12 predictions for 2012

Please find below former Reserve Bank of New Zealand advisor and multiple CEO, Terry “Macca” McFadgen’s, predictions for the year ahead. Do not take them too seriously. As noted by Macca, predictions are “foolhardy and discredited”, and this exercise is just for fun.

Feel free to provide your own predictions for the year ahead in the comments field below.

The evidence that so- called “economic forecasters” are unable to do any better than a chimpanzee is overwhelming. If you want to dig deeper into that proposition take a look at William Sherden’s work, “The Fortune Sellers”(sic), or at Taleb’s,” Black Swan”.

Macca would be extremely surprised if he were to be an exception to the chimpanzee rule. However, it’s Christmas and we should have some fun.

So here is Macca’s Dozen for 2012:

1. Obama will be re-elected not so much because he deserves it but because the opposition is so awful. Gingrich is loopy, Perry is dense, and Romney is too rich and too clever. So we will not be facing a US economy in the hands of a bunch of loonies who insist on a further sharp fiscal contraction. Good news.
2. The US economy will continue a grinding recovery through 2012 and by the end of the year will be looking a lot better. Unemployment will be trending down meaningfully by the fourth quarter. Companies will also be accelerating investment by then. The fog will be lifting. There will be no need for a third round of quantitative easing from the Federal Reserve.
3. At some point during the year there will be flood of money into US equities as investors realize that a US recovery is well under way, and earning negative real interest rates on cash and bonds is not such a great way to preserve wealth. This funds flow-or more accurately the associated wealth effects on consumption- will further reinforce the recovery. A virtuous cycle will be set in place.
4. Conversely, by the end of the year US Treasury yields will be rising and all the investors who bought long maturity bonds over the past year or two will be nursing big losses. I hope this doesn’t include anyone managing your savings.
5. In short, the US economy will demonstrate what a really smart guy the late Rudi Dornbusch was. Dornbusch, who was an economist at MIT, was famous for lots of things but one of them was the observation that in economics everything takes a lot longer than you think, but then it happens must faster than you ever thought possible.
6. The Euro-zone will not be split asunder and indeed not a single current member will exit because the pain of exit exceeds the pain of staying. Just like some marriages really. (But none close to home Macca hastens to add!)
7. The ECB will print Euros to buy Spanish and Italian bonds once things get really bad in the EZ and it becomes evident that a nasty asset price deflation spiral is setting in. This should occur about the middle of the year, or maybe earlier. The key obstacles to a print run-moral hazard (they’ll just do it again if you save them!) and fear of inflation- will by then have been removed. Even with a print run the EZ will be a sad, bad place economically for a few years, maybe a decade. Macca is looking forward to lots of cheaper winter holidays in the EZ sun.
8. China will roll the dice and re-inflate its economy by building more housing for which there is no market other than speculators, and more bridges to nowhere and airports without planes. This will be a tough decision with obvious downsides but the alternative (giving the masses their money back so they can spend it) is worse because it puts the elite’s grip on power at risk. This will set up a huge banking sector bust for 2013/4, but next year will be okay in a Disneyland sort of way.
9. As China kicks on for another year with 8% plus growth, the commodity currencies will remain well supported during 2012 provided an Australian housing crash is avoided. (Note the relationship to my cheap holiday aspirations please Santa). On balance Macca thinks we will avoid a crash although his confidence level is probably about the same as Ricky Ponting’s as he contemplates having to take strike against the Indians on Boxing Day.
10. So with a bit of luck the housing bubbles in Australia and New Zealand will continue to deflate quietly-with gently falling nominal prices generating real declines of about 5% pa. The potential fly in the ointment is the risk that the availability of European funding for our banks shrinks dramatically in which case all bets are off. In that case, the Big Four will have to trim their balance sheets fast and lending for housing will suffer. The downside scenario here is a ghastly 25% plus adjustment. Too horrible to contemplate!
11. The Israelis will not launch an assault on Iran because it would cause a global depression and the Americans will not allow it. Instead they have bought off the Israeli hawks with a covert operations program which is going well. Expect more in 2012. Do not holiday in Iran.
12. Roger Federer will win a Grand Slam tournament in 2012 proving beyond all doubt that he is the greatest tennis player of all time. He will then retire in glory. In a team game involving 11 players and a leather ball, Australia will be humiliated by India. Renewal will then follow.

We will revisit these outputs from the Ouija Board next Xmas and see how this chimp has performed. Do not forget that this exercise is foolhardy, empirically discredited, and strictly for fun!

In the meantime, enjoy the holiday season.