by Mike Larson
 |
Welcome to 2012! I trust you had an enjoyable holiday season like I did … and that you’re just as ready as I am to make this your most profitable year ever.
So what am I expecting?
In a nutshell, an even MORE tumultuous year than 2011. I say that because many of the problems that hammered markets in 2011 haven’t gone away. They’ve gotten even worse — and the list of NEW problems is getting ever longer.
Why You Still Need to
Worry about Europe!
Last year, I said repeatedly that Europe’s purported debt problem “fixes” would fail. That was clearly on target. I also told you that I believed the global economy would slow broadly. We’ve gotten plenty of evidence that’s the case in Europe, South America, and Asia. Though the U.S. has admittedly fared a bit better than expected.
I also told you that many stocks would struggle …
That was certainly what played out, with the Dow plunging by 2,000 points in late summer. A late rally did save us from an even worse year-end result. But the S&P 500 still only managed to finish 2011 within four one-hundredths of a point from where it closed in 2010. If that’s what the Wall Street pundits consider a good year, I’d hate to see a bad one!
So what will the next 12 months hold?
Well, in Europe, I’m expecting things to get much worse. We’ve seen policymakers over there throw everything but the kitchen sink at this crisis …
They created two large bailout funds — the European Financial Stability Fund (EFSF) and the European Stability Mechanism (ESM). They engineered a second Greek bailout when the first one failed. They poured money into sinking bond markets in Italy and Spain.
And in their grand finale for the year, they launched a massive Longer Term Refinancing Operation (LTRO), propping up 523 European banks with 489 billion euros (about $650 billion) in 3-year loans.
But the underlying problem still remains: European banks and European countries simply owe too much money to too many creditors, and they have neither the capital nor the income to sustain their debts.
 |
| Banks are redepositing LTRO cash with the ECB. |
That’s why most banks are taking all that LTRO money and parking it right back at the ECB rather than making new loans to European companies or other European banks! Indeed, an all-time record 453 billion euros were parked at the ECB’s deposit facility earlier this week — showing the money is not circulating through the economy as policymakers hoped!
Meanwhile, a key manufacturing index in Europe just registered 46.9 in December. That was the fifth month in a row below the 50 level, the dividing line between economic expansions and contractions. The message? That much of Europe is mired in recession.
At the same time, we just learned that the leaders of Germany and France are set to hold yet another “fix Europe” summit soon. That will come in advance of yet another gathering of all 27 European Union leaders later in January. If things were really “fixed” over there, would we really need meeting after meeting after meeting? Of course not!
It Ain’t Just Europe Folks!
If Europe were the only problem out there, you might be able to shrug it off like Wall Street traders tried to do late last year and in the first day of trading in 2012. But it’s not. I also believe that …
* The emerging markets that led us out of the wilderness after the 2008-2009 downturn will NOT be able to do so again. That’s because their own economies are slowing sharply, and because countries like China are facing serious real estate problems akin to what we faced previously here.
* The dollar could rally in the coming months as the euro continues to sink into the abyss. That would be negative for contra-dollar assets, and asset prices overall. After all, the last time the dollar surged, it forced investors worldwide to close out so-called “carry trades.” All the assets that those highly leveraged trades funded — stocks, high-risk bonds, commodities, and so on — tanked as a result.
 |
| Bickering politicians can’t agree on how to fix the nation’s deficits. |
* The domestic economy is still hamstrung by an anemic housing market, a relatively lackluster job market, weak income growth, and more. Meanwhile, the risk of yet another downgrade to the U.S.’s sovereign debt rating is rising rapidly thanks to political gridlock in Washington, a continuing surge in the U.S. debt load (to just past $15 trillion), and the $1 trillion-plus annual budget deficits we continue to run.
Until next time,
Mike