From Alhambra Investment Partners:
As 2012 dawns on a watchful world, the words of the great Austrian economist Mises seem drawn from the mists of time that lead back to an era long gone. For the global economy is now entering its fifth year of broad torpor, and in spite of official statistics indicating an expansionary U.S. economy now for 30 months, life no longer has that “feel” of irrepressible progress for most Americans. And how could it, when real per capita incomes have declined nearly 10% in the last four years even as 25 million Americans, via an 8.6% unemployment rate and another 8% underemployed or discouraged, cannot find full time jobs they seek, often desperately?Used to the conditions of a capitalistic environment, the average American takes it for granted that every year business makes something new and better accessible to him. Looking backward upon the years of his own life, he realizes that many implements that were totally unknown in the days of his youth and many others which at that time could be enjoyed only by a small minority are now standard equipment of almost every household. He is fully confident that this trend will prevail also in the future. He simply calls it the American way of life and does not give serious thought to the question of what made this continuous improvement in the supply of material goods possible. – Ludwig von Mises
The irony is that when Mises spoke of the halcyon era of 1950s America, his worry was that U.S. voters and taxpayers were so accustomed to taking economic progress and prosperity for granted that they did not understand the institutional conditions necessary to engender that progress; hence, they might fall prey to the then-growing calls by Keynesian and socialist proponents of big government for retrograde policies of capital consumption, policies that harmed economic growth and the standard of living stealthily, over time. Today, by contrast, the economic environment is worrisome and not benign, but Mises’ fears of American blissful ignorance are as valid as ever: 2012 is an inflection point leading either toward a sure cementing of the “Europeanization” of the U.S. economy, or, perhaps, a return to Misesian “capitalistic”, that is, pro-growth, policies (Mises’ outmoded descriptor is nonetheless accurate to describe policies conducive to economic growth, because the core to human progress is saving and the accumulation and formation of capital).
This then — a consequential U.S. Presidential election and how it affects the U.S. economy — is the primordial fact of 2012, and is the point of departure in analyzing the year ahead in forming investment strategies and business plans. A very close second factor in our analysis, if we do not indeed label the two as “1″ and “1A”, is the unfolding denouement of the recession and debt deflations in Europe. China slowing, India in recession, war in Iran and Middle East/oil stability, monetary instability and currency volatility, Russian revanchism, Australian housing bubble collapse, and a host of other issues all factor into planning in any global survey as well. But the American election, the consequent U.S. economy’s direction, and the Eurozone are of capital importance in determining our collective future. While economic forecasting has as much credibility as tarot card-reading in terms of ex post success in results, and indeed can often serve to embarrass the forecaster far more than illumine his professional prowess, we nonetheless hereby submit ourselves to the jury of a candid world in laying out our views of how the year will play out in key areas. And, we are willing to be judged on these calls a year from tonight.
Review of the U.S. Economy in 2011: Lessons for the Future
Before turning to 2012, how are we to think of 2011? The U.S. economy, assuming 4th quarter growth of 3%, will come in at about 1.7% for the year, after 3.1% growth in 2010. Consumer price inflation should end up at around 2.5%, while unemployment trended slightly downward all year, and will end up at around 8.6%. Taking a longer view of the current recovery, more than 2.5 million private sector jobs have been created in the last 22 months. Consumer and industrial loan growth has been steady, if unspectacular. Indexes of primary economic activity such as for purchasing, manufacturing, and export/import volumes have shown solid, if not robust, levels of growth. Consumer and business confidence has not been good, but it has not been terrible, as it usually must before the onset of recession. Housing starts and sales volumes, while depressed from the levels of the bubble era, show a return to growth, even as prices continue to fall. And importantly, the slow process of both bank and household recapitalization has been underway for three years. Total debt in the U.S. economy, both public and private, peaked three years ago as a percentage of GDP, at 355%. It is now back down below 320% and declining slowly but steadily in a necessary deleveraging process, due wholly to zealous private household and business firm recapitalization (U.S. government debt outstanding continues to hit new record highs every hour of every day, by an additional $160 million). All in all, with the exception of control of federal spending, the U.S. has been making progress, however halting, in recovering from the market meltdown and panic of the fall of 2008 and concurrent recession.
U.S. equities, meanwhile, were basically flat in 2011, although the bond market rallied across the year. The Dow Jones Industrial Average ended the year up 5.5%, at 12,217.56, while the S&P 500 closed at 1257.6, literally down o.oo3%. The NASDAQ tech-dominant index finished at 2605.15, off 1.8% for the year. The fact that the Dow Industrials were up more than 5% while companion markets indexes were slightly negative is itself indicative of the extreme volatility in global markets this past year, and investor preference for the biggest, best-capitalized, most well-known names — a classic flight to quality. Overall the U.S, market P/E ratio traded in the 12.5 to 13X range, well below its long-term average of 15.9. The markets’ performance can be summed up as one exhibiting nervousness, after solid gains across 2009 and 2010, and certainly the trading volatility across the year exemplified this as well....MORE