“Predictions – An Exercise in Futility”

Sydney M. Williams

Thought of the Day

“Predictions – An Exercise in Futility”

December 30, 2011

Attempts to predict the future conjure images like Shakespeare’s witches, who at least were endowed with such abilities; palm readers, hiding behind mysterious curtains; and old women, doped up and dressed in long flowered gowns gazing into murky crystal balls. Pretending to do so seriously is both arrogant and foolish – arrogant because it presupposes a nonexistent ability and foolish because it has little better than a 50-50 chance of success.

However, it being year-end, being both foolish and arrogant, and recognizing that the following predictions will be more entertaining than informative, here goes:

     1) President Obama will lose his bid for re-election. Mr. Obama has the advantage of being an incumbent. He is the favorite of the mainstream press and is expected to substantially outspend his Republican opponent. However, economic performance is the most important determinant of elections, and the economy, while gradually improving, will remain sluggish, with unemployment too high to help. Additionally, voters are increasingly concerned that the President’s policies have placed the country on a path toward Socialism. Despite denials of Left Wingers, the Tea Party is more representative of Middle America than the “Occupiers.”

     2) Mitt Romney will become the Republican nominee, and he will do so earlier than generally expected. This is principally because, with the exception of Jon Huntsman, he has been competing against a bunch of nuts, as the last few weeks in Iowa have made clear. Mr. Romney comes across as a sincere, capable, if unexciting man. He is neither arrogant nor overconfident like Barack Obama, and he is neither incompetent nor ignorant like Joe Biden. Of course, as a Presidential candidate, Mr. Romney, a Mormon from Massachusetts, will have to overcome the political dirty tricks that come so naturally to a Chicago politician, but he should prevail.

     3) Demonstrating that countries, like people, are more adaptable than experts believe. By the end of 2012 at least one country (probably Greece) will have left the Euro Zone without devastating consequences. However, Europe will continue to subsist amid a morass of indecision and decline. Difficult choices – like living within one’s means – will be avoided by those in countries along the Mediterranean, while northern states will insist on draconian budgets that will impede recovery.

     4) The U.S. economy should gradually improve. The drag will be the consumer who spent more in 2011 than many expected, but at a pace that cannot be sustained in 2012. Once again, savings are declining and borrowings are increasing. Helping the economy should be a gradual, but continued improvement in housing construction – off of a very low base – and exports, assuming Congress and the Administration avoid a trade war.

     5) Concerns about unsustainable budget deficits will result in battles over cuts in entitlements versus cuts in defense. This will cause the country to lean increasingly toward isolationism, especially in matters of our military. Todd Purdam, in a Vanity Fair article entitled “One Nation, Under Arms”, writes seductively of the attractions of returning to a pre-World War II era when the United States was not a policeman to the world. As attractive as such a prospect is, one can’t go back. We live in the world as it is. Nevertheless, expect such notions to gain credibility.

     6) Commodity prices, after peaking around mid-year, have come down precipitously with the CBOE Index peaking in early March at 99.22. It has since declined 16.5%. Gold and oil are both up on the year, but both down from their highs, with gold down almost 18%. Those declines have been reflected in the stock markets of Australia and Canada, lower respectively by 15.7% and 15.5% in 2011. In 2012, strengthening global economies and inflation concerns should lift commodity prices.

     7) The Dollar may continue to show strength, at least in the early months, but a heavy federal debt load and the printing of money ensures a continuing depreciating Dollar over the longer term. Public policy and a too-loose Fed have caused gradual Dollar devaluation over many years. If I were not so polite I would say our elected and appointed representatives in Washington have “trashed” the Dollar. Its recent strength may persist, but nobody should take comfort that its strength derives from a positive view of more responsibility in Washington, or a more vigilant Fed. It is simply an indication that much of the developed world is in a worse mess than are we.

     8) An economy that gradually improves and rising commodity prices will bring an end to the thirty-year bull market in bonds. To find the greatest excess within the financial asset category, one has to look no further than the piteous yield on U.S Treasuries, especially when the supply is increasing at historic rates.

     9) Based on a guess (and a hope) that the President loses the election, I predict a modest rise in the market for 2012. While stocks are lower than they were four years and twelve years ago, only one year in the past nine has been down – 2008, though this year will be close. Expect stocks to do modestly better, with most of the gains coming in the second half. It is generally believed that large-cap, dividend paying stocks with a global franchise have become the venue of choice for financial asset investors; thus, the pros conclude, such equities are no longer attractive. That may be the case, but it seems to me that neither their multiples nor their yields indicate excessive exuberance.

My best advice for 2012 is to stay healthy and make the most of each day, keeping in mind that every hour that passes is one that is gone forever. Each one of us will have opportunities for success and for failure, and it pays to know the difference. It behooves us to be adaptable and accepting of change, the one constant in our lives. Life is a gift to be savored and enjoyed. My best wishes for a Healthy and Happy New Year!