Musings Report #51 12-15-12 Themes for 2013
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8 Themes for 2013
Here are eight dynamics that are generally under-appreciated by the Mainstream Media that I see as becoming increasingly important in 2013.
1. Rising systemic fragility increases odds of “unexpected” breakdowns.
As costs rise and revenues stagnate, destabilization events become increasingly likely in both the public and private sectors.
2. The Fed loses political capital.
As the stock market declines in 2013, the Federal Reserve’s primary data point of success (a rising market) vanishes, and the failures of the Fed’s policies trigger a decline in the Fed’s political capital. Though it is nominally independent, the Fed will increasingly be constrained by its loss of credibility and the rise of political resistance. The recession will seal the recognition that the Fed has failed and its policies are dysfunctional.
3. Economic Stagnation and Permanent Adolescence.
The social consequences of economic stagnation will attract more attention. Japan is the lab experiment for what happens to a nation’s youth when opportunity declines structurally and most are unable to earn enough money to buy homes and support families: they withdraw into permanent adolescence, living at home, staying unmarried, surrendering long-term goals, and indulging in childish video-gaming and pop-culture hobbies.
4. Probabilities of a major stock market decline increase.
The debate about recession or no recession is meaningless; incomes are declining for most households and corporate profits will take a hit as the global slowdown increases and the US dollar rises. I will present two charts from correspondent B.C. in Monday's blog that support the notion that the stock market is poised for a major decline.
5. The velocity of money dooms the Fed’s liquidity/stimulus policies.
The Fed has done its best for four years to push investors into risk assets (by lowering yields on safe savings to near-zero) and to push households to borrow and spend more. This chart reflects the fundamental failure of their policies: all the liquidity is “dead money.”
6. Income is the foundation of real economic growth and wealth-distribution stability. It is declining in real terms.
Nominally income appears to have grown 24% since 2000. Adjusted for inflation, it has declined by almost 10%.
7. Small business—the engine of growth--is in structural decline
Uncertainty, higher taxes and regulatory fees/costs have eroded the incentives to risk capital and time in starting and expanding a small business.
8. Territorial disputes will be invoked to distract domestic audiences from domestic instability and inequality.
The Senkaku Islands are one such flashpoint where compromise is now impossible since the domestic populations of Japan and China have been persuaded by nationalistic hyperbole that a "line in the sand" has been drawn.
The same can be said of small islands in the Sea of Japan and South China Sea. As usual I take the contrarian view, which in this case is the U.S. will gain in stature and power as the nations being bullied by China (Japan, Vietnam and the Philippines) seek to strengthen ties to the U.S. military. This is a potential sea-change; recall that the Philippines sent the U.S. packing 20 years ago (the vast Subic Bay base was closed). Recently, the Philippine government has asked for joint operations with the U.S. to expand.
The conventional view is that China is flexing its muscles and the U.S. will lose stature and power. I would argue China is over-reaching and laying waste to 20 years of careful diplomacy. The U.S. need do nothing but respond to requests from Vietnam, the Philippines, Japan and South Korea to benefit.
Market Musings
On Monday I present four quite diverse charts to support the idea that the US stock market is due for a significant (20+%) decline in 2013. On the other side are some very experienced and smart Elliott Wave Theory (EWT) and solar-cycle analysts who see the market roaring to a new multi-year high in early 2013. Once this peak has been reached, these analysts expect a big decline to follow.
That leaves a simple either/or for Q1 2013: will the market roll over here into a multi-month decline, or will a Santa Claus rally continue to new highs in January-February?
As always, we can expect one or the other but must be ready for anything. Though I see very little evidence, technical or fundamental, to support the view that 2013 will be a low-volatility bull market, we have to be open to the possibility, no matter how unlikely it might appear. Put another way, we have to ask: what conditions could spark another year of a 4-year-long bull market? It seems likely that 2013 will be the year that central bankers run out of tricks to levitate global stock markets.
From Left Field
In housing debt we trust--it's not just the mortgage, it's all the other consumer debt buying a house triggers
‘Solo, Piano — N.Y.C.’ (short film, via Katharine K.) On a cold winter morning, a lone piano stands curbside in New York City. Over the next 24 hours, this short documentary chronicles the interactions of passers-by as the piano awaits its fate.
China's sex scandal surge/purge--tens of thousands of local-official sex scandals await discovery/Internet distribution, Mistresses are as de rigueur as luxury vehicles (and just as important as status markers)
"It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things." (Leonardo da Vinci)
Thanks for reading--
charles
