2012 might be a tough year to top considering we had a US election, an Olympics and the warmest year on record. Let's also not forget we somehow managed to survive the Mayan apocalypse! While I pride myself in knowing that I do NOT know the future, I love to look at probabilities, and like to throw my hat in the ring each year in regards to how things might play out moving forward. Below are few of the trends I will be following over the next 12 months in order to help me predict and determine overall market direction:
Global Economies - After having slowed down from 4.2% in 2010, 3.0% in 2011, and around 2.5% in 2012, I believe we may have bottomed out. Of course with Eurozone and Japan going back into a recession it is doubtful that we see any type of major turn around. I do however see world growth holding steady or even slightly improving to 2.6-2.7% in 2013. My thoughts are the emerging market giants such as Brazil, China and India have all started to turn things back around. Just keep in mind their export business hinges on demand from the US, Europe and Japan. Therefore I am not projecting any major turn-around.
US Economy - The world's #1 economy will remain in the spotlight, and my hunch is we will gradually continue to recover. The housing sector is finally starting to show some life, and there is more and more talk circulating about US manufacturing coming back home in anticipation of cheaper and more readily available energy sources. I am also thinking that as global growth begins to stabilize and actually turn back around we might start to see US exports follow suit.
China - Since 2010, the Chinese economy has decelerated significantly, most reports show growth falling from over 10% to now down around 7.5%. I am of the belief that growth in China is close to bottoming out and that they will gradually start picking up momentum eventually heading back to 8% growth by the end of 2013. The new Chinese leadership seems eager to turn government spending into more consumer spending, which in my opinion will help add some stability to the Chinese economy longer-term. Bottom-line, I believe Chinese growth will find a bottom and start to turn back around, moving higher.
Europe - European leaders have been singing a little different tune as of late, and it seems as if the risk of Greece leaving the EU or Spain going broke is more of a long shot than it was a few months back. Leaders seem to have discovered that austerity alone is not the answer to the crisis, and relaxed their strict targets for both Greece and Spain. Nevertheless, I suspect a large majority of the EU will remain in a deep recession and growth will continue to disappoint. Though things don't seem as dramatic or severe in Europe, I still seem no longer-term solution for their problems. Rather than dying of an immediate "heart attack," the EU seems to be stricken by a fatal longer-term debt cancer diagnosis. From my perspective their only hope is to form a central Treasury that has the power to collect direct taxes from member states. Also giving them power to issue a single type of debt that can be repurchased and re-owned in Euros.
The Middle East - As we have come to learn anything is possible when discussing the Middle East. My best guess is that president Obama, needing another notch on his political resume, will eventually cave to pressure toppling the current Syrian regime and ultimately attacking Iran. With the majority of the Middle East now controlled by the West Iran has been in the crosshairs for several years now. 2013 might actually be the year that broke the camels back so to speak, and Iran will finally be brought into "check." Some analysts actually believe Washington will need a distraction from the economic crisis of 2013, and a new war in the Middle East might be just the solution. I guess the bigger question is not Iran, but rather how China and Russia will react to the attack.
Energy Prices - There is no denying the fact the US is in the midst of an "Energy Boom," but I am doubtful that crude oil prices will see any major type of setback. There has been talk in the trade that crude oil could drop to $50 per barrel or lower. Sorry I ma just not in that camp. Sure I could see prices dropping to $70 per barrel if the global economies continue to struggle and demand continues to falter, but I doubt we fall much lower simply because US exploration and Middle Eastern suppliers need prices at or above these levels to support their efforts and to keep them afloat. Even though I believe prices "could" drift lower from their current levels, I believe our ultimately risk still remains to the upside, especially if military action in the Middle East advances. Net-net I believe crude oil prices could trade between a low of $70 and a high of $140 during the next 12-months.
US Dollar - Understanding that the US Dollar helps determine overall commodity market direction makes this an highly important prediction. Unfortunately it seems that this might be the toughest equation to solve. On one hand you have to believe that increasing US debt, along with the growth outlook in the emerging world economies improving and capital flows into these economies possibly ramping back up, the US dollar should weaken in 2013. Especially considering the current plan in Washington for adding jobs looks to be from mining, drilling and farming US resources for export, which needs a weaker US dollar to make it happen. The kicker is during the coming year, economic fundamentals such as growth differentials and current-account balances may actually tend to favor the US dollar, especially compared to other developed economy currencies. Essentially making the US dollar the best looking "dog" on the block, and prompting investors to seek stability and coverage from any type of global crisis under its shelter. With this in mind, I would have to believe the US dollar will ultimately trend lower, but dramatic swings higher during time of uncertainty will keep it little changed overall for 2013.
Interest Rates - The Federal Reserve's so called guaranteed "low rates" might soon start force investors to leave fixed income. With almost no returns, the Fed might finally get what they have wanted, when investors jump out of bonds and into more appealing stock market type plays. Keep in mind the bond market is much bigger than the equity market and a simple 10% reallocation of money from bond funds to equity funds could increase money flowing into stocks by about 30%. Ultimately this could lead to higher US rates. In my opinion we should be locking in ALL longer-term rates as we print near record lows. The risk is obviously much higher to the upside than the potential gains associated with rates moving lower. Remember our goal is to find ways to reduce our exposure to longer-term risk, not speculate on short-term trends.
Inflation - I suspect inflation will remain subdued during 2013. Basically mild-growth and higher than normal unemployment rates the past few years have kept a lid on prices and inflation here in the US. Yes we have seen some recent gains in crude oil and lumber prices, but nothing in my opinion that should set off alarms about runaway or some type of hyper-inflation.
Commodity Prices - Despite all of the wild rides in 2012 commodity prices as a whole are very close to the same levels they were at this point last year. The US Dollar is trading between 78 and 80, the same as in December of 2011. Crude Oil prices have also stayed within the prices range established in 2011 between $75 and $115 per barrel. Natural Gas, though showing renewed strength as of late is still trading right around the same levels seen in Oct of 2011. Copper prices are trading at about the exact same level recorded during the first week of 2012. Gold prices have stayed well within the 2011 ranges of approximately $1,300 and $1,900 per ounce. Silver also well within the 2011 range of $26 to $50 per ounce. Cotton, Coffee, Cocoa, Orange Juice and Sugar are all trading below their respective 2011 averages. While Lumber, Soybeans, Canola and Live Cattle are all trading well above their respective 2011 averages. Net-net we have made a lot of noise and burned a lot of rubber but we haven't really taken the commodity car very far down the road. I suspect the same will hold true in 2013. I do not believe the commodity bull-run is over, but I do believe it has tired to some degree and may need some additional rest before pushing higher in the future. I am afraid mild downward pressures from soft growth and relatively high inventories in some markets may keep a lid on overall commodity prices.
Gold and Silver - As I have said on many occasions I am NOT a gold or silver bug, but I do believe every investor should have his or her fair share of the physical just in case the global printing presses explode. As long as there is "uncertainty" and massive government debt I have to believe both Gold and Silver will remain well supported. I continue to support the thought of being physical buyer of both on any massive setback in price. Look for bargains in 2013 as buying opportunities for the long haul. Remember, Central banks around the world are snatching up new gold and moving to secure their foreign gold, while investment guru's who were previously denouncing gold as a viable investment have been increasing their exposure.
Farmland - Should continue to perform well. Maybe not with the kind of gains seen the past couple of years, but I see no signs of a significant setback. Remember farmland values are based on a combination of "production" and the "price" of the crop. Not just "price" like some analyst want to project. Meaning just because the price of corn goes lower it doesn't necessarily mean land prices will drop in association. Think about it this way, a 1,000 acres of ground that yielded 100 bushels of corn last year and marketed for $7.50 per bushel, generates approximately the same revenue as a year when the yield is 180 bushels per acre and it is marketed for about $4.15 per bushel. My point is, yes, major crop prices could take a tumble if US farmers were to harvest bumper crops, but land price may only setback slightly because gross revenue will still remain strong and most US farmers are cash flush with a great looking balance sheet.
US Stock Market - I remain bullish the US stock market and believe we can push the S&P500 to new all-time highs in 2013. From my perspective US consumers are starting to spend and US companies are regaining their swagger. I believe the "energy and agricultural boom" here in the US will continue to create wealth and jobs. Both of which will ultimately help recharge the US economy. I also believe global investment dollars will start to more heavily poor into US equities. Some analyst may go as far as to say investments in cash flush US companies like Apple, Google or Microsoft might be safer than US treasuries or good old fashioned green backs. As I said last year, be careful betting against the US stock market. The Fed adamantly is going to do everything in their power to keep the market supported, and as you know, I love to play the game being on the same sideline with those who make the rules.
Weather - Extreme weather is obviously the new norm. In 2012 we saw the warmest year on record, record droughts across America and an odd super storm across the Northeast that left thousands homeless. I couldn't tell you why we are seeing such extreme weather, but the climates certainly appear to be changing. I am not a big proponent of CO2 causing the drastic changes, but I am starting to buy into the fact the North Pole is rapidly shifting and the sun is awakening to a new solar maximum. Meaning here in the US we may actually be seeing warmer and drier trends pushing further and further north. I suspect the changes with the sun are affecting the oceans here on earth and we will continue to see more extreme and volatile weather patterns. Therefore I have to believe 2013 will produce a couple of monster storms and earthquakes of mass proportions.
New Laws - I have to believe the US is about to embark on a series of major changes to the law. Not only are we seeing rapid reform in banking and investment regulations, but I have to believe we are about to see massive changes and regulations to our right to keep and bear arms. Only a fool would sit here and predict looser gun regulations. Not only is there a massive wave of US citizens now calling for tough gun regulations, but foreign leaders are also starting to put pressure on Washington to tighten up US gun laws. I am not suggesting the powers the be are going to show up at your doorstep asking for your guns, but I do believe it will become more and more difficult to obtain and transfer ownership of guns and ammunition. One law that might actually be removed is the one that makes marijuana illegal. I suspect after Colorado and Washington show the rest of the country how much revenue they can create by legalizing the drug, politicians in other states will be quick to jump on the bandwagon. Keep in mind 15 states have already decriminalized marijuana possession, along with 18 states now approving legal medical cannabis.
Black Swan - For years there has been speculation of some type of "cyber attack." My gut tells me something dramatic is going to happen in 2013 that rocks the world in regards to social networking and our life as it is tied to computers. Just think of what some type of malicious cyber attack would do to the US stock market or commodity markets, now that high frequency trading has become the norm.
Corn, Beans & Wheat - Sorry folks, my guess is the highs of 2012 will stand in the record books for both corn ($8.43^6) and soybeans ($17.94^6). I also have to believe the 2008 wheat high of $13.34 is extremely safe as well. As for how low prices can go, considering the funds always tend to overdue things, I have to suspect "IF" growing conditions are somewhat adequate here at home in 2013 then corn prices (during the second half of the year) could eventually trade sub-$5.00 per bushel, soybeans sub-$11, and wheat sub-$6.00. Just keep in mind the corn high of 2012 came on the heels of a devastated crop, basically 17-year lows in the US yield. Be careful betting on a repeat. I realize many parts of the country are extremely dry so a sub-trend line yield is certainly likely. My guess is a US yield of around 150 bushels per acre will keep prices some where around $6.00 per bushel, considering tight global supplies and adequate demand. If we come in below 150 bushels per acre then prices will trade higher accordingly, if we come in above the 150 bushel mark then prices will more than likely break even further during the 3rd and 4th quarter of 2013.
Cattle & Hogs - I wouldn't rule out NEW All-Time highs in either the Cattle or Hog markets. If the global economies can somehow start gain some traction we might actually see a strong surge in beef demand and Live Cattle prices could push north of 140. It also wouldn't surprise me to see some type of disease scare in the Chinese hog herd pushing prices back towards the August 2011 highs of 107.35.
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