9. The millennial revolution

I’ve long believed that Generation Y — also known as “Eighties babies” — would be the salvation of the American, and perhaps even the global, ideal. They are technological Zeitgeists who are generally unencumbered by the social and political baggage of our time.

While Mark Zuckerberg is the poster child for this dynamic, expect to see a new wave of entrepreneurs and activists emerge to capture our imagination and change the way we communicate, interact, and yes, believe.

The American…global…ideal? What?

10. Values

As financial stress and global pressures permeate, folks and families will again seek simpler pleasures that aren’t measured by money or predicated by status.

This will be the silver lining on the 2012 horizon — at the end of the day, regardless of our financial performance, we’ll come to realize that we have our friends, our families, and yes, ourselves, as we find our way to better days.

Yeah, we have the things that really matter. Too bad about the money.


Bill Bonner
for The Daily Reckoning

The Daily Reckoning