2012 Economic Outlook

2012 Economic Outlook

Lighthouse Growth ResourcesJanuary, 2012By Bill Bayer

A Tale of Two Forecasts• It won’t be the best of the times• But it could start the worst of times.

Will we:• Muddle Through with the Un-Recovery • Or have a Major Economic Crisis with

the potential failure of our economic system.

• More in a few minutes

Copyright William W Bayer 2012

2011 Forecast Result - HousingForecast Result• Stable prices but still

large supplies of foreclosures still coming.

• No price growth in top 20 markets in last year

• But no longer declining

• Lower end market stronger

• Reasonable activity at lower end of market

• Prices on large houses will be slow to recover

• Very little activity in upper market• No recovery in prices of larger

houses. Deals available if have cash.

• LT investment value of housing to be questioned

• Apartment rentals strong. Less desire for everyone to buy a house.


2011 Forecast Result -Commercial Real Estate

Forecast Result

• Stable prices with some development coming

• Prices stable with slight improvement

• Expect moderate growth • Growth less than we expected getting better. Retail poor.

• Consider limited investment in low-leverage cash flow opportunities

• Excellent year to buy single family homes & rent them for a LT investment with positive cash flow.

• Check out REITS; but be careful what you buy

• Good REIT’s yielded 6-12%. Beware of niche and risky REIT’s


2011 Forecast Result -Banking

Forecast Result

• Industry will improve – expect less problem banks

• Nearly all surviving banks are actively engaging in lending

• Fed will continue to slowly address problem banks

• Fed has slowly worked through the problem banks. Closures down versus 2010

• Steep yield curve will re-capitalize the banking industry

• For most banks, earnings are good and capital base has improved

• Paperwork and higher rates will increase cost of loans

• Paperwork brutal• Interest rates low due to

European crisisCopyright William W Bayer 2012

2011 Forecast Result - Employment

Forecast Result

• Employment will improve slowly

• Gradual improvement in last half of 2011

• May take rest of decade for employment to return to 2007 levels

• Gradually the “experts” are starting to understand employment is LT issue in US

• It will be hard to find qualified workers

• Many can’t find workers despite many looking for jobs

• Many looking for jobs that no longer exist

• True. Best example is construction industry

• Unemployment from 8.5% to 9.5%

• Dec rate – 8.5%. Average for year about 9.0%


2011 Forecast Result - EnergyForecast Result• Energy prices to remain

high• Oil prices started at $90, rose to

$114, and ended at $103

• Supplies are down due to government policy and higher demand

• No new drilling- due to environmentalist and Presidential policy

• Weak economy constrains demand

• Invest in energy stocks on dips; esp. those with high dividends

• Exxon rose from 75 to 87 with 2.20% dividend yield

• Conoco Phillips – 68 to 73 with 3.62% dividend yield.


2011 Forecast Result - Economy

Forecast Result• GDP growth of 3.00% to

4.00% • Annualized GDP = 2.5% for 3rd

Qtr. 4th Qtr GDP est. > 3.0%

• Core Inflation of 1.50% to 2.50%

• Core was about 2.2%• Overall inflation = 3.40%

• Higher long term interest rates

• Ten year Treasury bond declined from 3.39% to 1.98%

• Higher short term interest rates

• Declined from 0.43% in Jan, 2011 to 0.20% in Dec, 2011

• Dollar stronger due to high rates

• Started 2011 at 80.5; Dropped to 72.55 in April. Rose to 81 in December.


2011 Forecast Result – Inflation & the Deficit

Forecast Result• Pockets of inflation –

grains, cotton, energy, copper, metals

• Corn up, wheat & soybeans dn.• Copper up; Silver flat• Oil and Gold up

• Deficit growth will be in the news and begin to influence policy

• Emergence of Tea Party• Huge D.C. fight over deficit

reduction• Key issue is 2012 campaign

• Long term inflation will become an issue

• Entitlement promises at risk in 2012 election. Inflation concerns are political issue


2011 Forecast Result – Stock & Bond Markets

Forecast Result• Dow in trading range

from 9,500 to 12,500• Ranged from 10,500 to 13,000.

Ended at 12,300.

• Buy quality stocks on dips and take profits when you can

• Purchasing blue chip stocks with high dividends on dips was one of best strategies in 2011

• Expect ST reactions due to potential crises in Europe

• Numerous quick and scary drops. Those who bought dips made money

• Avoid bonds. Expect interest rates to rise and bond prices to fall

• European crises supported the dollar and US interest rates fell due to demand for “safe” US Treasuries


What I missed in 2011

• Impact of European crisis on US Bonds• Markets ignored long term US issues

such as deficit levels, potential inflation, and the conflict between those who work and the entitlement class

• LT and ST interest rates went lower due to US being seen a safe haven vs. Europe

• Long term US issues were ignored by the market. Loss of confidence in US is a huge risk in 2012 and beyond


2012 – Conflicting Forecasts• It won’t be the best of the times• But it could start the worst of times.

Will we:• Muddle Through with the Un-Recovery • Or have a Major Economic Crisis with

the potential failure of our economic system.

• 25% probability of disaster


2012 – Most likely

• It won’t be the best of the times• Expect continuation of the Un-Recovery

but somewhat stronger• Election & European crisis will cause

periodic market drops and recession fears

• But, by the end of year, expect stronger economic growth, higher employment and higher interest rates.


2012 Forecast - Housing Market

• Continuation of moderate recovery in prices

• Popular forecasts of strong recovery in housing starts will prove to be wishful thinking.

• Upper end of market will start to show more strength

• But it will be increasingly accepted that housing market will not lead recovery


2012 Forecast - Commercial Real Estate

• Market performed better than expected in 2011

• Prices will continue to be stable or show slight growth

• Investment in low-leveraged cash flow positive opportunities will pay off over the next 5-10 years

• Prefer single family homes with 25-35% down and positive cash flow.


2012 Forecast - Employment

• Employment will continue to grow slowly• We will not return to employment levels

of 2007 for many years.• Continued challenge in finding qualified

workers for open positions• Unemployment rate will decline to 7.5%

to 8.0% by end of year.


2012 Forecast - Energy

• Energy prices will remain in range around $100 per barrel oil.

• If economic growth strengthens, energy prices will stay over $100 per barrel.

• If economy is weaker, oil prices will be in $80-$90 range.

• Election will influence energy policy and long term energy supply.

• High dividend oil stocks are still a good investment


2012 Forecast - Economy

• GDP growth of 3.0 to 4.0% (versus 2.5% in 2011)

• Inflation at 2.00% – 3.00% Core inflation a bit lower

• Long term interest rates will be higher than in 2011 (They can’t keep going down without serious crisis)

• Short term interest rates will rise – slightly.


2012 Forecast – US Dollar

• Us Dollar looks good compared to Euro and other currencies that are seen as more risky.

• The continued European crisis supports the dollar as the US looks stronger than it is.

• The US election is key. If the US starts to address deficit, dollar will remain surprisingly strong. If not …


2012 Forecast – The Markets

• US remains the world’s choice for safety when crisis’s occur

• US is still seen as safe – despite our high deficit and long term inflation issues

• Stock market will be in trading range with upward bias. Range from 10,500 to 14,000 on the Dow

• Interest rates will be stable early in year but will increase by year end.

• Bond prices will decline


2012 Forecast – China

• China economy is powerful and will continue to outgrow the US, Europe, India and Japan

• However, it will become increasingly clear that China has long term issues.

• The “Walmartization” or China-fying of US retail will begin to end

• China’s issues with its huge population of seniors, growing inflation, and increased consumerism will begin to challenge their culture and system.


2012 Forecast – US Election

• Mitt Romney will win the Republican nomination.

• Republican race will be over by May 1st• Romney will defeat Obama with 53% or

more of popular vote• Republicans will increase their seats in

the House and the Senate• Stock market will rally into the election

but decline in November and December


2012 Forecast – Small Business Environment

• By now, your business should be making money

• If not, the economy is not the issue – your business is sick and needs action to fix it.

• Government interference will increase but will be when the Republicans win the election

• Plan on business climate similar to 2011


2012 Forecast Alternative – Economic Crisis (25%)

• If Europe fails to address debt crisis, confidence in world economic system will be lost

• The result would be crisis worst than 2008-2009.

• Result• Severe recession/Depression• Deflation• Extremely difficult business environment


2012 Forecast Alternative– How to Spot the Crisis

• Spreads for the debt of Italy, Spain, Greece, Ireland and other problem countries will expand. Rates to 10+%

• Germany will refuse to defend the Euro and causing European Economic Union to fail

• US Treasuries and T-Bills will be very strong – Negative ST interest rates

• US Dollar and Japanese Yen very strong


2012 Forecast Alternative– What to Do if Crisis Happens

• Sell all stock market holdings• Buy treasury bonds• Identify key employees and cut staff

where-ever possible• Preserve cash

• Cash is king in a crisis• Reduce life style expenditures• Act quickly and act quickly again to

reverse positions if crisis passes.Copyright William W Bayer 2012

Closing Thoughts

• I expect 2012 to be a good, but not great year. (I do not expect Crisis.)

• If you made money in 2011, you should make more in 2012.

• Actively manage your business. Be alert.• Implement a strong sales and marketing

function so you can grow your business• Take advantage of the last chance to

refinance• Cut marginal people.


2012 Economic Outlook

Economy & Finance

Transcript of 2012 Economic Outlook