2012 was a year of modest recovery and sluggish job growth just barely ahead of population growth – and only if you discount underemployment and large declines in the work-force participation rate. We had a hard-fought election that ended with the re-election of Barack Obama for another four years, while the GOP retained control of the House and the Democrats retained control of the Senate. How does all this bode for our economy in 2013?
Politically, signs are pointing to more of the same, without any major policy shifts on the horizon – I foresee an extended season of economic mediocrity.
That said, there are some pockets of economic activity to look at – deals are always being made, and money is always changing hands. Here are some of the top financial trends of 2012 that will likely continue into 2013.
1. Real Estate Will Do Well
Observers have been noting a massive overhang of foreclosure properties for a couple of years now, and they’re waiting for the other shoe to drop. It hasn’t yet. Meanwhile, slow improvements in property values are beginning to rescue upside-down homeowners – or at least convince them that the light at the end of the tunnel is something somewhat preferable to an oncoming train.
Today’s record low interest rates are destructive to everyone but borrowers – and the Fed has already indicated they will hold rates low through 2015. So borrow people will – and much of that borrowing will go to real estate. As mentioned above, much of that real estate in the U.S. is being bought by wealthy individuals in China, Asia Ex-China, South America, and the seven crime families of Russia and their cronies looking to move wealth beyond the reach of their governments. These people will also support the domestic yacht-building market as well.
2. Hybrid Cars Will Gain Further Traction
Sure, the Chevy Volt has been a bust so far, but that doesn’t mean hybrid cars will go the way of the Betamax. As more manufacturers ramp up production, economies of scale will increase, and hybrid cars will become more affordable at entry. Right now, we seem to be at a lull in oil price hikes. Surges in domestic production are holding oil prices in check, but that won’t last forever. When oil surges again – as soon as Iran starts feeling its oats – then there will be pent-up demand for hybrid autos waiting in the wings.
Don’t take my word for it… look who’s attracting smart money in the form of venture capital: Fisker Automotive, a green sports car company – is showering in VC money right now, and may have been the top venture capital fundraiser of the year. This wouldn’t be the case – especially for a smaller, unproven manufacturer – if venture capitalists didn’t smell a broadening in the market for hybrid and green car technologies.
3. Much of Asia Will Outperform the United States
The facts are clear and pretty much written in stone – what remains uncertain is the timing. But while the United States is now close to four years into a loosening and expansionary monetary policy, the Chinese are still in the early stages of theirs. Asian economies have a huge savings surplus that is now being used to finance U.S. consumption. But Asians are learning to be consumers, too – and this will boost their own economies, fueled by a radical growth of the middle class in China, India, Indonesia, Thailand and other emerging 2nd world economies.
On top of that, demographic trends portend a substantial decline in American productivity per capita in the near to medium-term. Our baby boomers are now nearing retirement age. They will be leaving the work force and beginning to collect their pensions without the commensurate productivity – leaving a shrinking workforce to shoulder the burden.
Meanwhile, as they unload their 401(k)s and other pension assets for retirement income, they will find ready buyers in Asia. Its big population bulges are now entering their most productive years (except Japan, which faces a demographic crisis even worse than ours). Asian economies and consumers are buying up American assets in bulk and will end the cycle owning a substantial portion of the American economy.
Will their equities outperform in 2013? I am not a market-timer, and have no short-term opinions about anything. Taking the long view, however, Asian equities are A. currently trading at cheaper valuations than American stocks, and B. have more headroom for growth in C. faster-growing economies.
Growth was about 5.5 percent in 2012. Believe it or not, that’s modest for Asia. Forecasters are expecting it to rise to about 6 percent in 2013. If the U.S. goes into recession thanks to the fiscal cliff, that could throw a wet towel on those numbers. But it’s not like you can avoid that risk by sticking to the U.S. or Europe!
4. Gold Will Hold
Not too many years ago – when everyone thought the 1990s bull market was permanent – market observers used to joke that they “bought gold as a hedge against capital gains.”
Everybody laughed at the goldbugs then – but they sure aren’t laughing now.
A collapse in gold and other precious metal prices may come soon. Or gold prices may stabilize and wait for the economy to catch up with it. However, a substantial decline in 2013 does not seem likely.
I’m no goldbug. Anytime I hear something being hawked on talk radio, I take it as a sign that the easy money has already been made. And they’ve been hawking gold to unsophisticated investors like it’s going out of style. Gold doesn’t generate wealth. It just sits there, being gold. There’s no economic activity. No dividends. It’s a chassis with no engine. When gold is performing well, it is because gold prices are a beast that feeds on fiscal and monetary policy stupidity.
5. Reports of a Sustained Economic Recovery Are Greatly Exaggerated
All of that said, the data still does not point to a vastly accelerated economic recovery for the U.S. Remember – the current occupants of the White House are the same bunch who came up with Cash for Clunkers. Meanwhile, their Republican opponents are advocating a platform of relative austerity, in the form of significant spending cuts, and low tax rates that they won’t get. The accommodative monetary policy that has hurt the dollar in order to keep the whole thing going is getting a little long in the tooth.
Meanwhile, as we’ve written in this space, the Congressional Budget Office is projecting a nasty 2.9 percent economic contraction – that is, recession – in the first 6 months of the year if we go over the fiscal cliff. As of this writing, Congress is trying to avert it, and they may strike a deal. If they do, they will either stick us with a nasty fiscal bump, if not the full cliff treatment, or they will demonstrate their utter fecklessness and unseriousness in dealing with the fiscal issues the country faces. If that occurs, we won’t get hit with the acute illness of a short-term recession, but a more insidious chronic illness, precipitated by debt downgrades, an increase in long term interest rates (inevitable, sooner or later, in any event) falling bond prices, and movement of capital away from the country.
Not disastrous, but not great, either.