Janus, Cassandra and Pollyanna
Last year at this time, I wrote a year-in-review piece for 2012, which, from a retrospective angle, looked back at the events that I foresaw happening over the last twelve months (stay with me here). How did I do? Well, frankly, appallingly.
How would I have done without the interference of the good men and women of the European Idiotocracy? Well, I suspect rather better, but that is besides the point. In an effort to demonstrate that I learn from my past mistakes, I will not be making any predictions about 2013 (at least not aloud), but shall instead be calling upon some special guests to give us their own, far more qualified and hopefully far more accurate predictions as to what will happen over the next year now that we have gotten that pesky "End of Days" thing out of the way.
My first guest is an orphan who lives with her Aunt Polly in Beldingville, VT. This young lady is the author of "The Glad Game: Finding the Positive in Every Situation," a regular guest on CNBC, former head of the BLS, and one-time spokesperson for Kim Jong-il—Ms. Pollyanna Whittier. Don't let her youthful appearance fool you. Ms. Whittier has an opinion on just about everything, as you will soon see. And so, without further ado, I shall turn things over to the young lady to my right. Take it away, Pollyanna:
Why, thank you, Mr. Williams. I must say you are looking incredibly handsome this morning. Well, 2012 didn't turn out to be such a bad year, despite all the doom and gloom of late 2011 when so many people predicted terrible things for this past year. Personally, I thought we'd sail through 2012 unscathed, that markets would regain previously lofty heights, that Greece would remain in the loving bosom of the European Union, that President Obama would be reelected, and that I'd get a new iPad Mini for Christmas. I think I did pretty well.
But you didn't come here to read a recap of my predictions from last year, did you? It's 2013 you're interested in, so let's get to it, and we'll begin with the Fiscal Cliff and the debt ceiling.
On December 26, President Obama announced to the world that he was selflessly flying home early from his Christmas holiday in Hawaii to work on single-handedly fixing the budget impasse despite the fact that Congress remained on recess. What a guy! Now, I read a whole bunch of stuff on the Internet that said he must have known he would do this before he went to Hawaii in the first place and that this whole thing was just a self-serving exercise in making him look good to the American public, but that would be manipulative and sneaky, so I think it's pretty safe to say we can rule that out.
The very same day, the widely respected Secretary of the Treasury, Timothy F. Geithner, announced that he was taking what he called "extraordinary measures" in order to find $200 billion under the debt ceiling to avoid a US "default" on December 31. That $200 billion would fund the US for an entire two months—which is great!
In a letter to congressional leaders, Mr. Geithner pointed out just how foolish certain Republicans people were being when they suggested that spending be capped. In a letter addressed to Tea Party leading light Republican Senator Jim DeMint, he wrote:
In your letter, you suggest that the debt limit should not be raised, and instead the federal debt be "capped" at the current limit. You further propose that after the government's borrowing authority is exhausted in August, the United States should for some indefinite period pay only the interest on its debt, while stopping or delaying payment of a broad swath of other commitments the country has made under the law.
I have expressed my concerns about this idea before, but I will restate them to be clear: this "prioritization" proposal advocates a radical and deeply irresponsible departure from the commitments by presidents of both parties, throughout American history, to honor all of the commitments our nation has made.
The debt limit applies to past decisions of Congress. Increasing the debt limit is necessary to allow the United States to honor obligations previously authorized and appropriated by Congress.
Bravo, Mr. Geithner, sir! Bravo!
I predict that, despite all the hand-wringing, the two sides will come together in an agreed compromise and find a way to work together in order to kick the can a little farther down the road extend the debt ceiling by six months and create some sort of bipartisan plan to make sure the United States lives within its means, pays down its debt, and becomes more fiscally responsible. When it is unveiled, the world will let out a huge cheer!
In Europe, I see great things happening in 2013.
Greece will remain in the European Union, and it will meet all the targets set by the Troika. In fact, by the end of the year, estimates for GDP will be revised up, unemployment will shrink, and the promises of the likes of Antonis Samaras will be proven to be rock solid. Angela Merkel will be reelected on an emotional tide driven by the German people's compassionate desire to help fund their less-fortunate neighbors to the south.
Silvio Berlusconi will return to power in Italy a changed and contrite figure and will set about tackling Italy's burgeoning unemployment situation while the illegal flight of money across Italy's borders in an attempt to avoid taxes will cease voluntarily as Italians work together to get through the recent period of uncertainty (a phenomenon that will spread to Greece as the current generation throw off a multi-generational refusal to pay taxes and do their bit to fill the public coffers), the coalition government in the UK will put their differences behind them and, through the generous application of more "fauxsterity," will get Britain back on track.
Elsewhere, Japan will decide that immigration is the answer to its demographic problem and will welcome hundreds of thousands of "Gaijin" with open arms, which will bring in enough additional tax revenue to avoid the debt disaster that the likes of mean-spirited Kyle Bass are predicting could finally materialize in 2013, Argentina will stop expropriating assets and return them to their rightful owners, Iran and Israel will resolve their differences, and in North Africa, that silly little misunderstanding about the new constitution proposed by the Muslim Brotherhood will be resolved peacefully. Syria? Don't worry. It's all good.
The Australian housing market (it still makes me laugh that people call it a "bubble" when it is so clearly nothing of the sort) will continue its inexorable rise higher as the level of household debt in the sun-burned country proves that the "new normal" levels are sustainable indefinitely while Australia's customer-in-chief, China, will rebound from its recent temporary slowdown (if you can even call it that), and the new leaders will right the ship, get GDP growing at 10% again, and manage the housing market as well as bank balance sheets perfectly to ensure that everything gets back on track.
In sport, the New York Mets will win the World Series, Fulham will win the English Premier League, and Andy Murray will win the Grand Slam.
Well, after that rosy assessment of the upcoming year, it is time to turn to my second guest to ask her for an assessment of the points made by the charming Ms. Whittier as well as any predictions of her own that she would like to make.
The gorgeous lady in question is the daughter of King Priam and Queen Hecuba of Troy. Her renowned beauty is such that none other than Apollo, god of light and the sun, truth and prophecy, healing, plague, music and poetry (among other things) bestowed upon her the rather useful gift of being able to prophesy the future—although, after a rather unsavory spat, he somewhat selfishly cursed her, ensuring that none of her predictions would be believed.
Don't let that deter you from hearing what she has to say, though, because whether you believe her or not, her track record is pretty darned good.
She warned the Trojans about the Wooden Horse, but they ignored her. She foretold of both her own and King Agamemnon's death, but, again, nobody listened and, supposedly, she also foretold that James "Buster" Douglas would knock out Mike Tyson in the tenth, but that was yet another prediction that fell upon deaf ears.
Anyway, I shall place you in the safe hands of the lady in question, Cassandra of Troy.
Thank you for that warm introduction, Mr. Williams. It's funny, but you look a lot older and much greyer in person than you do in photographs.
I'm sorry, folks, but what you have read thus far is so completely removed from reality as to be nothing short of ridiculous.
Allow me to explain.
First of all, this whole Fiscal Cliff/Debt Ceiling nonsense.
These bozos will come to a compromise, but most likely not until it's too late because they loathe each other and are desperate to score political points wherever possible. They do this because they believe (most likely correctly) that the population of the United States don't really understand what is at stake here, and they do it because each side genuinely believes that they have a mandate to stop the other from doing what they want to. It's ridiculous, but it's reality.
A simple cursory glance at the history of the debt ceiling over the last 37 years (left) is enough to tell you what will happen here. It will get raised. End of conversation. The most likely outcome to the whole Fiscal Cliff fiasco? We go right over the damn thing before agreement is reached, with each side loudly blaming the other like a pair of eight-year-olds found standing over a broken vase. They sadly believe that, after August 2011's short-lived reaction to the supposedly disastrous credit-rating downgrade, they can get away with just about anything.
They are wrong.
Speaking of "wrong," let's move on to the bond market, shall we? "Wrong" doesn't even come close to describing where the prices of sovereign debt instruments are currently trading, and in 2013 that, I believe, will be the biggest story to unfold.
If, as I foresee, a sweeping wave of reality begins to wash over the investment world, then sovereign bond holders (and the institutions that produce them) are in for a world of hurt.
Where this cascade begins is anybody's guess, though. It could be in Japan now that the era of "Abenomics" seems to be upon us.
To recap, Japan has the world's most outrageous debt-to-GDP ratio at roughly 240%, and as that super-smart guy Kyle Bass has so eloquently pointed out recently, their debt will shortly reach 1 quadrillion yen—a hard-to-fathom number which he simplifies thus:
"If you were to try and count to a quadrillion and every number took you one second to get there, how long do you think it would take you to count to a quadrillion? Thirty-one million years."
Kyle's assessment of the ramifications of that?
"There is no chance the Japanese can ever repay their debts. Plain and simple."
Kyle is right. In fact, Kyle has been right for a couple of years. But Kyle has been a victim of his own peerless ability for clear thought—he has been early. No matter. 2013 will be the year Kyle is proven oh-so-right.
Adding to Japan's woes is their demographic situation, which will now lurch from problematic to perilous almost overnight:
Now, charts are great to outline the problems facing Japan, but what about "Abenomics" as the possible solution to Japan's woes? Well, according to one of the smartest Japan-watchers I know, BAML's Pawan Kalia, far from being Japan's savior, Abenomics could, in fact, be the final straw that pushes the Land of the Rising Sun towards sunset in a hurry. Pawan's logic? Simple. Abe won election on a platform of aggressive fiscal expansion, and although ¥3-4 trillion is priced into the market, the final number may well be closer to ¥10 trillion or 2% of GDP (in fact, if you listen very carefully, you can even hear numbers like ¥200 trillion over 10 years being waved around with abandon in certain circles). If that is even close to what eventually transpires, it will require massive new bond issuance.
Ironically, just as fixing the confidence problem will sound the Fed's death knell, in Japan, generating the much-hyped "2-3% inflation" will also bring the bond market crashing down around the government and the BoJ's ears.
Be careful what you wish for.
In Europe, that cute little blonde girl couldn't be more hopelessly wrong about everything being fine and the EU putting all its problems behind it in 2013. Let's begin with Greece.
Beware Alex Tsipras.
The charismatic and combative leader of the left-wing, anti-austerity Syriza party came from nowhere last year to almost sweep into power on a wave of anti-European sentiment, and, though Antonis Samaras' New Democracy Party (the original architects of Greece's cooked books) narrowly won the election, Tsipras is not lying down quietly:
(UK Guardian): Public opinion surveys have repeatedly put his party in the lead since the summer. He has his sights on power. Demands for fresh elections are likely to be heard frequently over the course of 2013.
"This government does not have a long lifeline," he says, waving his arms for emphasis as he lists the measures adopted by his "dogmatic neo-liberal" political enemies that, he continues, have been tried and failed miserably.
"Greece is unique. Even after its debt was restructured it continued to go up," he says. Because the measures were self-defeating, he adds, they were doomed to exacerbate the country's economic death spiral. "A haircut is inevitable and it will happen after the German elections [next September]."
Sound like a recipe for stability to you? Greece will announce it is wildly missing yet another set of targets, and Europe's "core" countries (post the German elections) will force them out of the EU once the idea of further austerity is soundly trounced by the rise of Syriza and, more worryingly, Golden Dawn in yet another hastily called election.
Talking of elections, 2013 sees several key votes across Europe, and there will be some interesting results—particularly when, as I foresee, anti-European platforms do well in some of the earlier ones. Politicians are never shy to leap on a bandwagon, and though it is getting crowded, the one carrying the anti-Europeans looks far more comfortable than the one with the wonky wheel upon which the incumbents are perched.
Angela Merkel will win another term in Germany in September but will come under immense pressure over the continuing need to funnel money into Greece—and, by that point, Spain—as the kingdom slides ever deeper into the mire.
The true state of Spain's finances will still not be revealed in 2013 as, should that happen, Europe will have no chance of survival in its current form, but the micro-data out of Spain will continue to deteriorate (though, miraculously, the headline GDP number will remain suspiciously resilient). This has already begun with a damning new assessment of Spain's housing situation by the country's top consultants, which was highlighted by Ambrose Evans-Pritchard this past week:Angela Merkel will win another term in Germany in September but will come under immense pressure over the continuing need to funnel money into Greece—and, by that point, Spain—as the kingdom slides ever deeper into the mire.
(UK Daily Telegraph): RR de Acuña & Asociados expects home prices in Madrid, Barcelona and other major cities to fall a further 30pc in a relentless slide until 2018, but it may be even worse in sunbelt regions where 400,000 Britons either live or own homes.
Fresh losses could reach 50pc and drag on for 10 to 15 years in those places where construction ran wild during the bubble, bringing the total decline from peak to trough towards 75pc.
"The market is broken," said Fernando Rodríguez de Acuña, the group's vice-president. "We calculate that there are almost 2m properties waiting to be sold. We have made no progress at all over the past five years in clearing the stock," he said.
"There are 800,000 used homes on the market. Developers are sitting on a further 700,00 completed units. Another 300,000 have been foreclosed and 150,000 are in foreclosure proceedings, and there are another 250,000 still under construction. It's crazy."
The overhang is vast for a country with 48m inhabitants and annual demand near 200,000. It is coupled with an outflow of workers and the start of an aging population crisis.
What else? Well, Q4 2012 is going to be a disappointing one for holders of (seemingly) fairly priced stocks, I am afraid. The Christmas shopping period will disappoint, and there will be a slew of lowered forecasts for Q1 to deal with after some downbeat earnings conference calls as the global economy finally decouples from the optimistic outlook fostered by fake central bank confidence.
Results in Q1 will confirm what the realists among us have known for a while—that the US and Europe are both in recession (the chart below demonstrates how Eurozone IP has plummeted after the post-2008 rebound), along with the UK and Japan. Several other countries will soon join them. Equities, which have returned to within touching distance of lifetime highs, due in large part to stupidly high bond markets, will be forced to re-rate and that means one thing—lower prices.
Money printing will continue at a rapid pace with QE5 a necessary evil before the summer rolls around, and as European data deteriorates even further, Mario Draghi will be called upon to make good on his promise to do "whatever it takes" to save the euro and will need to pull one more rabbit out of his hat. Can he? I don't think so.
Gold and silver will reassert themselves as viable alternatives to fiat currency (despite continued and inexplicable sharp sell-offs on days when all logic would dictate they go higher—particularly, and, of course, quite coincidentally—immediately ahead of non-farm payroll numbers and FOMC decisions) as central banks continue to buy physical bullion as fast as they sell paper futures contracts can, and a group of hedge funds will begin to accumulate COMEX futures in readiness to stand for delivery en masse in order to flush out any missing gold from storage warehouses. Gold and silver miners will finally see their stocks perform as they should (although a look at the chart below shows that, 2012 aside, the miners have outperformed the S&P 500 quite handily since 2009), and the sector will end the year among the best-performing.
Tensions in the Middle East will ratchet up again as Iran shows no signs of softening, and the spat between Japan and China will be exacerbated by Shinzo Abe's government's decision to increase the 1% of GDP cap on defense spending in order to help with his ill-judged pledge to generate 3% inflation.
Egypt and Syria will both be concerns (though to differing degrees) in the first half of 2013, and there will be social unrest in China as well as some of the smaller Asian nations in the latter half of the year as food inflation begins to rise alarmingly. This will lead to a new wave of protectionism as countries strive to ensure their populations are adequately fed.
There are plenty more speed bumps facing the world in 2013, but, seeing as nobody listens to me anyway, I'll leave it there for now. Good luck to all of you (especially New York Mets and Fulham fans—you'll need it with the terrible year you have in store).
Well, my thanks to Cassandra for her views on the upcoming year. That was certainly a contrast to those of Ms. Whittier.
All that remains is to sum things up, and to do that, I have enlisted the help of the ideal arbiter: Janus, god of beginnings and transitions. A man who simultaneously looks to both the past and the future.
If anybody can make sense of what we are about to witness, it's him.
Mr. Janus (or should I just call you "Janus"?), over to you for a few closing thoughts.
Thanks, Grant. Please, feel free to call me by the name I prefer to use these days: J-Diddy.
Well, we've certainly been given two contrasting views of what 2013 could end up looking like to the world. Pollyanna's rose-tinted view in which everything runs smoothly, problems get "fixed" (usually by benevolent governments) and nothing untoward actually happens—which certainly has been the case by and large in 2012—and Cassandra's more, let's just call it "skeptical," outlook.
The truth is likely somewhere in between.
As 2012 closes, despite all the problems facing Europe, equities have performed rather well and the euro, miraculously, has actually strengthened 1%, thanks entirely to Mario Draghi and the power of hot air.
It is highly unlikely, however, that the status quo can be maintained for another year. The forces at work here are just too powerful.
There are a few things I believe bear watching very closely in 2013 as I fear all of them will have a profound impact on how the year plays out. Firstly, as has already been mentioned, Japan's attempts to generate inflation and the possible rout in her bond market that those attempts may cause is a situation to watch very closely. The weakening of the yen has been quite drastic so far, as has the effect on Japan's Nikkei 225 Index (see chart below), but don't expect other nations to allow Japan to steal a march on them in the race to debase. Japan may well have given the other competitors too large a head start to catch up—but the tenacity with which Abe pursues his pre-election promise will have severe and wide-reaching implications—not least in the US Treasury market, where any dollars accumulated by the BoJ will be stashed.
Secondly, the continuing explosion in US student debt delinquencies will also have its day in the spotlight. It will not be pretty:
(Zerohedge): We have already discussed the student loan bubble and its popping previously... As of September 30, federal (not total, just federal) rose to a gargantuan $956 billion, an increase of $42 billion in the quarter—the biggest quarterly update since 2006.
What also shouldn't be a surprise, at least to our readers who read about it here first, but what will stun the general public are the two charts below, the first of which shows the amount of 90+ day student loan delinquencies, and the second shows the amount of newly delinquent 30+ day student loan balances. The charts speak for themselves.
And lastly, keep an eye on foodstamp recipients in the US (which will blow through 50 million in 2013), the ongoing crackdown on graft in China (a tightening net, which will catch some big names), weakening economic data out of the Netherlands and Finland (which will threaten to fracture the Northern European alliance), and the stubbornly high price of Brent crude in the face of all kinds of promises of abundant natural gas supplies coming out of the USA.
2013 could also be the year Meredith Whitney's much-vaunted Municipal Meltdown call has its day in the sun.
Lastly, before I go, I know who the New York Mets are, but who the hell are Fulham?
Well, there you have it, folks. A Pollyanna 2013, a Cassandra 2013, and something in between. All in all, making predictions is always a folly of sorts, but being aware of the issues that may well have an effect is an extremely useful exercise indeed.
There is no way of telling what will happen next year, other than to say that the road down which multiple cans have been kicked for several years now most certainly ends somewhere. Will it be in 2013? I don't know... but I fear it might.
Like several other people, I personally believe that Japan will be the big story this coming year as Abe-san hits the "Print" button like a frantic game of Whack-a-Mole without paying attention to the line of dominoes that begins right by his feet. That line leads in all sorts of directions and ends up firmly in the US and European bond markets, but whether the dominoes fall in one smooth line or not is anybody's guess.
Whatever happens, we all get to sit and watch it play out together, so all that remains for me to do is to thank you all sincerely for reading my weekly ramblings in 2012 and to wish each and every one of you all the very best for 2013.
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