Daily Briefing for Saturday, September 22, 2012

End of Q3 Analysis Of My January Predictions

Back in January, I offered readers my assessment on what we might expect in 2012.  On Friday, I started to think I should revisit and score myself on accuracy and precision.  Banker John, interestingly, sent me a note Friday evening to ask if I was planning to do this.  I took that as a sign that I should.  Let's see how I've done so far.  My original prediction in italics, below:

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.

U6 unemployment in 2012 has ranged from 14.5% to 15.1%.  U3 unemployment (the official unemployment figures) ranged from 8.1% to 8.3% in 2012.  Both U6 and U3 in 2012 are better than in 2011, but not in a meaningful way.  I got this one right.

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. 

Inflation is clearly in a downtrend, starting at 2.9% in January, dipping as low as 1.4% in July and ticking back up to 1.7% in August.  Food inflation is also on a downtrend, from near 5% in January to near 3% now. 

Thus, on its face, I missed this one.  I'm still predicting more inflation, however.  I suspect my call on this was a bit premature.  But this was a forecast for 2012. not 2013.  As John reminded me today, yards are great, but points on the board are what matters.  Grade: Fail.

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.

I'm scratching my head on this one.  This summer was hot, no doubt, but we heard little about blackouts or brownouts this summer.  According to the U.S. Energy Information Administration,
"EIA expects the nominal U.S. residential electricity price will rise by 1.0 percent during 2012 to an average of 11.91 cents per kilowatthour. During 2013, U.S. residential retail electricity prices increase 0.9 percent over the average 2012 price. When measured in real terms, the U.S. residential electricity price declines by an annual average of 0.8 percent in both 2012 and 2013." 

Not sure how to score this one.  My prediction was based in large part on other's predictions and creating an amalgamation.  Grade: Fail, but with mitigating circumstances.
 
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. 

Nailed it.  Grade: Pass.

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.

Nailed this one, too.  Grade: Pass.
 
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.

I know the numbers on their face don't support my position on this, but here me out.  I'm thinking I'm still right on this one.  I readily concede the major U.S. equity markets are up significantly - 14% since the first of the year.  This is remarkable.

But as I indicated in my January letter, I continue to be concerned about the lack of volume of shares traded.  The number of shares traded daily has continued to drop - down 21% since the first of the year.  The EU financial crisis is no where near being over.  The only thing helping stocks right now is the Fed's recent announcement of another round of quantitative easing.  I think I'm early to the party on this one.  I'm emboldended on my call given Friday's stock volume - the largest volume in a single trading day, with the market closing down.  High volume on a down day isn't somethign we'd want to see.  Grade: will review at the end of the year.

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.

I think I'm safe on this one.  Pass.

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. 

I give myself full credit for this one.  Here's why.

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. 
President Obama signed the National Defense Authorization Act on December 31, 2011.  Many Democrats and Republicans decried the decision to do, as the bill "would allow the military to indefinitely detain terror suspects, including American citizens arrested in the United States, without charge,"  according to ABC News.

This alone earns me full credit for this prediction.

 

SCORECARD

 

Pass: 6

Fail: 2
Incomplete: 1

 

As for my two fails, I think my timing is off on the inflation call.  I think it's coming...but perhaps not in 2012.  As for my call on energy prices, my reliance on the long term summer temperature forcast from back last January, and the regulatory war on coal, let me to be more bearish than I should have been.  I take full responsibility for both, nonetheless.