2013 Economic and Financial Market Forecast

2013 Economic and Financial Market Forecast
Lou Scatigna

 

It’s that time of year again, as we enter the new year it’s a great time to review the past year and make some forecasts for 2013.

 My goal in bringing you this information is to help prepare you for what might happen. Forecasting the markets in the coming year is challenging because there are so many variables that can influence the outcome. There are many political and geopolitical events that can greatly dictate the direction of financial markets in 2013. The 2012 Presidential election was as divisive and nasty as any I can remember. Class warfare and an “us verses them” narrative by the President has torn the fabric of our country. As I complete this on December 30th we still do not know if we are going over the “Fiscal Cliff”. Our government is broken and as partisan as it has ever been. Markets do not like impotent leadership and politics are going to play a big role in U.S. financial markets in 2013. The re-election of Barak Obama was the most important factor in my 2013 forecast. The country has made the decision that they want more government support which in the end will result in  more debt and eventually insolvency and hyper-inflation.

In this report I may forecast two possible outcomes based on certain events taking place.

The problem with forecasting financial markets in 2012-2013 is that they are hostage to news which can sway them up or down. Unless one is psychic and able to see events in the future, predicting the performance of  any financial market with confidence is impossible but I will try my best.

Please don’t take this as investment advice, talk to your own financial advisor before making any moves in your investment portfolio. Use this forecast as one of many out there and come to your own conclusions on what you should do.

As always when I make a dire forecast I hope and pray that I am wrong, I get no pleasure in being correct as the country suffers. I found myself getting depressed as I researched, came to my conclusions and wrote this report. I really fear for the future of our once great country. 2013 marks 30 years that I have been in the financial services industry and I have never been so concerned about the economy and financial markets as I am today.-Lou


Economy:

The U.S. economy stumbled along in 2012 aided big-time by an out of control, money printing Federal Reserve Sugar Daddy. Without the massive Fed accommodation the economy (and stock market) would have been in decline in 2012.

The was some optimism in some sectors or the economy in 2012. Housing prices finally began to firm and even rise slightly in some markets. Real Estate agents are seeing increased activity as investors and first time home buyers take advantage of historically low mortgage rates and depressed home prices. Although still anemic, there has been positive job growth. According to the BLS (BS) the economy has been creating about 100,000 jobs per month in the second half of 2012. To put this in perspective, a real economic recovery would produce 250-300k jobs each month.

The U.S. economy will be facing significant head winds in 2013. Although as I write there is no deal on the “Fiscal Cliff”, taxes will be going up on at least some taxpayers. These “rich” people, mostly small business owners, will cut back on hiring and expansion. Ernst and Young stated that over 700,000 jobs will be lost if the top two tax brackets are raised. Increasing taxes during weak economic growth has always had a negative effect on the economy. I expect the fisrt half of 2013 to show GDP growth of only 0.5- 1.0%. If taxes go up, and I’m sure they will on at least the higher brackets, I expect the economy to be “officially” in recession by the 3rd quarter.

By the 4th quarter 2013 I fear that the economy will be in free fall with negative GDP of -2.0% or greater. Again, there are some many variables that can affect the economy and most of them are negative. There is a better than 50-50 chance that war is going to break out in the Middle East. Military assets have been positioned and all indications point to conflict starting in the first half of 2013. Any hostilities will cause oil prices to surge delivering a body blow to the world economy.

Another negative for the U.S. economy is the implementation of Obamacare. Businesses are just beginning to understand the negative impact Obamacare will have on their companies. There is a lot of nasty and costly surprises in the 3,000 page Affordable Care Act. This week I was notified by Horizon Blue Cross the  premiums for my group health plan are rising by 12% in 2013. Over the last three years the premiums have risen over 50%. Were we not told that premiums were going to decline as a result of Obamacare? Increased health care costs are going to result in fewer full-time jobs. Already many companies including Darden Restaurants and Papa John’s Pizza have announced that they will be restricting employees hours to 30 or less to avoid paying for health insurance as mandated by Obamacare.

Bottom line: The U.S. economy is going back into Recession …or worse in 2013.

 

 

Unemployment:

Unemployment as measured by the Bureau of Labor Statistics remained above 8% until (magically) it dropped to 7.8% two months prior to election day. Ironically, the decline was due to the fact that millions of people “left the work force”. The so called “participation rate” fell dramatically in 2012  as the government decided that the long-term unemployed really were not unemployed but “discouraged” and not looking for work and thus need not be counted for the official UE rate.  Are these people not still unemployed? Of course they are, but the government will not count them in the figures. John Williams excellent website Shadowstats.com calculates key statistics the way they were calculated in the 1980s and 1990s before official fudging started to skew the numbers (positively, of course). According to Shadowstats the real unemployment rate is about 20%, These are levels seen during The Great Depression.

Regardless of the bogus government numbers, unemployment in the U.S. will continue to remain high in the U.S. Continually extending unemployment benefits is not helping to motivate beneficiaries actively seek work.

Bottom line: The official unemployment rate in 2013 should range between 7.6 and 9.0% with the highest unemployment rate in 4th quarter 2013. Shadowstats unemployment rate should range between 21 and 25%.

 

 

Housing:

If only that housing bubble did not happen. Reckless finance coupled with homebuyer stupidity (and sense of entitlement) combined to propel the housing market to unsustainable heights and the resulting crash nearly took down the world financial system.

While housing has never been more affordable given low prices and historically low mortgage rates demand has remained very low. Today you can get a 30 year fixed rate loan for 3.5% if you qualify. Unfortunately, many people due not qualify due to their below average credit rating. Job insecurity is the number one reason potential homebuyers remain renters. Why buy a home if I may have to move to find a new job? Massive amounts of foreclosed inventory may keep supply high holding back prices. On the positive side, investors are looking at real estate as an alternative to money in the bank that earns little in the way of return. Real Estate is also considered a good hedge agains inflation and dollar devaluation.

Bottom line: Real Estate may have seen a generational bottom in 2012. I look for real estate to do fairly well in 2013 with home prices rising 5-8%.

 

 

 

Inflation:

The big question facing investors in 2013 is “Are we going to finally experience inflation as a result of the Fed’s massive money creation over the last four years?”. The massive QE money printing by both the Fed and ECB will result in rising prices especially for food, energy and precious metals. The number one question I am hearing from clients and radio listeners is “How can I protect myself from inflation?” The answer is quite simple, own things, not paper. If it is real and you can put your hands on it then it is an inflation hedge. Real Estate, gold, silver, food, oil, natural resource stocks are all ways to protect yourself from the coming inflation nightmare.

Inflation as measured by the Consumer Price Index is another fat lie served up by our government. You see, changes in the CPI affect the inflation adjustments to a whole bunch of government programs from federal government pensions to the biggy, Social Security. Grandma’s cost of living is rising but due to a very low CPI she get’s a small increase in her SS check, very nice. Now ,as part of the “fiscall cliff” negotiations, the government wants to calculate the Social Security COLA using the “chained” CPI which will allow the government to use a lower measure of inflation than the regular CPI.

Central Banks have no real option to keep the system alive except to print money and prop up banks that are drowning in bad debt issued by bankrupt governments. Historically, when debt becomes too high for a country it is inflated away by massive monetary expansion and this time will not be the exception. The Federal Reserve recently announced the commencement of QE4. The Federal Reserve will now buy up to $85 billion worth of Treasury Bonds and Mortgage Bonds EACH AND EVERY MONTH for the foreseeable future.The risk of hyper-inflation is real and must not be overlooked. The question is not really are we going to have massive inflation, the question is when. I have no doubt that it is coming (there is no way to really avoid it) I’m just not sure when. Agricultural commodities and ETFs that track them along with precious metals is the best way to protect yourself against this inevitability. 2013 may be the year that the Great Inflation begins. It will be something to behold. Rising poverty and rising inflation is a bad mix indeed and will result in rising crime and civil unrest.

Bottom Line: Although it is an understated government number, the CPI will rise by 5.5% in 2013. The real inflation rate will be 12%.

 

 

U.S. Dollar:

The U.S. Dollar did basically nothing in 2012. the dollar index started the year at 80 and ended the year at 79. The U.S. was still considered to be the safest bet as Europe continued to deal with the PIIGS debt problems. By the end of 2012 it looks like Europe has finally gotten serious about it’s debt problems. The European Central Bank has made it clear that it will do whatever it takes to defend the Euro and the European Union. The Euro closed 2012 at or close to the year high versus the Dollar. I look for the U.S. Dollar begin it’s historic collapse in 2013. The massive money creation by the Fed will be the dollar’s death knell and it will happen by late 2013.

U.S. Treasury  Secretary Tim Geithner notified Congress that the U.S. would hit it’s $16.4 trillion debt ceiling on December 31, 2012. In just four years, our debt has grown form around $11 trillion to $16.4 trillion, an almost 50% increase. This is not sustainable. Both the President and Congress seem little interested in making any significant spending cuts, guaranteeing massive increases in the debt over the next few years. Currently the Fed is purchasing virtually all new Treasury debt being issued and is doing so with phony, printed dollars. When interest rates go up, and they will, our entire tax revenue will go to paying just the interest on our debt, what happens then? Well, that is the end game. The question is when will it start to happen, my guess is the wheels will come off the dollar late in 2013.

Bottom line: The dollar is toast and the dollar index will drop from 80 down to 69 or worse in 2012

 

 

Gold and Silver:

The gold and silver market is like no other market in the world. No other market trades like precious metals. Gold and Silver are paper currency alternatives and as such are heavily manipulated by Central Banks, The Exchange Stabilization Fund and Bullion Banks. After the Fed announced QE4 in early December, the “Gold Cartel” went to work to reduce the price of gold and silver. While one would think gold and silver would rise given the Fed printing $85 billion a month gold actually dropped over $100/ounce in late December and silver was hammered even more on a percent basis. Gold and silver will still close 2012 with a small gain making it 11 years as the bull market continues.

I expect 2013 to be the year when gold and silver soar to amazing heights as the wheels come of the dollar and inflation begins to rear it’s ugly head. Gold closes 2012 at around $1,650/ounce while silver ends 2012 at $30/ounce. The cartel’s takedown of gold and silver in December is a gift from God himself for those who are under exposed to precious metals, which is virtually everyone. Although gold and silver may decline a little bit more before resuming their uptrends, 2013 will be known as the year that precious metals outperformed every asset class.

I expect gold to rise to at least $2,200 (+ 33%) in 2013 silver will go up even more on a percentage basis to at least $45/ounce (+50%). I fear that my forecast may be too low for gold and silver.

Bottom line; You must have some gold and silver in your life, it is financial life insurance.

 

 

 

Oil:

This is a tough market to call to make since so many variables that can push oil much higher or lower. The number one variable is geopolitical risk in the Mid East. Iran’s recent threat to choke of oil shipments at The Straight of Hormuz must be taken seriously. Any disruption in supply could send Oil north of it’s 2008 high of $147/bbl. During 2012 oil went as high as $110 then went down to $75 and closed the year at $90. Worldwide economic contraction may lessen demand for oil but geopolitical concerns as well as that decline in the value of the dollar could boost prices. A rising oil price will further add to the world economic woes.

Oil will experience great volatility, ranging from $150 on the upside and $70 on the downside. Again, anything is possible with oil prices in 2013.

Bottom line: It depends on events in The Middle East

 

Stock Market:

If there is one market that I have been off on my forecast it is the U.S. stock market. I expected stocks to have a reasonably good first half of 2012 but I forecasted a plunge in the second half of the year. The plunge never came, at least not yet. What I failed to see was the extent of the Fed’s QE operations. The Fed created so much liquidity and much of it found it’s way into stocks resulting in a continued bid in the market. With 2012 being a Presidential election year, TPTB made sure that the market behaved itself. The inability to earn anything in safe vehicles like CDs and U.S. Treasuries has forced some money into stocks as the only alternative. For 2012 the Dow was up 8.8%, SP 500 was up 13.63 and the NASDAQ was up 14%. Corporate earnings were not bad in 2012 even though the economy sputtered. During the 4th quarter many companies lowered earnings expectations for early 2013 citing a slowing economy and a decrease in consumer spending. If early indications of Christmas spending are accurate, the economy dramatically slowed in the 4th quarter which does not bode well for 2013. Consumer confidence is falling dramatically in late 2012 another negative indicator for 2013.

Political and geopolitical events are going to have a major influence on stock prices in 2013. As we end 2012, stocks have dropped for five straight days a investors worry about going over the “fiscal cliff” with tax rates going up and major cuts in government spending. In any case taxes will be going up at least for the more wealthy Americans. Also concerning is the increase in taxes on capital gains and dividends as well as the Obamacare tax surcharge of 3.8% on dividends and capital gains for investors who make more than $250K . Raising taxes on investment returns has historically been a negative for stock prices and it will be so in 2013.

I believe that the stock market plunge I forecast for the second half of 2012 was only postponed until early 2013. I expect the first half of the year to be a scary time for stock market investors. The potential for war in the Middle East is another huge variable that could implode world stock markets. Political wrangling over the budget, entitlements and the debt ceiling are other negative factors that could result in a stock market panic. The country is hopelessly divided on what to do with taxes and entitlement spending meaning nothing will be dealt with and our debt will grow.

I expect stocks to plunge during the first half of 2013 with the Dow trading down to 8,000 and the SP 500 down to 770. If and when that happens we will see a generational buying opportunity in stocks. Ultimately, inflation will be the reason stocks rise in late 2013 as investors look for any place to exchange paper dollars for real assets. If the dollar drops 50% in value, the price of IBM would double to maintain the same enterprise value.

The stock market is a huge casino that is as risky now as it has ever been. Be very careful.

Bottom line; After a scary panic during the first half of 2013 (down 38%) stocks will rebound but still close 10% lower for the year.

 

 

U.S. Treasuries:

U.S. Treasury bonds (especially long maturities) are in the mother of all bubbles that will eventually crash and burn. I was surprised that U.S. Treasuries were remarkably stable in 2012 with the yield on the 10 year ranging from 1.90% down to 1.35% (currently 1.6%). The party for the U.S. bond market is going to end in 2013 as mainly foreign investors become skittish of the U.S. budget deficit, rising debt and the severe political divide in Washington. When the yield breaks 2.25% on the ten year the game is over and a brutal multi-year decline in bond prices will begin. Another risk to the bond market is the likely downgrade of the U.S. credit rating by Moodys or Standard & Poors.

While I believe gold and silver will be the best asset class in 2013, U.S. Treasury bonds will be the worst. As Treasuries sell off so too will the U.S. dollar.

I would only own Treasuries with a maturity of 3 years or less, longer maturities carry an amazing amount of risk.

 

 

2013 promises to be another roller coaster year with all financial markets experiencing unusual volatility.The big story will be war in the Middle East, and all financial markets are going to be violently volatile. 

Although this report covers the state of financial markets, I want to also comment on the state of American culture.

Although it has been happening for a long time, recently we have seen country rapidly fall both morally and ethically. We have eliminated all reference to God in public life and with that the moral and ethical values of our country’s Judeo-Christian heritage. The sanctity of life has been diluted as we kill 8,000 unborn babies every day. Young men today have had their minds warped by violent movies and video games. All the recent mass shootings have been by young men 20-24 years of age. This generation is the product of our country’s decade long moral decline. Explicit music and movies celebrate killing and encourage violent behavior.

We are close to the end of the lifecycle of The United States of America. We have corrupted our financial and moral fabric. It pains me to say that our future is not bright.

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