Week in Review Part I: Europe, Washington and Wall Street

Let’s jump right into it with my major predictions for 2011 and see how I did.

WIR 1/1/2011

“I believe stocks will finish down 5-7% in 2011.” [meaning the three major averages]

As of 11/25, with five weeks to go, the Dow Jones was down 3.0% and the S&P 500 and Nasdaq were down 8.0%. Not bad.

As of 12/16, two weeks to go, the S&P 500 was down 3.0%, Nasdaq down 8%, though the Dow was up 2.5%. Still pretty darn good. But not good enough.

And then we finished 2011 with the following:

Dow Jones +5.5%
S&P 500 unchanged
Nasdaq -1.8%

So much happens at yearend, much of which has nothing to do with fundamentals, especially when traders have closed their books and the computers, a k a the casino, take over full bore. But I came close, saving for the Dow, and almost nailed it.

Point two. WIR 1/1/2011

“I believe the European debt crisis is with us well into 2012 and I can guarantee you that Ireland’s role is far from over.”

Can’t argue with me here. Ireland, by the way, is going to be a big story again in 2012. Obviously, everyone knows that Europe will continue to call the tune on the global economy (but very few were saying that a year ago), influencing both the U.S. and China among the other major engines.

Heck, back on 6/5/10 in this space, I wrote:

“So you have a European continent that could be stuck in neutral, at best, for years, nay decades.”

No reason to change that 1 ½ years later.

Point three. All first quarter last year, I said the CRB Index of 19 commodities would finish down for 2011, having closed 2010 at 332.80. Even when it was at 360, and then a high of 370, as everyone and their mother was talking about commodities shooting to the moon, I maintained we would finish in negative territory for this key benchmark, citing massive speculation that would eventually be wrung out. It was. The CRB finished the year at 305.30. I’m as proud of this call as just about any I’ve made.

For 2012, I see the three major U.S. stock indices falling 10%, and it is going to be one wild year, controlled by the flash traders and computer program trading (two different things) more so than ever. Stocks could be up big, like 15% to 20%, and then crash.

I draw your attention to something I wrote on 3/5/11, which I’m quoting at length because I still believe every word of it.

“Speaking of the U.S. and its deficit dilemma, Congress avoided a government shutdown for two weeks with yet another short-term funding deal but this can’t go on forever. Eventually it has to face up to its obligations, including a decision on raising the debt ceiling.

“For all the talk of who is to blame for our current mess, though, there is only one man who stands above the rest in terms of responsibility and that is Barack Obama.

 He is the one who has to now lead. He is the one who has to give an address or two from the Oval Office and give Americans the facts on our looming entitlement calamity. Obama is the one who has to tell Americans it’s time to sacrifice.

“But the president and his advisers are convinced they can play their game of chicken until after the 2012 election and I’m here to tell you that unless the financial markets, including those overseas, believe the United States has come to grips with its deficits, Jan. 2013 will be too late. We will meet our Waterloo at some point in 2012.

“The president had his chance to begin to lay out the facts to the American people with his State of the Union address and instead he virtually cemented his legacy as one of the worst presidents in our history. Obama can still turn things around, but there is little reason to believe he will do so and, no, growth in the economy will not bail us out of a looming debt-to-GDP ratio of 100% with exploding spending to come in the mighty triad; Social Security, Medicare and Medicaid – the latter two powered by Obamacare in the out years. Until the American people hear the truth, you will continue to get absurd poll #s like we had this week with the latest NBC News/Wall Street Journal survey wherein when asked if cuts to Medicare were necessary to ‘significantly reduce’ the deficit, 18% said yes, while 54% said no.
“Warren Buffett was on CNBC this week and said you ‘can’t stop this country.’

“Wrong, Warren. Debt can stop this country, just like debt stopped many an individual and corporation during the financial crisis and has stopped Greece and Ireland.”

A few months after writing the preceding, I began to talk about a crash in 2012, a 30% decline in a short period of time that will be fueled by our Greece- or Italian-like moment. The fiscal numbers between the U.S. and those nations may not match up, but something will trigger a severe change in sentiment, which in turn may finally force our policymakers to act. No, the president won’t be able to just employ a four corners stall game until November. The markets won’t let him.

Which brings me to foreign affairs and the hot spots. Last year I held back on issuing any bold predictions on this front, outside of the usual concern about Pakistan, Lebanon and China; economics, mostly, regarding the last one. I said of China on 1/1/2011 that I was more uncertain than ever and I still am. I believe the government can engineer a soft landing without massive unrest, but I’m not 100% sure of this.

Here’s what I am certain of. 2012 is going to be one of the more memorable years of the last 250 years of civilization. At times, President Obama is going to outwardly appear overwhelmed. Even he won’t be able to play Joe Cool when confronted with some of the issues he’ll be handed.

One I already told you of, going back months, is going to be largely of his own doing. Iran. I have already spelled out how Obama can lose the election on this single issue if, say, after Labor Day, Iran were to explode even a crude nuclear device. The Republican nominee would have a field day with this. “This happened on your watch, Mr. President!”

So if there is even a 30% chance of Iran having a full nuclear capability in another nine months (given our admittedly shoddy intel), it’s too great a risk. Obama has to act sooner and I’m convinced it’s sometime no later than May. He’ll need time to repair the damage, which could be considerable in terms of retaliatory attacks, Hizbullah going full bore on Israel, Syria stepping in…you get the picture.

Iran can’t get the bomb, and President Obama knows this. Will Iran give the U.S. and its allies an excuse to move through some dumb action of theirs in the Strait of Hormuz? I don’t think so. But the mullahs may make a dumb move elsewhere.

Of course Iran will be gaining increasing influence in Iraq, but you already know that by now. The United States lost the war and we aren’t going back, abandoning the country yet again. [Imagine being an interpreter who helped U.S. soldiers and now having to watch your back the rest of your life. You’d have to flee with your family to avoid being taken out in the dead of night.]

Israel will not only have to deal with probable war with Hizbullah and possibly Syria and/or Egypt, but, and I hesitate to write this but I have to, an assassination will occur, courtesy of Israel’s own extremist element, a la the assassination of Yitzhak Rabin in 1995.

Egypt’s new parliament after the last round of voting will be 65 to 70 percent either Muslim Brotherhood or Salafists. They are supposed to be charged with writing a new constitution. The military will fight back. A presidential election is to be held by yearend but I’m doubtful this happens. All I know is this will be a powderkeg virtually all of 2012. [Al-Qaeda and its offshoots will be a cause of some of the chaos.]

There will be a military coup in Pakistan. This is a layup. Concerns over the security of its nuclear weapons then will be a huge issue for the world to deal with. At first, India will not act, but Prime Minister Singh will be faced with massive internal problems of his own and any terrorism in India will no doubt be blamed on Pakistan. There will come a time when we’ll be watching with fear over a war between the two that could go nuclear within 48 hours.

Russia will see waves of terrorism in Moscow and elsewhere. Putin and his goons will pull out all the stops to stay in power, including the March presidential election. I don’t believe, however, that come Dec. 31, 2012, it’s Putin still standing.

Europe will be convulsed in riots, as the people in Britain, France and Italy reject their government’s austerity programs. For Britain, this will be a real problem with the 2012 London Summer Olympics. Many will be cancelling their plans to attend.

France’s presidential election in April will be tumultuous. I just don’t see how Sarkozy gets in a run-off, especially after France loses its AAA rating, as is inevitable. The Socialists will prevail. Marine Le Pen will make things interesting by gaining the run-off over Sarko.

As for North Korea and new leader Kim Jong Un, I’m holding off. No one knows, or can really hazard a guess. One just hopes that the leaders of South Korea, Japan and the United States, in particular, have gamed out all the scenarios and are prepared as much as one can be for anything Kim and his Orcs throw at the civilized world.

China’s transition to a new leader, Xi, will go relatively smoothly, but there will be several instances of major unrest as the economy slows further and many homeowners suffer huge losses on their purchases at the top of the bubble. If the unrest gets out of hand, however, China could play the nationalism card and create an issue in the South China Sea. I do not see the U.S. and China having more than a war of words.  As spelled out below, though, Jan. 14 is a key date for the region; Taiwan’s presidential election. Here’s hoping it is a rare positive for 2012.

Christians will continue to suffer, worldwide, as I spell out later.

And, yes, there will be a serious cyberattack on a major U.S. utility or urban infrastructure that will be but a sign of things to come. I’m just not prepared to say this is the year we see the financial markets taken down because of one.

Through all the above, as if it isn’t enough, the eurozone crisis will continue unabated. So let’s move on…

Europe, Washington and Wall Street

If ever there was a headline that summed up the state of the European continent these days, it was this:

“Another chunk falls off Colosseum as restoration delay drags on”

Ah, yes, dithering. The Wall Street Journal had a story, an ‘in-depth’ piece on the euro crisis that merely stated the obvious, like what every second-grader in America knows by now. There isn’t any leadership, anywhere in the world these days, least of all Europe. Angela Merkel of Germany? Nicolas Sarkozy of France? Not by my definition. But the Journal piece talked of what I have the last 20 months, a eurozone that’s been dithering. And so here is but a perfect example of the Euro mentality, as told by AFP:

“The Colosseum lost another piece on Tuesday as Rome’s most famous monument deteriorates further ahead of a long-delayed restoration funded by an Italian billionaire now scheduled to start in March.

“The chunk of volcanic tuff fell from one of the iconic arches of the nearly 2,000-year-old structure – just two days after a similar incident reported by a group of concerned tourists on Christmas Day put local staff on alert.”

What idiots. It’s a matter of economics, my Italian friends. The Colosseum and the Vatican are your meal tickets. The Vatican knows how to take care of its treasures. So take care of the Colosseum!

Get this. “The number of visitors to the site has gone from around one million visitors a year to around six million over the past decade – thanks mainly to Ridley Scott’s epic film Gladiator starring Russell Crowe.”

Well, citizens of Italy. If the Colosseum keeps crumbling, a la Pompeii, incidentally, that’s six million potential visitors who may choose to go elsewhere and who are you then going to sell your little trinkets to? More importantly, how many hotels and restaurants will go out of business? How many airline employees will lose their jobs as flights are cut back? Do you ever think of this, Italians? Obviously not.

But at the same time, you stupidly expect us, or your European brethren, or fellow banks, to buy your debt? You have 1.9 trillion euro of it. I’ve listed these figures ad nauseum but after an unsuccessful 10-year bond auction this week (more on this in a second), you are coming to market with some 200 billion euro of debt in just the first four months of 2012. At least 440 billion, overall, next year. And you’ll be competing with another 1.560 trillion of sovereign and European bank debt being rolled over in ’12.

So the Italians float a 10-year piece of crappola, the yield goes off at 6.98%, and the media calls it a success. I mean all we have been told is that 7.00% is the magic number. Above that and eventually you end up requiring a bailout; a la Greece, Ireland and Portugal. But 6.98% was deemed good because it was less than the previous 7.48%. The 10-year ended up finishing the year at 7.01%.

So you can see why some of us are a bit cynical, knowing the only way the euro crisis gets solved is after a messy crash. Like the horrific chain collision in New Orleans the other day, where on Interstate-10, the taillights you saw in front of you suddenly disappeared, amid either a fog bank or a cloud of smoke. It just went black. Amazingly, last I saw only two were killed but over 60 were injured. That’s what Europe is headed for. It will all just turn black. Eventually the curtain will then rise, the ambulances will be able to make it in, the survivors will be whisked away and the dead buried. After a period of mourning, life will resume. Europe needs to bury its dead. I wish they’d hurry up and do so. I’m tired of writing about this topic, especially when Americans are looking at our own future.

You want further proof of the sad state of Italy? Remember how about a month ago I wrote of how I couldn’t believe more people weren’t concerned about the slide in democracy in Europe? How Greece and Italy are now being run by unelected technocrats?

You know this guy now leading Italy, Mario Monti? You know how some in the media, as well as fellow technocrats, think he’s Mr. Wonderful? Following are bits of a report by the Financial Times’ Guy Dinmore and Giulia Segreti:

“Italy has saved itself ‘from the edge of the precipice,’ Mario Monti declared yesterday, defending the record of his six-week-old government while calling on the European Union to deliver a coherent response to the eurozone debt crisis by substantially increasing its bail-out fund….

“Mr. Monti said that under ‘normal conditions’ – which he declined to specify – Italy would not need more austerity measures along the lines of the 30 billion euro package approved by parliament last week intended to balance the budget by 2013.

“The government’s next focus, he said, would be a package of measures to regain lost competitiveness by liberalizing the economy…

“Reforms were needed to the system of labor contracts that virtually guarantees a job for life for some privileged workers while providing little security for others, especially young workers on short-term contracts, Mr. Monti said. However, he evaded a question on whether the government intended to challenge trade unions opposed to changing Article 18 of the workers’ statute. They oppose making it easier for companies with more than 15 employees to fire workers.

“Mixing his metaphors, the former professor of economics and EU competition commissioner said Italy had been ‘on the edge of the precipice without a railing’ and had been moving ‘very close to Greece’ in a south-easterly direction.

“Italy had braced itself and was now moving with the winds behind it ‘to the north-west towards Brussels and far from Greece.’

“ ‘But the turbulence is absolutely not over,’ he said."

Eegads. I’d ask the Italian people, ‘How did you ever elect this guy?’ But they didn’t.

That’s just one example of what’s happening in Europe these days. The treasures, the only reason to go to Europe (I can drink beer anywhere, after all), are crumbling, as are the economies, and you have people running some countries that no one voted for.

Meanwhile, over in Hungary, you have a maniacal crackpot, Viktor Orban, who is an elected official but turning into a little dictator. The first thing the parliament has done is pass legislation controlling the central bank. Now the likes of Ron Paul would like to do away with central banks, but that’s a different matter. Orban thinks that by taking over Hungary’s monetary authority and setting interest rates low to spur growth, that then investors will come in and refinance Hungary’s massive debt load. Good lord. This is 2011. Not 1342, when people had one eye and the grog was often poisonous. It’s a global economy, Viktor. It’s not a make believe kingdom.

So let me try and summarize this week in Europe. The banks are flooding the European Central Bank with their cash, at 0.25% interest, and not reinvesting the huge amounts they just borrowed from the ECB, at 1%, into Euro sovereign debt, which is the gamble the ECB was taking, whether they want to say so or not. Ergo, the banks are like Scrooge, in the presence of the Ghost of Christmas Yet to Come. They are petrified. Paralyzed. Unable to lend. Small businesses are dying.“I am not the bank I was,” they plead in unison. “I will not shut out the lessons of Greece.”

Let’s just say that unlike Scrooge, however, the banks aren’t close to dancing a jig and buying the biggest goose in the window. There is no happy ending, at least that I see.

Lastly, Ireland is going to be a big story again in 2012. While Angela Merkel has labeled the Irish the poster child for how to suck it up and move on, the fact is the country, save for some in the export sector, is dead. As some in Ireland are now claiming, though, they must declare default, or at least threaten it, in order to get out from under the massive bank debt the government vowed to honor. Ireland’s back in recession (unofficially) and will not be able to meet its stringent targets as established by the ECB, IMF and EC (European Commission). This is where an increased European Financial Stability Facility (EFSF) may have helped, but Merkel refuses to allow this. Ireland needs a break on interest rates. It’s time for the placid Irish to rise up. Prime Minister (Taoiseach) Enda Kenney said Ireland also needs more time to pay back the billions borrowed to fix the banks.

While in Spain, new Prime Minister Rajoy already seems paralyzed. The budget deficit, he’s learned, is far worse than he was told (I could have told him that…I wrote a year ago that the big problem in Spain was a lack of transparency with banks and the autonomous ‘regions.’) He’s proposing $billions in cuts, but isn’t really spelling out how, just yet, beyond freezing public salaries. The markets, though, are at least giving him a chance to get his sea legs in his new position. But you know what one of Spain’s main problems is? Try 700,000 unsold homes, let alone 23% unemployment.

Turning to Washington and Wall Street, the International Council of Shopping Centers said pre-Xmas sales ending Dec. 24 were up 4.5%, while the National Retail Federation was calling for a 3.8% gain for November and December. I went shopping myself on Tuesday and Wednesday and feel like I got a lot of it done for Christmas 2012. [Don’t tell my brother it’s going to be another lean one.]

Meanwhile, the Chicago Purchasing Managers Index for December came in at a strong 62.5, and better than expected, while the figure on weekly jobless claims was solid.

But next week we’ll get the December employment report, as well as various manufacturing data, including from overseas, and it is likely to be market-moving. The following two weeks, earnings will start rolling in.

As for 2012, the Fed sees an economy growing 2-2.5%, while the consensus among economists is in the 2-3.0% range. Fourth quarter GDP is expected to come in at 3%.

We did see a report on housing from S&P/Case-Shiller for October and prices were 3.4% lower, year over year, in the 20 major metropolitan areas, with Atlanta down the most for 12 months, 11.7%.   Prices in Atlanta, Cleveland, Detroit and Las Vegas are lower today than they were in Jan. 2000.

But an AP/GfK poll says 78% of Americans are hopeful about the year their family will have in 2012. I don’t want to be the one to break it to you all, but you are sadly mistaken.

I mean for starters, there’s Washington. It’s not going to be good when they return after the holidays. They still have to extend the sham payroll tax holiday for all of 2012, and extend unemployment benefits further as well.

And then there is the issue of the debt ceiling, which President Obama postponed for the time being, though due to the Aug. 2 Budget Control Act, this will not be up for debate again until after Nov. 2012 (most likely).

The thing is, overall, the debate remains the same. How to raise taxes and tackle entitlements? Or, how not to raise taxes and just ignore entitlements?
As Oklahoma Republican Sen. Tom Coburn said recently, “Washington is kind of like Las Vegas. It brings out the worst in everybody….it all comes back to leadership. There is none right now in this country, either Republican or Democrat.”

Former Senator Alan Simpson, of Simpson-Bowles fame, said, “This next year is going to be chaos. Absolute chaos,” citing Europe, for one.

Democratic Senator Kent Conrad of North Dakota said, “the American people still don’t believe you need to make hard choices…They believe you should balance the budget, but when it comes down to doing the things that need to be done to accomplish that, they don’t support them. Until the American people believe we need to change some things, it’s unlikely we’re going to accomplish them here.” [Washington Post]

Boy, that’s nice and depressing.