The Brazen Dozen – 2012

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. 

The Brazen Dozen is a list of events that I believe have a 40 percent probability of occurring during the year. These events skirt the outposts of probability. The objective is to think outside the box with regard to economic, market, and political activity so that we may better prepare for the 100-year floods that seem to occur so frequently.

In this month’s article, I share my outlook for 2012.  Yes, it is already mid-February, but sometimes publishing schedules can actually offer an advantage!

For a review of 2011’s Brazen Dozen, click here.

1. Europe moves steadily toward resolution of the current fiscal crisis, but does not make it out of the woods by the end of the year.  Greece and Portugal solidify plans to exit the union.  Spain is set to make a final decision in 2013.  Looking at the world today, this may not seem such an odd prediction, although I think Germany, France, and others will try very hard to hold the union together only to find failure in the third quarter when it becomes obvious a split must be made.  The exact structure of the split, however, remains anyone’s guess.
    
2. The Fed leaves interest rates unchanged throughout the year and initiates QE3 late in the year. Though there is some talk of QE today, the stock, bond and credit markets are behaving quite well, eliminating much of the possible upside of any potential QE.  In other words, with markets already elevated, why initiate QE which is obviously designed to provide further elevation?  Instead, watch for FOMC members to step up rhetoric on fiscal policy at the risk of the Fed’s own independence.
    
3. The IPO market for technology companies continues to heat up with many near-zero revenue companies going out successfully. This was on last year’s list.  Though the economy remains quite challenged, simple laws of supply and demand continue to force investors into searching for the “next best thing.”  Tech is always considered the best “next best thing” and rightly so.  It will be a good year for I-bankers on this front.


4. Consolidation in the money market fund industry continues and the SEC backs off of floating rate NAV…for now.  There remains too much uncertainty in the cash space as we near expiration of 100 percent FDIC insurance on 12/31/12 and the SEC reconsiders its desire to enforce a floating Net Asset Valuation on money market funds.  The desire to create some subordination level will get a lot of airtime, but will not be implemented in 2012.


5. Emerging markets slow considerably from 2011 as reduced stimulus/increased austerity in the developed world “trickles down” to the emerging world.  Contrary to what many believe, emerging countries are not ready to drive global growth.  Instead, they are dependent on more developed countries while they produce goods and services that are primarily consumed there.  Once their consumption level increases to a point of being self-sufficient, they are no longer “emerging.”


6. Consumer behavior, as measured by Personal Consumption Expenditures (PCE) fades in the new year, printing negative growth in the first quarter and only slightly positive growth for the remainder of the year. Consumption growth came in at 3.9 percent in 2011, equaling income growth for the year.  However, it seems incomes grew primarily in the fourth quarter while spending was concentrated in the early part of the year.  I believe after shying away from the malls since 2008, consumers returned in 2011 primarily focused on spending reservoirs that had built up.  Today, it seems they’ve gotten this out of their system and will go back to more austere behavior, even potentially decreasing overall spending in the first quarter.  Incidentally, the last negative spending quarter was way back in the first quarter of 2009 at the height of the crisis.


7. The stock market remains range-bound with the Dow trading between 11,000 and 13,500, ending the year up 0 to 5 percent. The publishing schedule has given me an advantage here (as of this writing, the Dow is up 3.5 percent year-to-date). I believe we are within 1000 points of the peak for the year.  Though cash on the sidelines will continue to support equity valuations and the IPO market, uncertainties around Europe, the election, and the economy will cause wide swings in the market of 8-10 percent either way 


8. The unemployment rate stabilizes in the 8.5 – 9 percent range, while nonfarm payroll growth remains at or below the 200,000 per month level needed to offset workforce growth estimates.  Continued political uncertainty keeps many long-term business plans on the sidelines as the potential for rule changes in Dodd-Frank, healthcare legislation and other regulatory areas remains prohibitive.  In addition, productivity growth continues as businesses turn more and more attention into getting the most out of existing or slightly expanded workforces as opposed to competing for large gains in market share. 


9. Housing prices remain flat and uncertain throughout the year as markets await long-term commitment from the government regarding its role in this important industry. Last year, I thought we might resolve this question, allowing the housing market to stabilize in late 2011.  I was wrong.  Where we stand today (election year, confusion among Fannie/Freddie’s regulator and their role, government suing banks while at the same time telling them to lend, etc.) does not leave much hope for a resolution in 2012.


10. As the fourth year of near-zero interest rates proceeds, more investors will gain comfort in security types and credit levels that offer added yield on cash investments. We have already seen signs of a possible trend here, but I believe the desire for yield will begin outweighing the desire to put investments away and not think about them.  Instead, CFOs will look to their money managers to offer sound advice on new security types such as asset-backed bonds and possibly asset-backed commercial paper.  We will also see many clients shift from 100 percent Treasury strategies toward corporate securities with high credit ratings.


11. Inflation as measured by the PCE Deflator edges downward during the year as energy prices settle.  This is the Fed’s preferred measure of inflation and their target of 2 percent is reached by summer.  The Fed has long felt inflation would moderate and it is finally correct in 2012.  In the January FOMC data release, the Fed stated it would like to have inflation settle at 2 percent.  Once the Deflator falls to 2 percent in the summer, the odds of another round of QE increase greatly.


12. InTrade.com becomes a household name as the “world’s leading prediction market” is highlighted over and over again during the elections.  OK,  maybe this one has greater than a 40 percent chance, but I couldn’t resist mentioning a Web site where you can buy futures contracts on everything from Barack Obama to the amount of snowfall to come in Central Park!