As we transition into 2012, it’s essential to reflect on the previous year to gain insights into what lies ahead. A glance at the stock market’s performance in 2011 shows a seemingly minimal change, but the broader narrative reveals significant volatility.
By the end of the year, the S&P500 closed at 1,263, reflecting an uptick of less than half a percent from its opening value of 1,257. However, these figures alone do not accurately capture the year’s market dynamics. The S&P500’s dramatic 52-week range, which stretched from 1,074 to 1,370, paints a more complex picture of the tumultuous events that transpired.
In essence, the markets went through turbulent phases. Massive sell-offs, like the S&P500’s 16.8 percent plunge between July 22nd and August 8th, were interspersed with sharp rebounds. For traders taking advantage of this volatility, it may have seemed exhilarating, but it was a nerve-wracking period for investors saving for retirement through index mutual funds.
On the geopolitical front, the world has experienced a drastic shift since last year. The U.S. military’s long search for weapons of mass destruction in Iraq culminated in a withdrawal that left the country to its own devices. Simultaneously, long-standing dictators such as Muammar Gaddafi and Hosni Mubarak were ousted through popular uprisings. Others, like Kim Jong-il, passed away just before the populace could challenge their regimes.
Nonetheless, it remains uncertain whether these changes in leadership will lead to progress or further decline. While we hope that Gaddafi’s removal signifies a new dawn for Libya, concerns linger about the intentions of the Muslim Brotherhood and other factions vying for control. Similarly, the potential for change under North Korea’s “Great Successor,” Kim Jong-un, is still shrouded in uncertainty.
In addition to political shifts, the financial and economic landscape endured its share of challenges throughout the year…
Slogging Along Like a Tired Mule
The yields on Ten Year Treasury Notes plummeted to historical lows—below 2 percent—in the last four months of 2011. These ultra-low yields are indicative of a sluggish economy and volatile stock markets. However, they also perpetuate an unwarranted perception of U.S. government debt as the safest investment globally.
This perception has allowed the Treasury to overextend itself, with debt nearing 100 percent of gross domestic product, while the Federal Reserve has engaged in questionable inflationary measures through QE2, Operation Twist, and other methods.
After the S&P’s downgrade of U.S. government debt on August 5th, many anticipated a surge in yields. Instead, they remained stable around the 2 percent mark. What could explain this anomaly?
Firstly, markets seldom respond predictably, but they do what is necessary. We suspect that lenders’ willingness to extend credit may soon be outstripped by the overwhelming debt burden. As 2011 drew to a close, a reckoning seemed increasingly inevitable.
This mountain of debt also acts as an anchor, hindering economic growth. The resources required to service this debt detract from potential investments that could stimulate the economy. Consequently, after officially exiting recession over two and a half years prior, the economy continues to trudge ahead with limited energy. High unemployment rates and slow economic growth persist, compounded by the misadventures of policymakers in Washington.
At the same time, it is vital to note the chaos unfolding within Europe’s financial ecosystem. The debt crisis there, akin to a snake consuming its tail, has reached a critical point. With each new financial rescue attempt from European leaders, anxiety over a potential liquidity crisis resurfaces. Unfortunately, solutions remain elusive, and the world is perilously close to a financial catastrophe.
With the context of 2011 established, let’s venture into thoughts about the upcoming year…
2012: Predictions, Prognostications, and Prophecies
Before diving in, we want to specify that what follows is merely a conjecture—an educated guess about a significant event for 2012 that combines elements of prediction, prognostication, and prophecy.
Are you prepared? Here it is…
The failures of European banks, stemming from their substantial holdings of toxic sovereign debt, will ignite a financial crisis in early 2012 that dwarfs the turmoil of 2008.
European governments, as the originators of this bad debt, will find themselves unable to rescue the banks. Moreover, European Union regulations prevent the European Central Bank from stepping in to stabilize the financial system. Nevertheless, a panic within European markets will inevitably spill over into U.S. markets, prompting the Federal Reserve to supply the necessary liquidity—essentially, emergency funds—to avert a collapse.
The Federal Reserve’s actions in the wake of the 2008 crisis marked a pivotal moment. Prior to this, most Americans were largely unaware of the Federal Reserve’s actions. However, public scrutiny of central banking has grown significantly in recent years.
The eventual Federal Reserve measures taken to salvage Europe’s financial system—and, by extension, the U.S. financial system—will signify a turning point. If it does not, it certainly ought to. The ensuing public dissatisfaction, outrage, and political pushback may become overwhelming. At the very least, disgraced Fed Chairman Ben Bernanke may find himself ousted, though the consequences of these actions will be long-lasting. The Fed’s monetary experiments will continue to undermine the dollar and other fiat currencies.
In this context, gold will likely maintain its status as a secure asset of last resort. Even though gold has faced challenges recently, the forces of enormous deficits and central bank interventions that propelled its rise over the past decade will persist through 2012.
Fasten your seatbelts… It’s going to be quite a ride!
Sincerely,
MN Gordon
for Economic Prism
Return from 2012: Predictions, Prognostications, and Prophecies to Economic Prism