My Crystal Ball for 2012

“Ow!” I yelled. It felt as if a sharp needle had plunged into my leg. I looked down, but found nothing. “Something bit me…” I muttered. As I brushed my leg, I felt another painful sting, this one on my pinkie finger. “Ow! What was that!?” Now with pinkie and leg throbbing, I could still see nothing.

My wife, Carol, was standing nearby. “I know what it is,” she said.

I froze.

Later, she told me she didn’t want to say what it was so I wouldn’t freak out and she could flick it off. But when I gazed down at my chest and saw this nasty-looking scorpion making his way up toward my neck as if to finish the job, I let out a yell and brushed the thing off… and improbably, it landed right on to my wife’s hip. She, more calmly, flicked it off and killed it with a flip-flop.

We were in Nicaragua with the family for the holidays. Fortunately, the sting, while painful, is otherwise harmless.

Well, that’s frontier markets for you. There are great reasons to visit Nicaragua: pristine beaches that you will have almost to yourself, the charming architecture of its old colonial cities such as Granada, the inexpensive food and lodging and much more. But it’s still a frontier market with bad roads, unreliable power and a large poor population.

There are great opportunities, but also the potential for painful setbacks. The sentiment, of course, applies to all markets — and life in general.

Welcome to 2012. What opportunities and surprises can we look for in the year ahead? Some thoughts…

Total federal outlays rise again. This one seems unstoppable. The U.S. government will spend more money in 2012 than in 2011, despite everything. It’s incredible to think that as recently as 2007, federal outlays totaled $2.7 trillion. In 2012, we’re looking at $3.6 trillion!

This means the government will likely have to finance an increasingly larger deficit. And why not? If investors are going to be so foolish as to lend the government money for 10-year terms at a rate of 2% or so, it’s like free money. The problem is that interest rates don’t stay low forever and investors don’t stay dumb forever. Just ask certain members of the EU. When doubts surface about your creditworthiness, rates don’t just slowly crawl upward. They jump — and then it’s “game over” pretty quickly.

Will 2012 finally be the year that marks the beginning of the end of the long bull market in Treasuries? I think so.

Multigenerational households in the U.S. rise. People are living longer and outliving their financial resources. The financial crisis of 2008 and the lackluster stock market of the last decade haven’t helped. Plus, medical bills have soared. So where do people turn for help? Family.

As The Wall Street Journal reports, about 39% of adults with parents 65 years and older say they’ve given them financial aid in the past year. And more and more households are becoming multigenerational households.

This is a return to an older order. In 1900, 57% of adults aged 65 and older lived with relatives. I think this is a long-term trend in the making — with unclear investment implications. But it seems a fundamental shift is taking place in the American household. I’d bet the number of multigenerational households rises again in 2012.

The curtain falls on the Chavez regime in Venezuela. The year 2011 was a bad year for dictators of all sorts. I think 2012 will also topple a regime or two. At the top of my list is Hugo Chavez. Venezuela will hold a presidential election in 2012. Meanwhile, the quality of life in Venezuela continues to deteriorate. There are reports of 30,000 people living in shelters awaiting Chavez to deliver on promised homes. There are shortages of basic goods, made worse by a 27% inflation rate. All the while, Chavez is battling poor health. The election will be the spark that ignites the uprising that will end his regime.

The stock market advances. Why? Because it seems improbable, and the market often does what is least expected. It’s easy to draw up an ugly scenario for 2012, mostly focused on the EU imploding. It’s harder to imagine the market having a good year, which is exactly why it will have one.

Now, I have no faith in market calls, as you know. So I make this prediction somewhat tongue-in-cheek. In truth, I don’t waste time thinking about what the market is going to do next. It’s unpredictable, and I’m a long-term investor anyway.

Lots of folks will try to divine market direction using all kinds of flawed tools. For instance, I read over the weekend that the S&P 500 (going back to 1928) has had only nine years in which the return was plus or minus 5%. The average return the following year was 26.3%. Only once did the market fall in value the following year. That was in 1940, the year after Germany invaded Poland. Even then, the market fell only 9.8%. The positive years ranged from returns of 14.3 to52.6%. This, of course, led our market seer toward optimism for 2012.

These kinds of things are interesting but mean nothing. The market is not bound by its own history. Mr. Market does not pull cards from a deck of defined possibilities. It can pull five kings. It can grab two aces of spades. It can draw a card we’ve never seen before. Keep that in mind and stay focused on what you own, not on where the market might go.

Commodities rebound a bit, but don’t top 2011 highs. It was a bad year for commodities. Most fell, as shown by the Dow Jones-UBS Commodity Index. I think we’ll see some rebound, but an unfolding recession in the EU will be too much to overcome, and the index won’t top its 2011 highs.

This doesn’t mean you can’t make money in commodities. If prices for oil stay at $100 per barrel, there will be plenty of oil companies and services stocks that will do quite well.

Gold stocks have a great year. The market hated gold stocks in 2011, especially the juniors. The MarketVectors Junior Gold Miners ETF (GDXJ) is made up of small mining stocks. It fell 38% in 2011. This, despite gold itself finishing the year modestly up.

The market is offering low multiples on gold stocks right now. Price-to-cash-flow multiples, for instance, linger near generational lows. Gold doesn’t have to go up for these stocks to make a lot of money.

However, I think gold will make another run at $2,000 an ounce in 2012 — and exceed it. All the factors that drove gold to new highs in 2011 are still in place. The world’s monetary system is still a mess. And its leading brand, the U.S. dollar, is not well.

Combine a rising gold price with low multiples and you have a kind of financial rocket fuel.


Chris Mayer
for The Daily Reckoning

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