When Nothing Seems to Work2012 Economic Outlook(such as it is) Jim O’Donnell Huntington University
So how are we REALLY doin’? Thomas Paine put it well: “These are the times that try men’s souls…”
What a Year! • The Arab Spring, • A spike and then a large drop in both gasoline and gold prices, • The Japanese earthquake and tsunami, • Osama bin Laden's death, • Sovereign debt contagion in the Eurozone, • The debt ceiling negotiation debacle, • A Standard & Poor's downgrade of the AAA debt rating for the U.S., • Epic flooding in Thailand, • Occupy Wall Street, • The start of the 2012 presidential campaign,
So how are we REALLY doin’? "The agony continues…. with maybe a slight bias to the upside." Barton Biggs, 11-19-11
So, how did we Really do? Country Returns, by ETFs, 2011 • USA +2% • UK -4% • Canada -12% • Japan -15% • China, Germany -18% • Italy, Brazil -24% • Russia -28% • India -40% America had – kind-a – the” best house” in an otherwise very sorry neighborhood.
So how are we REALLY doin’? Not so hot • S&P 500 is unchanged in 12 years. • Furious, gut-wrenching changes that go no where. If you think you’ve had enough, I understand. --- But then…what do you do? Where do you go to invest?
So how are we REALLY doin’? Two powerful, catastrophic market corrections in the last 12 years • 2000-02: -50 to -75% • 2008-09: -57% And then,: Summer 2011: another -20% PLUS: mind-blowing volatility.
“Mind-blowing” volatility? • Average daily difference, 8/11 on, hi/lo: 269 pts. • Number of days Dow closed over 12,000: 136 • Number of Days Dow closed below 12,000: 113 • Days in 2011 when Dow moved +/- 200 pts.: 37 • Five days in 2011 when Dow rose/fell > 4% • Four consecutive Aug. days Dow up/down 400 pts Yikes!!! (Is this a casino??!)
In these long…long…long…long Bear Markets… • Diversification is a largely unattainable • 63 days when 90% of stocks moved same way • “Macro” themes accounted for about 80% of individual stock movements. • Average correlation of all of the stocks in the S&P to the index itself has never been higher • not during the Great Depression -- not during the 1987 stock market crash, --- not even during the 2008 financial panic.
Either “Risk on” or Risk off” Today “macro’ themes dominate: BIG!! themes Themes like – • The European Sovereign Debt Monster • The U.S. Debt and Deficit problems • Entitlements and entitlement reform • Stimulating growth amid austerity
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“Macro” Themes They can - and will - kill us if not addressed: • They will be with us a loooooong time • They produce enormous fear • Yet are unquantifiable!!! ------------------ They will be addressed • Though their resolution may be far off.
In the meantime…. • How do we hang on? • Faith? Yes. • But this is not a strategy • First: “Do no harm” • Tell the truth – don’t scare us Huh?
Lie # 1 “We’re in a bear market and heading for another recession” _______________ • Feelings are not reality: S&P is UP about 38% since 2009 (This is not a bear market!) • GDP up last nine quarters. Economy growing. Corporate profits up. Dividends rising. This lie undermines confidence.
Lie #2 “It All Comes Down to Jobs!” ___________________ Yes, jobs are important. But all jobs are NOT equal • REAL jobs produce more than they cost • Gov’t. jobs can cost more than they produce – MUCH MORE! This lie makes our fiscal problems worse.
Lie #3 “Hope is absurd. Gloom is appropriate.” ____________ All news is hopeless, even good news. • Progress in Europe? Not really • Stocks up today? Yeah, for a day. • Corporate profits up? For now. • Housing ever recovering? You’re kidding! - The next Great Depression is just around the corner.
Lie #4 “It all _________’s fault!” _________________ You fill it in: • The rich? • Business? • Obama? • The Fed? • The Occupy people? Take your choice or add your own. Taxes? Education? Regulation?
Lie #5 “Stocks aren’t cheap. Better wait for more clarity. _________________ Consensus, as with certainty – and divorce - is always very expensive.
An End-of-the-World Investing Scenario Currently, risk assets – stocks, real estate, for instance - are priced as if the world will end. Soon. And maybe so. But!what if ……things get better? Even begin to? ….What if some of our seemingly intractable problems begin to be addressed and respond? Would that break the cycle of fear…..dread……paralysis…gloom?
Ten Predictions from a Person with Economic Hope • 1.) Crude oil falls to $88 a barrel.2.) S&P 500 exceeds 1,420. --- 10% gain3.) U.S. real GDP growth exceeds 3.i%, unemployment rate dropsto 8%.4.) Barack Obama vs. Mitt Romney for president;Republicans retain House, gain Senate.5.) Europe develops a broad plan to solve the sovereign-debtcrisis. Greece and Italy restructure their debt. Spain andIreland strengthen their finances. A bank meltdown is avoided.European economy contracts.
Ten Predictions fro a Person with Economic Hope • 6.) Computer hackers attack major financial institutions.7.) Investors buy currencies of countries “that seem to be managing their economies sensibly,” such as nations inScandinavia, Australia, Singapore and Korea.8.) Congress reduces the U.S. debt by $1.5 trillion over 10years, with cuts to defense, Medicare and agricultural subsidiesas well as some tax deductions.9.) Syrian President Bashar al-Assad is ousted.10.) Stock indexes in China, India and Brazil surge 15%-20%
Believe What You Want • We’re already in recession • The Financial Crisis of 2008 was just a warning • Home values will fall forever • Western Civilization is doomed • “Big” - and Bigger - Government is our only hope now As for me and my house - with apologies to Joshua – “We will follow the Lord.” We’ll also think, hope, trust, and believe. ………..and advocate for market-based solutions to our problems.
Happy New Year! More importantly, May God bless you and prosper you. And don’t take me -- or this economic stuff -- too seriously. Life ismore than money.