Friday, December 30, 2011

Forecast for 2012

I am probably in a minority of one in making the following forecast, but here it is for what it is worth.

Let me start with the apparently not very important countries, explain why I am doing so, and then move to the more important countries, and finally to what implications all that has for the management of your savings and wealth.

Established democracies (India and Indonesia) are being threatened by fascist forces (in one case Hindutva, in the other Islamist), though the established structures have so far proved resistant to fascist agendas. Expect the threats and attacks to continue, and let us hope that these democracies continue to weather the attacks.

Budding democracy in Nepal is threatened by Hindutva forces that want to restore the corrupt and incompetent monarchy. Here, one can only hope and pray, as the basic shape of what is to come is not clear.

Emerging or struggling democracies in North Africa and the Middle East face the possibility of having democracy nipped by Islamism (for example, Pakistan, Iraq, Tunisia and Egypt). In these countries, a particular Islamic ideology (Salafist or similar) is being imposed by violence on the population without anyone in authority seeming inclined or able to counter that, in order to nurture political, cultural, religious and social openness in these countries.

So what will happen if the anti-democratic forces in such countries succeed in imposing their agenda? The countries concerned may have an initial period of stability and even prosperity, but stagnation will soon ensue, and it may then take three generations before they liberate themselves from the hold of such forces.

China’s new generation of leaders, led in all probability by Xi Jinping and Li Keqiang, will have an interesting time helping determine and working with their new team. While they will have the support of the existing leaders, who will step down but remain available and influential, the key question is whether they will together be able to steer China through challenges it has never before faced in its history: a population gradually but inevitably becoming more open to the outside world at the same time as the growth rate falls below 8% and therefore begins to unleash social and political tensions as unemployment rises. It is not at all clear to me that China will find it easy to negotiate these challenges. There is therefore a very real danger of China taking to internal repression and/or external aggression.

Untoward developments in any country will further weaken confidence in emerging markets, and pull out from them even more money, both domestic and international.

That applies also to the European Union, though I am more optimistic about that. I expect that the 17 nations which have decided to go ahead with fiscal union will proceed with it, at least the important ones among them in the next three to six months, though it will take perhaps up to two years for everything to be agreed. Naturally, if the Euro project falters, then that will pull money ≈ out of the Euro area also.

Where will all the money pulled out of these countries go to? To the US and UK, where it is already headed in a significant though not yet substantial way.

The UK economy will begin an upswing for structural reasons from some time in 2012 (and the timing of that will depend to a certain extent on how well or badly the Olympics go from a financial and business point of view).

The US economy has already begun its upswing, as I stated publicly some months ago in my speech in Phoenix. This will continue. American banks will start lending to businesses again, and US businesses should do well, at least in the US itself. While unemployment will fall, it will regretfully not fall in proportion to economic growth, due to reasons I have detailed elsewhere.

President Obama will therefore have a recovering economy to boost his prospects of re-election, but a resistant rate of unemployment to mar his prospects.

While he will be tempted to focus all his energies on domestic issues in order to try and win the Presidential race, his chances of actually reducing unemployment and ensuring a victory depend entirely on whether he can take the international initiatives that will reduce unemployment - that is, by means of a world trade agreement that provides a level playing field for all countries, and does not unfairly privilege countries which improperly exploit their human resources, and avoid looking after their environmental and ethical responsibilities.

For the last three decades or so, unethical and environmentally-unfriendly practices have driven global "growth". This may be the crucial year which determines whether our leaders turn our back on that kind of growth and put growth on a new basis which is sustainable and just.

We are going into a year that could be dangerous or exciting, depending on how our leaders respond to the crises that are facing us in principle, and will face us even more in actuality this year.

So much for global politics. What about global economics? Here too we are in an unprecedented situation, with at least one of the best economies in the world now offering a negative rate of return for government bonds - in other words, investors are paying that government to keep their money for them, and losing money in order to do so, presumably on the basis that it is better to have a guaranteed (small) loss than the prospect of much bigger losses elsewhere (e.g. in equities).

What am I talking about?

Denmark's Central Bank has just placed government bonds with three-, six- and nine-month terms, and gained 2.32 billion Danish kroner (approximately EUR 310 million). Two of the three bonds offer investors a return of less than zero per cent - the State will have to pay back less money than it has been lent. The interest for the three-month bonds is minus 0.21 percent, while the interest for the six-month bonds is minus 0.07 percent. Meanwhile, if you were interested in Italian government bonds, those were offering over 9% interest. That is now the gap between bonds from an "unsafe" economy versus bonds from a "safe" economy. Expect more such offers from governments, but weigh them carefully.

Stupid quesiton, but why did not the Danish investors put more of their money in gold? Because even gold might still be over-valued in the current circumstances. Why not more money then in real estate? Because current prices regarding that may turn out to be a bubble too.

So what is the best way of investing? Spread your portfolio as wide as possible, forgetting growth and focusing solely on protecting the value of your savings or wealth. The worst investments might well turn out to be, as I have said for a long time, in the so-called "liquid investments" (i.e. in quoted instruments), which are most exposed to a fall in value. And the best investments might turn out to be those you make in real businesses, producing real goods and services, run by people you know and can trust. But don't forget that it is the US market which is the only one that is guaranteed to grow - unless something extremely stupid is done by America's leaders.

As we go through the swings and roundabouts, and the ups and downs, of 2012, let's do our best with our money and our talents, but let's keep in the forefront of our minds that this life is temporary.

What matters to us eternally is whether we are living our lives on the basis of developing a relationship with God, or whether we want to run our own lives in defiance or ignorance of God.

May Jesus the Lord bless and guide each of us on our path as we consider these things. Sphere: Related Content


Chuck Kelley said...

I comment seldomly, but I nevertheless enjoy and benefit from your articles. Thank you for sharing your insights and your heart so openly.

Michael A. Gumuchdjian said...

Thank you for your very fascinating "personal Forecast for 2012" with many very valuable and surprising findings.
I wish you a 2012 full of splendid positive experiences
in all respects.

Michael A. Gumuchdjian,
Zollikon/ZH, Switzerland

Anonymous said...

Thank you for your very fascinating "personal
Forecast for 2012" with some very interesting and
surprising findings.
I wish you a 2012 full of splendid and exiting experiences in all respects.

Michael A. Gumuchdjian
Zollikon/ZH - Switzerland