Saturday, June 30, 2012

Daily Briefing for Saturday, June 30, 2012

End of Q2

I went through my January 2012 newsletter to see if I'd made any major blunders in my predictions.  From my analysis, in toto:

Now that I’ve laid that groundwork, I’m going to give you my talking points on what I think we
should expect in 2012.

1. Unemployment numbers will remain relatively stagnant. Even if we continue to see an
improving trend, I would not expect it to be a strong enough trend to result in meaningful recovery.

2. I tend to agree with Jim Rogers on the inflation issue. The sheer amount of money the
Federal Reserve has injected into the economy cannot have a deflationary effect. Note
well – we may not see inflation outside of food and energy prices in the coming months.
But as people in lower income brackets spend a disproportionate amount of their
income on food and gasoline, they will clearly feel the effects of this.

3. And by energy, don’t forget to pay attention to your electric bills. We should anticipate
the risk of further blackouts this summer, especially in Texas, due to new EPA
regulations. The above average temperatures forecasted for Texas and the
southwestern United States this summer will exacerbate this problem.

4. Interest rates will remain relatively low, despite inflation. As people tire of stock market
volatility, they will put their money in bonds, CDs, and other cash equivalents. This will,
theoretically, generate significant cash reserves for banks to lend money.

5. In stating this position in item four above, I am necessarily ruling out the risk of a “bank
holiday” other shock to the banking system. While you may think it odd that I need to
even mention such a possibility, I suggest you watch this two minute video
of Joe Biden discussing the risk of a bank holiday. (The fact Biden is on stage with Jon Corzine
when making these comments about bank holidays is an added bonus.) Given this is an
election year, I would be quite surprised if we had a bank holiday in 2012. My only
caveat to this would be if systemic use of leverage by major investment firms caused
them to become insolvent – like MF Global. If this were to happen to other major
investment firms, all bets are off.

6. The equity markets will remain in a state of malaise. I suspect there is a good risk of yet
another correction (i.e., a drop) in the stock markets. I say that because of the growing
lack of confidence investors have in the stock market, coupled with lower trading
volumes and growing unease over the EU debt crisis.

7. Meaningful financial reforms at the state and federal level will remain elusive. Simply
put, politicians won’t agree to reduce spending fast enough to provide substantial relief
to the growing debt and unfunded liabilities situation. I continue to believe things will
have to get much worse before there is the political will to do the things necessary to
make things better.

8. Food prices will remain on an uptrend. We will continue to need maximum yields to
feed a growing global population. Should we experience adverse weather in key
growing areas, expect further price increases and possible food shortages.

9. We should expect continued erosion of civil liberties. Both political parties continue to
push for more government involvement in our private lives as well as in our
communities, all under the auspices of keeping America safe.

I'd give myself good marks so far, although arguably my opinions in number six have not materialized.  The Dow is up about 5% for the year, thanks in large part to Friday's 2.2% increase.  Taking that out of the mix, the Dow is up roughly 2.8% for the year.  Meanwhile, inflation on average this year is running about 2.5%, meaning the Dow's increase in real terms is minimal.

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