Market Outlook for the Early 2010s

8/3/2019 Market Outlook for the Early 2010s

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Market Outlook

for the

Early 2010s

Forecast of the Stock Market

and

Global Economy

Steven Kim


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MintKit Research

www.mintkit.com

Disclaimer This survey is provided as a resource for information andeducation. The contents reflect personal views and should not be construed asrecommendations to any investor in particular. Each investor has to conductdue diligence and design an agenda tailored to individual circumstances.

Keywords:

Outlook, Forecast, Prediction, Stocks, Bonds, Financial, Markets, Currencies,

Forex, Euro, Real Estate, Commodities, Debt, Economy, USA, Europe,

Greece, China, India, Investing, Global, Strategy, Planning

2012 MintKit.com
http://www.mintkit.com/http://www.mintkit.com/


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Summary

A systematic approach to investing requires a prediction of the stock market and the global

economy, whether the call happens to be a precise forecast or a rough guesstimate. As a

backdrop for picturing the markets downrange, the main event of 2011 was the breakdown

of the equity market along with the turmoil in neighboring fields such as commodities and

currencies.

One reason for the hullabaloo stemmed from the fitful progress of the economy in

developed countries like the U.S., Britain and Japan. Another factor stemmed from the

tizzy over the debt crisis in southern Europe, along with widespread fears of a breakup of

the euro and collapse of the economy across the continent. These worries brought up the

specter of a world plunging into a full-blown recession.

Despite the current jitters in the marketplace, however, the global economy is slated to

expand by more than 3% in 2012. Meanwhile the corresponding figure for the U.S. is

about 2% even as Europe ekes out a paltry gain.

On the financial front, the stock markets of the mature economies are likely to expand by

roughly 16% before the year is out. Better yet, the bourses in the emerging countries

should surge by 30% or so.

On a different note, the smackdown of the stock market last year cropped up in sync with

the long-range schedule of crashes. As a result, the sequence of blowouts appears to beon track in spite of the muddled breakdown rather than a clear-cut collapse after the

bourse touched a peak in 2007. As things stand, the next crash of the stock market is likely

to occur around 2017 in tune with the running tempo of bombshells since the previous

century.

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* * *

According to received wisdom, the stock market is a forerunner of the economy at large.

When the bourse flops, for instance, then the tripup is deemed to signal a setback ineconomic activity within half a year or so.

On the whole, the popular image does make a fair amount of sense. As an example, a lot

of investors try to buy or sell equities depending on the outlook for corporate earnings

roughly half a year down the line.

Moreover, the companies listed in the stock market represent a microcosm of the largereconomy. In this environment, the bourse reflects the pulse of commerce along with the

flow of profits.

Regardless of the common perception, though, the stock market does a patchy job of

predicting the tangible economy. All too often, the bourse merely reflects the jitters of the

investing public in response to current conditions in the marketplace. The same is true of

the other branches of the financial bazaar such as commodities or currencies.

This survey examines the outlook for real and financial markets over the years to come.

While the analysis deals mainly with the outlook for 2012, the review also considers the

prospects further downstream.

Hits and Misses over the Past Year

A year ago, we made a medley of forecasts for the global economy as well as financial

markets over the medium range and beyond. For the long-range calls, only time will tell

how the closely the auguries end up matching the reality.

Even so, we can at this stage review the outcome for the shortish projections dealing with

the year just past. Not surprisingly, the bodements were partly right and partly wrong.

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For starters, the forecasts of the real economy turned out to be largely on target in spite of

the weakness in the marketplace along with the hoopla in the financial forum. As an

example, we had expected the U.S. economy to grow by a couple of percent over the

course of the year; and the actual turnout was 1.7%.

For the world as a whole, our prediction for 2011 was a growth rate of 4.5% or so (Kim,

2011a). That forecast turned out to be somewhat optimistic. According an estimate by the

World Bank, the global economy grew by 3.2% over the course of the year (World, 2012).

A glaring feature of the financial patch last year was the breakdown of the stock market.

The crash of the bourse reflected rampant fears of an imminent recession in America

coupled with similar concerns for Europe and the world as a whole.

The benchmark of choice for professional investors namely, the S&P 500 index is

made up of giant firms based in the U.S. Many of the companies obtain a hefty fraction of

their profits from far-flung operations round the world. For this reason, the fortunes of the

listed firms are tied closely to the vigor of the global economy.

As we had expected a year ago, the U.S. economy expanded in concert with the world at

large. Given the growth of economic output on the domestic front as well as global

environment, the earnings of the companies in the S&P benchmark should have risen as

well.

In line with our expectations, the firms within the index did enjoy an upturn in profits over

the course of the year. In fact, looking at the larger picture, the earnings of the companies

have been rising steadily since the Great Recession of 2009.

As a point of reference, consider the net income for the companies within the flagship

index. At the beginning of 2009, the earnings per share came out to $13.08 on an

annualized basis, after adjusting for inflation and presenting the amount in terms of

constant dollars at the price level for November 2011.

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A year onward, the corresponding value for earnings had soared to $56.68 per share. By

the beginning of 2011, the profit level stood at $80.82 per unit. Moreover, the income level

continued to rise as the year wore on.

In fact, the earnings had hit rock bottom at $7.30 per share way back in March 2009. Afterthat stage, the profit level climbed steadily from one month to the next, without a single

reversal, until the autumn of 2011 and beyond (Multpl.com, 2012).

As things turned out, March 2009 was also the point at which the S&P index bottomed out

at the 666.79 level. When we keep in mind the previous paragraph as well, we note that

the stock market turned around precisely when the earnings started to recover.

In other words, the investing public was simply keeping up with the ongoing level of

earnings for the companies within the benchmark. So much for the fanciful notion that the

stock market always predicts the real economy ahead of time.

Looking now in the forward direction, both the U.S. and the world as a whole are poised to

trudge upward as the year wears on. In view of the decent earnings for the listed firms

during 2011 as well as the healthy outlook for 2012, we would at this stage expect the

bourse to be buoyant. Sadly, though, the market hovers pretty much where it had been a

year ago.

At this juncture, the outlook for the tangible economy is reflected in the likely course of

corporate profits. According to one plausible estimate, the rising tide of earnings for the

S&P companies is slated to slow down but not flip into reverse during the first half of

2012; after that, the profits should begin to speed up again in the latter half of the year

(Yousuf, 2012).

Given the sturdy turnout for the listed companies in the recent past as well as the cheery

outlook for the near and midrange future, it would be natural for the stock market to be

higher at this stage than it was a year ago. Yet, the sensible result has not come to pass.

In other words, the investing public has of late been more irrational than usual. There are

several reasons for the perverse behavior, as we will see later on.

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A year ago, we were expecting the S&P index to rise by some 15% by the end of 2011. To

set the baseline, we note that the yardstick had a closing value of 1,257.64 points at the

end of 2010. Then the benchmark clambered to a peak of 1,370.58 by May last year.

Based on the last two figures, the upswing came out to a rise of just 9.0%.

Then the yardstick crumbled in stages during the summer and autumn before it began to

regain its footing. The final value at the end of the year was 1,257.60. To put things simply,

the market merely bounced around during 2011 and ended up where it had begun.

By contrast, the Dow Jones Industrial Average rose by 5.5% over the course of the year.

Meanwhile, the Nasdaq index slipped by 1.8% over the same period.

In short, the real economy in the U.S. as well as the world at large behaved pretty much as

we had envisioned a year ago. The same was true of the companies within the flagship

index for the stock market. On the other hand, the investing public in its collective wisdom

decided to leave the bourse pretty much unchanged over the course of 2011.

In light of the improvement in corporate performance, the supine behavior of the equity

market seemed to be more quirky than usual. No doubt the investers were unnerved by

the bungling and hanky-panky of the politicians in the U.S. as well as Europe. These

bogeys are examined in greater detail in the sections to follow.

Bombshells over the Past Year

The year just past saw a parade of memorable events, ranging from the overthrow of

dictatorships in Arab countries to the revolt of taxpayers in Western nations. From the

standpoint of the worldly investor, the key developments included the bedlam over the

bond market in Europe as well as a grass-roots campaign to rein in the public deficit in the

U.S.

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Debt Crisis in Europe

The weakness of the economy in recent years served to expose another stumper that had

been festering for a while in Europe. In the run-up to the financial flap of 2008, a gang ofreckless banks in search of plump yields had bought up scads of bonds issued by the

Greek government. The rash move was the handiwork of a clutch of big institutions located

in France, and to a lesser extent Germany as well as other rich countries.

After feasting on fizzy bonds for years on end, the time had now come for the gobblers to

pay for the juicy returns they had slurped up in the interim. As is their custom, though, the

wily bankers were not averse to calling on the taxpayer to come to their rescue.

To save the bunglers from their self-inflicted wounds, the politicians of Europe saw fit to

lend even more money to the bankrupt state that had issued the flaky goods. The pretext

was that the bond market in Greece had to be propped up in order to save the stricken

government.

Otherwise a simple and cathartic act namely, an official default on the bonds would

bring about the end of the world. The argument, such as it was, revolved around a series

of amazing leaps of logic.

Suppose that Greece were to acknowledge its spendthrift ways and admit the obvious: the

mounds of money it had borrowed and squandered over the years was far too massive to

ever pay back to any meaningful extent. If the government were to fess up to something

that was obvious to any lucid investor, then Greece would be forced to leave the currency

union. The latter move would then kick off the disintegration of the euro. The crackup of

the common currency would be followed by the implosion of the networks of production in

Europe, and thence the demolition of the global economy.

Scary stuff, wouldnt you say? Or maybe not.

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Sadly for the prophets of doom, the investing public found it hard to swallow the hogwash.

Instead of calming the investing public, the bald attempts to fudge the truth and stick the

taxpayers with the cost of the bailouts stirred up even more angst.

The investors began to wonder what other varmints the pols were hiding in the closet. Ifthe shamsters were so fond of twisting the facts about bogeys that were plain to see, what

else were they plotting with wraiths that were hidden from view? And how much more

havoc would the perpetrators seek to wreak upon the financial markets and the real

economy?

Amid the bluster and the muddle, the investing public on both sides of the Atlantic feared

for the worst. As a result, the markets of the West wobbled and crumpled, and promptedthe rest of the world to follow suit.

Cap on Debt in America

On the other side of the pond, a groundswell of voters in America got upset over the

growing injustice of the taxation system. A prime example lay in the spectacle of giant

corporations shirking their duties when it came to shouldering their fair share of the tax

burden.

In this light a favorite exhibit of the gripers was a lender, Bank of America, which had

received billions of dollars in concessions from the government even as the company

earned sumptuous profits and paid nothing by way of income taxes. From a larger stance,

the protesters reckoned that the government could rake in an additional bounty of $100

billion each year if the giant corporations were to pay their equitable share of taxes.

The tidal wave of discontent gave rise to a grass-roots campaign in the U.S. known as the

Tea Party. Before long, the voters in the movement managed to install a cranky gang of

politicians to convey their message to the legislature. The upshot was a small but potent

faction in Congress fiercely opposed to any increase in government debt. In fact, the

objectors insisted on a cutdown of the budget deficit over the years to come.

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So headstrong were the naysayers in Congress that they brought the budgeting process to

a grinding halt. As a result, the federal government almost ran out of money as the

summer wore on. Thanks to the antics of the politicians along with the gridlock in

Congress, the risk level for government debt was ratcheted upward by a rating agency for

the first time in U.S. history.

The hard cap on public debt was bound to have malign as well as benign effects. On the

upside, the clampdown constrains the ability of the government to waste oodles of money

on programs that are not only feckless but harmful to the nation as a whole.

Thanks to the cutdown of waste in the public sector, the purchasing power of the dollar will

shrivel more slowly in the future in comparison to the steep decline in recent memory. As aresult, the greenback is slated to survive a couple of decades longer than it would have

done otherwise, before it finally becomes worthless and turns into a historical relic.

On the downside, though, the choke on public spending hampers the ability of the

government to pursue not just noxious programs but hearty ones as well. In view of the

frail health of the economy at this stage, the politicians ought to be taking direct action to

shore up the chains of production in a wholesome fashion.

Given this backdrop, the timing of the clamp on debt was execrable. It would have been far

better for such a cuff to be slapped on when the economy happened to be perky and

robust.

From a realistic stance, though, the voting public would not feel the urge to express their

displeasure during a period in which jobs were plentiful and wages ample. For this reason,

a prudent act such as a curb on public debt could only arise in a woeful setting such as the

current environment.

Owing to the cap on debt, the government now finds itself in even worse shape than

before. For this reason, the economy is doomed to stagger and struggle for many more

years to come.

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To sum up, a big surprise this year took the form of a stiff choke on government debt in the

United States. The curb on the public deficit led to a paralysis of decision making over the

national budget.

Thanks to the stalemate in the legislature, the government almost ran out of money to payits bills. The close call in turn prompted a rating agency to downgrade Treasury bonds for

the first time in history.

Thanks to the clampdown on debt, the government found itself in a straitjacket. In the run-

up to the elections of 2012, the politicians would normally go on a spending spree in order

to pump up the economy. In the current environment, though, the usual antics would have

to be shelved due to the cuff on the federal deficit.

Without a big boost to the economy fueled by a binge of government spending, investors

saw no reason to lift up the bourse in 2011. The dearth of animal spirits in the marketplace

was of course an abnormal turnout for a pre-election year. The ruckus in the legislature

played a big role in whomping the the stock market and keeping it down.

Assault on Wall Street

In the throes of the Great Recession, the U.S. and many other countries decided to shore

up the housing market along with the financial sector. By propping up the rickety assets in

real estate, the politicos were in effect going out of their way to uphold the distortions in the

economy that had cropped up during the run-up to the financial crisis.

As an example, the ill-formed moves included direct schemes to buttress prices in the

housing sector, as showcased by a program of public guarantees for private loans. To add

to the mischief, the indirect plots included crutches for crippled banks that had gone

overboard during the housing craze and now continued to hold onto a multitude of

distressed properties.

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Over the past couple of years, the price of real estate has of course climbed down from the

ditzy heights scaled during the heyday of the housing craze. Even so, the puffy prices are

still out of whack compared to the current level of wages throughout the population.

The financial flap, along with the Great Recession, had thrown millions of people out ofwork and squelched trillions of dollars of household wealth in every major country round

the world (Kim, 2012). In that case, the natural level for the housing market at this point

would be even lower than the beefy prices prior to the onset of the housing bubble.

On the other hand, the heap of crutches meant to buttress the bloated properties and

zombie banks ended up thwarting the natural process of adjustment and recovery

throughout the economy. As is often the case in a financial flap, the knee-jerk reaction ofthe demagogues served to exacerbate the problem and prolong the torment rather than

cure the illness.

Unfortunately, the voices of reform in the public sector have been too few and feeble to

address the challenges in a serious way. A batch of bitter pills would be required in order to

heal the financial forum as well as the real economy in earnest.

The healthy tack is to scuttle the artificial shackles in the marketplace. The economy would

then suffer a short and sharp recession, followed by a fresh start and a sturdy recovery. As

a group, though, the putative leaders were unable to muster the grit needed to take the

high ground.

In the absence of true leadership, the developed nations of the world will continue to

stagger and struggle for many years to come. The quandary resembles the plight of Japan

during the lost generation that began in the early 1990s and continues to this day.

The lack of mettle to revamp the system wholesale has condemned the nations of the

West to a similar fate over the decades to come. On the other hand, it doesnt have to be

this way.

Luckily for the Western countries stuck in the muck, a large swath of the population is

unwilling to take the flimflam lying down. A plain example is found in the grass-roots

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campaign known as Occupy Wall Street, a movement which came to life in New York and

spread like wildfire to hundreds of towns in the U.S. and thousands more on foreign

shores.

Going forward, the vital task of the firebrands in the popular campaign is to converge on aconcrete set of measures for public policy. If the activists should succeed in pushing

through a workable agenda, then the U.S. and other supple nations can look forward to a

brand-new era of reform and renewal, of innovation and upgrowth.

Fitful Progress of the Economy

A widespread cause of concern last year lay in the spasmodic progress of the real

economy throughout the developed regions. The anxiety was compounded by the

misguided moves of public officials in recent years in response to the financial crisis, Great

Recession, and knock-on debacles.

On one hand, the politicos did manage to stauch the gush of panic in the marketplace by

making reassuring noises about taking decisive action to counter the problems. On the

other hand, the flurry of measures drummed up to date have served to strangle and

suppress the economy rather than nurse it back to health.

Another source of angst lay in the state of public finances in southern Europe. The debt

monster, which had been incubating for years on end, was thrust into the floodlight by the

breakdown of sovereign bonds in Greece coupled with the empty coffers of the national

treasury.

As is often the case, the politicians of the European Union managed to turn a hillock into a

mountain by whipping up a rash of counterproductive schemes. The upshot of the folly

was to throttle the economy and prolong the agony rather than cure the ailment.

The crux of the problem sprang from a rampant misconception about the true nature of the

malaise. The mixup hampered myriads of actors including frazzled investors and frantic

politicians.

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An exemplar lay in the cause of the debt crisis along with the impact of clumsy responses.

According to one flight of fancy, a default on bonds by the Greek government would spark

a chain reaction of epic proportions. The crackup would lead to the breakup of the unified

currency in Europe, followed by the smashup of the meshwork of production anddistribution throughout the continent. The regional fiasco would in turn knock down the

global economy. Ergo, the bond market in Greece had to be propped up at all costs in

order to save the euro as well as the regional economy, not to mention the health, wealth

and happiness of all mankind.

On one hand, any thoughtful person would agree that the breakdown of the bond market in

one small country could perhaps set off a chain reaction that leads to the destruction of theworld. But the same is true of any event anywhere in the world.

The stickler is no different from the universal ferment of chaos that governs the course of

natural events as well as human affairs. A plain example involves the buzz of a wasp in

Africa whose flapping sparks a gale that alters the trade winds and brings on a new ice

age.

The real question for a live mind is not what couldhappen, but what is likelyto occur and

how big the impact would be. With this mindset, the prudent person takes steps to improve

the prospects of a cheery outcome in favor of a grody turnout.

Where the hoopla over the debt market is concerned, a frail economy thats tied up in

knots is far more likely to crumple wholesale than a nimble one that has the wherewithal to

adapt more freely in response to sideswipes. But shackling the economy is precisely what

the politicians have been doing since the onset of the financial crisis in 2008 along with the

aftershocks such as the debt flap in Europe.

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Right Way Forward

In order to tackle the problems in a serious way, the first step is to remove the fetters that

hamper the markets. The next task is to stop molesting the economy and instead give itthe leeway it needs to recover on its own.

There is of course, a third and optional move. The hearty tack is to take concrete steps to

bolster the process of creative destruction along with the swift recovery of the economy at

large.

In this light, a good example of a healthy move is to clear the slate by pulling the plug onbrain-dead firms that are unable to earn an honest living. To save a bunch of battered

banks from their self-caused wounds is to fritter away the taxpayers money and to prolong

the distortions in the real economy.

A second instance of a wholesome course lies in a policy of matching grants for training

the unemployed, including any laid-off workers from the newly defunct banks. The

subsidies could help the jobless in learning fresh skills in order to participate in the

economy in constructive rather than destructive ways.

A third sample is a program of partial guarantees offered to financiers in the private sector.

As an example, the government could expand its support for investment companies that

work in concert with the Small Business Administration. The program would expand the

pool of capital available for use as loans to newborn entrepreneurs and their fledgling

ventures.

Picture of Economic Growth

On the upside, the outlook for world growth over the next few years is more sunny than it

has been in the recent past. The upbeat tone is reflected in a forecast by the Organisation

for Economic Co-operation and Development (OECD), a club of several dozen rich

countries dotted round the planet.

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In the U.S., the gross domestic product is expected to grow by 2.0% in 2012, followed next

year by an increase of 2.8%. By contrast, the 15 countries of Europe that employ the

common currency is slated to eke out only 0.2% this year, followed by 1.4% in 2013.

From a larger stance, the entire membership of the OECD is set to expand by 1.6% in

2012, then 2.3% the following year (Organisation, 2012). In this way, the mature

economies will continue to clamber upward despite the specter of gloom and doom

hanging in the air.

In a similar way, we can expect the emerging markets to grow at a moderate pace this

year before trotting ahead in 2013. A plausible forecast for the world economy as a wholeis a growth rate of 3.2% in 2012, followed by a small increase of 3.5 percent each year on

average from 2013 to 2016 (Conference, 2011).

Backdrop for the Next Crash of the Stock Market

After the bust of the Internet craze in 2000, the stock market in the U.S. tumbled in fits and

starts for a couple of years. After that stage, the bourse regained its footing and trudged to

a summit in October 2007 before running out of steam once more.

After reaching the zenith, the equity market did not break down all at once. The same was

true of the housing sector in the U.S., which had crested the previous year.

On one hand, the property market had begun to falter by 2006. In April that year, the

median price of new homes in the States touched a peak then began to flounder and slide

(Census, 2012).

On the other hand, the hullabaloo was still in full swing in many other locales ranging from

Europe and North Africa to Asia and South America. In Britain, for instance, the housing

craze lasted until the first quarter of 2008 (Nationwide, 2011).

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During the upswell of the housing bubble, legions of punters had bought up gobs of

financial assets built atop risky mortgages. The binge of betting on dicey rigs was led by

an army of wildcats in the form of hedge funds. The gamesters of this stripe included

boutique outfits standing on their own as well as cloistered groups lodged within larger

concerns such as commercial banks.

Due to the complexity of the new-fangled assets in the financial ring, nobody could grasp

the full extent of the hazards entailed by the gizmos. To make matters worse, the eager

beavers took up humongous amounts of leverage, up to a hundred times or more of the

value of the stake put up at the outset to serve as collateral for the wagers. The lofty levels

of gearing ensured that the principal would be wiped out at once when the house of cards

came tumbling down, as it was bound to do sooner or later (Kim, 2012).

As the frenzy in real estate began to fizzle out after 2006, the windfall bagged by the

speculators was fated to do likewise. Worse yet, the spree of profits scooped up on the

upswing would duly turn into a spew of losses on the downstroke.

The breakdown of mortgage-based assets turned into a full-fledged rout in 2008, giving

birth to the biggest bombshell in the stock market since the early part of the previous

century. Moreover, the blowup of the bourse was soon followed by the worst recession in

the global economy since the Second World War. Thanks to these superlatives, the

crackup of 2008 was a shocker to remember.

Hazy Horizon

The pandemonium in the marketplace brought on a heap of uncertainty over the prospects

for the years to come. To begin with, the housing frenzy and its aftershock had knocked

out the banking system and bashed in the real economy.

For a second thing, the blubber in the housing sector and the credit market had disrupted

the price signals in the marketplace. As a result, the chains of production and distribution

were bent grossly out of shape.

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So severe was the mangling that the warpage was unlikely to unwind in earnest anytime

soon. In that case, the economy would have to limp along for many years to come even

after it managed to crawl out of an outright recession.

To add to the distress, there was worse news still. In their great wisdom, the fearlessleaders decided to pander to the lobbyists from the banking industry. In America, Europe

and elsewhere, the politicans gave birth to a litter of deformed schemes to prop up the

largest banks and save the pulped outfits from their self-inflicted wounds.

For this purpose, the first act of the politicos was to scrounge up trillions of dollars in order

to bail out the shattered banks. A second, and related, move was to take active measures

to shore up the housing market.

The refusal to let the comatose banks die a natural death came to impose a whopping

burden on the society at large. By propping up the bettors in the banking industry and the

housing sector, each government consigned the local economy to a slow and tortured

recovery.

The financial flap and the Great Recession in its wake had nuked millions of jobs and

nixed trillions of dollars of wealth in each of the major countries of the world. Thanks to the

brilliant schemes designed to sustain the rot, the population as a whole faced a future

chockfull of hardship and frustration.

The flogging suffered by the body politic was spotlighted by the upsurge of unemployment

as well as poverty. As an example, the jobless rate in the U.S. soared from 4.4% in May

2007 to 10.1% by October 2009.

On a positive note, the recession came to end by the summer of 2009. Even so, the plight

of the labor force hardly improved for years to come. For instance, the unemployment rate

was still hovering at 9.0% in October 2011 (Labor, 2011).

The devastation was worse in terms of the millions of souls thrown into abject poverty.

According to official figures, 15.1% of the U.S. population was living in poverty in 2010.

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The proportion, which had risen from 14.3% the previous year, was the third consecutive

rise in the annual survey (Census, 2011).

In the meantime, the economy was saddled by a load of bloated banks that had scant

interest in playing its proper role in the marketplace. In delving into this issue, we shouldkeep in mind that the core function of a commercial bank is to take in cash from thrifty folks

and lend out the money to creditworthy parties.

In the world of commerce, certain actors need to borrow cash as a matter of course while

others dont. To begin with a counterexample, large companies as a group drum up

enough profits from their operations to finance their ongoing activities as well as newborn

ventures.

Moreover, a big and established firm has the wherewithal to obtain capital directly from the

investing public by issuing stocks or selling bonds. For these reasons, a giant concern

rarely has any need to borrow money directly from a bank.

By contrast, small and midsize firms are often obliged to set up lines of credit in order to

finance routine operations as well as fund projects for expansion. A case in point is the

moola required to obtain a letter of credit whose function is to back up a purchase from a

foreign supplier.

Despite their mission, though, the banks that had received bailouts from the government

had little or no interest in fulfilling their only real function in the economy. Instead, the

banksters found other uses for the moola much better to their liking.

A fine example involved the shunting of billions of dollars by a single firm in order to pay

princely bonuses to favored employees. Another common ploy of the hustlers was to buy

up weaker rivals, thereby reducing the scope of competition within the banking industry. As

for the rest of the dough, the banksters chose to hoard the money wrangled out of the

public treasury.

To top it off, the cash infusion from the government enabled the recipients to hold onto

huge stockpiles of properties rather than sell them off in order to whittle down their

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holdings and pay off their bills. If the housing market had been left alone to do its job, the

average price of homes would have quickly subsided to a sane level following the loony

buildup of prices during the property craze.

On the other hand, the tight grip on properties held by the banks acted as an artificial plugthat stymied the housing sector and kept the market from losing its froth. As a result, the

property sector could not cast off the flab as a prelude to regaining its health.

Due to the contrived chokes on pricing, myriads of homes stood empty for want of buyers.

At the same time, millions of souls lived in squalor because they couldnt afford to buy or

rent decent homes for their families.

Given the mass of artificial props, the housing sector continued to be overpriced in relation

to the average level of income. In this and other ways, the property market was prevented

by the government from regaining its vigor.

At first blush, the ham-handed program of support for the housing sector might seem like a

blessing for the folks who already owned their homes. While the rigidity in the marketplace

might seem beneficial over the near term, the impact over the longer range was the direct

opposite. The reason stems from the fact that the housing market can only flounder in the

midst of an ailing economy.

By contrast, the cost of living for the population as a whole continues to climb higher in the

modern era. The main driver behind the advance lies in the groundswell of demand for

natural resources from the emerging nations.

For this reason, the price of food, fuel and other commodities in the global marketplace is

destined to increase in spite of the occasional breathers from time to time. In that case, the

goblin of inflation runs riot even if the local economy ends up going nowhere at all.

What happens if the price of a property remains fixed in nominal terms in an epoch in

which the cost of living rises by a handful of percent each year on average? The real value

of the dwelling of course shrivels up due to the relentless press of inflation.

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Looking at the larger picture, the property sector is a pillar of the economy at large. Given

the shackles on real estate, however, the housing market has turned out to be a brake

rather than an engine of growth. The crummy outcome is no picnic for the beleaguered

owners of homes nor anyone in the economy at large.

Patterns in the Stock Market

The past is a lousy guide to the future. Even so, its the main source of insight available to

anybody.

One way for us to presage the market downstream is to begin by reviewing its behaviorover the past few years. In this light, the big landmark was the financial fiasco of autumn

2008 after which the S&P 500 index crumpled in stages to a low of 666.79 the following

March.

Trading Volume as a Key to Human Behavior

The tenor of the market can be grasped at once on a bar chart that portrays the price level,

including the high and low values within each time slot. The following exhibit, from Yahoo

Finance, depicts the romp of the S&P index over the span of five years ending in early

2012.

The lower pane in the diagram shows the volume of trading for the stocks covered by the

index. Starting from the bottom left of the chart, we can see that the turnover increased

gradually, despite the inevitable variations over the short run, until the second half of 2008.

The market reached a climax as the financial crisis flared up that autumn. Amid the panic

in the market, the volume of transactions for the S&P benchmark hit a peak of 11.5 billion

shares on October 10 that year.

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To a lesser extent, a horde of investors rushed into the arena once more during the bout of

selling that marked the bottom of the market in March 2009. Following that debacle,another blitz of sales swept though the bourse during the smashup of spring 2010.

By contrast, the blowup of the market in autumn 2011 was attended by a smaller binge of

selling. In view of the reduced volume, we can infer that the meltdown last fall stemmed

from the withdrawal of buyers from the bourse rather than an onrush of sellers. Put

another way, the blowout in the arena was not as hysterical as it had been in the previous

couple of flops despite the awesome depth of the latest plunge.

Rocky Path of the Bourse

We now shift our focus from the volume of trading to the value of the benchmark. In April

2010, the S&P index touched a peak of 1,219.80 points. Then the yardstick fell to a low of

1,010.91 units three months later. From the peak to trough over this stretch, the market

had crashed by a little over 17%.22


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Then the flagship index tramped upward once more, reaching a high of 1,370.58 in May

2011. The next move was a plunge within three months to the 1,074.77 level. The

knockdown turned out to be another whopper amounting to a cut of nearly 22%.

From the low plumbed in 2010 to the peak reached the next year, the market rose by

almost 36%. Given the severity of the crash in 2011, we would expect a rebound of similar

magnitude on the subsequent stretch.

Starting from last yearss low, a rise of 36% corresponds roughly to the 1462 level in

absolute terms. Another point of reference is the value of the benchmark at the end of last

year, which came out to 1,257.60 points. When we compare the last two figures, the peakrepresents an upswell 16.3% from the terminal value at the end of 2011.

In other words, the market is apt to rise by 16% or so by the end of this year. As we noted

earlier, the top of the ascent corresponds to the 1462 level.

Given this backdrop, the sage investor would do well to trim the sails and take up a

defensive pose as the benchmark nears the target zone. As usual, though, we can expect

a goodly amount of turbulence to the downside as well as upside as the months go by.

Impact of the Election Cycle

In the absence of big surprises, we can expect the financial markets to play out pretty

much as they have done over the past couple of years; namely, trudging higher in fits and

starts. The same is true of the real economy.

As an example, the volume of economic output for the world as a whole is slated to rise by

a little over 3% during 2012. In line with earlier remarks, the U.S. economy is apt to

expand by a couple of percent in the year to come.

On the other hand, Europe will continue to suffer from the slings and arrows of misfortune

as the politicians dither and conspire in the midst of the debt crisis. Instead of taking

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decisive steps to heal the markets for good, the vote mongers have opted as usual to take

the facile route of propping up the rot and stretching out the misery. For this reason, the

Old World is likely to turn in a piffling gain of about 0.2% this year.

Thanks to the follies of the leadership, the jitters among investors and businessfolk alikecontinue to buffet the economy. After a labored advance during the first half of 2012,

however, the economy should gain more traction in the second half.

Given this outlook for the real economy, the proper response of the U.S. market is to rally

rather than slump. Another motive force comes from the election cycle in America.

A year in which a Presidential election takes place tends to be a buoyant spell for the U.S.bourse. The lift to the stock market is showcased by the performance of the Dow Jones

Industrial Average. The exhibit below, courtesy of Seasonal Charts, shows that the

benchmark is prone to rise by more than 7% on average during an election year such as

2012. In that case, the stock market is poised to advance more strongly than usual this

year.

Yet another factor lies in the cruddy turnout of the stock market during 2011. Certainly

there was plenty of cause for investors to stomp on the European markets last year. But

there was no good reason for beating up the U.S. bourse as well.

It seems likely that the financial community will see the error of their ways as the months

go by. In that case, the U.S. bourse should make up for its drab performance from 2011.

Given this backdrop, we expect the stock market to push higher during 2012. As we saw in

the previous section, a credible projection is a rise of 16% or so for the S&P index by the

end of the year.

As usual, the forecast could fall apart for any number of reasons. An obvious example

involves a spat in the Middle East over the prospect of Iran building a nuclear arsenal with

which to bully its neighbors.

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In the absence of big surprises, though, we can expect the default forecasts to play out as

envisaged. In that case, 2012 looks set to be a buoyant spell after a disappointing stretch.

Whatever the turnout this year, the next few years are apt to be more of a mixed bag. On a

positive note, the European economy is likely to stage a frail comeback in 2013. Thanks in

part to the upturn on the continent, the global economy should be a tad more sprightly next

year than it is today.

By contrast, the U.S. has scant reason to expand at a peppy pace in the years to come. In

that case, the economy is set to advance by only a couple of percent a year in line with the

norm in the modern era.

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On the downside, though, the stock market is likely to fare worse shortly thereafter. The

next couple of years correspond to the weakest stretches of the election cycle in the U.S.

For this reason, the stock market is slated to turn in an anemic performance in 2013 as

well as the year to follow. In that case, the bourses of the emerging countries shouldexpand at a breezy pace during 2012, followed by a slowdown for a couple of years

afterwards.

Forecasting the Next Crash

On average, the stock market in the U.S. has a habit of crashing a couple of times adecade. A recent milestone lay in the ascent of the S&P index to an all-time high of

1,576.09 in October 2007, followed by a stepwise collapse over the span of a year and a

half.

On the heels of the financial flap and the Great Recession, an interesting question for the

mindful investor was the timing of the next debacle. From the standpoint of 2009, the

global economy was slated to flounder and stagger well into the 2010s thanks in large

measure to the counterproductive schemes of public officials. Meanwhile, the financial

forum would also continue to wallow in the doldrums. For these reasons, there was

scarcely any room for a bubble of any sort to crop up in the marketplace.

Given this background, it was unclear to us during the recession of 2009 just when the

next bombshell would pop up in the stock market. According to the long-range timeline, the

bourse was destined to break down in 2011.

On the other hand, neither the real economy nor the financial bazaar would have

recovered sufficiently within a couple of years to justify a full-scale blowout. Rather, an

additional stretch of a few years would be required for the bourse to claw back a hefty

fraction of the losses suffered during the financial flap. After recouping a goodly amount,

the market would then be ready for another sideswipe and knockdown.

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Despite our reservations, though, the subsequent crash of the stock market showed up

right on time according to the long-range schedule. In 2011, the feeble state of the

economy in the mature nations weighed heavily on the sentiments of the financial crowd.

As the shabby numbers on jobless rates and economic growth trickled out of government

agencies, the punters in the forum were seized by fears of a fresh lapse into a full-blownrecession.

In this edgy climate, the U.S. bourse rose to an apex in the summer of 2011, then broke

down shortly afterward. As a barometer of the stock market, the S&P 500 index touched a

high of 1,370.58 points in May.

Then the benchmark thrashed around for a couple of months before plunging to 1,074.77by October. From peak to trough, the index had flopped by a thumping 21.6%.

As usual, though, the stock market was shoved into the abyss by the madding crowd for

no good reason at all. To wit, a crippled economy is not the same thing as a prostrate one.

In line with earlier remarks, the chains of production and distribution had been twisted

grossly out of shape by the monstrous bubble of the housing market and mortgage-based

securities. Given the scale of deformation, the economy could only flail around and crawl

along in fits and starts.

To compound the problem, the politicians had chosen to prolong the agony by propping up

a heap of dysfunctional banks and overpriced properties. The nutty moves of the

government served to foul up the natural process of recovery throughout the marketplace.

In this sickly environment, the economy was doomed to gnash and grind far longer that

otherwise. Despite the welter of abuses, though, there was no reason why the meshwork

of production and distribution should fall apart all of a sudden.

Even so, the lack of cause was not enough to keep the stock market from taking a

nosedive. In any event, the first crash of the 2010s showed up right on time according to

the long-range timetable.

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As a result, it appears that the sequence of blowups is back on track (Kim, 2011b). In that

case, the next bombshell is likely to pop up around 2017. Until then, the default forecast

for the next few years calls for a spell of relative calm in the equity market.

Summary of Forecasts

The global economy is slated to expand by some 3.2% over the course of 2012. By way of

comparison, the corresponding figure for the U.S. is 2.0% while that for Europe is 0.2%.

Meanwhile the rich countries as a whole are set to grow by 1.6% as the year wears on.

By contrast, the front-runners in the emerging regions will continue to power ahead at a

heady clip. In jaunty countries such as China and India, the pace of growth should hover

around 7% or more per year.

As in previous years, the exporters to the budding nations will fare somewhere in between

the two extremes of growth. A case in point is Australia or Canada in their role as exporters

of raw materials to the sprouting regions. Another sample is Germany or Korea as

suppliers of capital equipment or finished goods.

Meanwhile, the debt flap in Europe will continue to frazzle nerves, dampen moods, and

subdue trade in 2012. In this fretful environment, a reasonable estimate for the year is an

upturn in global output by a few percent as we discussed earlier.

On a cheery note, an election year such as 2012 tends to be a tonic for the U.S. bourse:

the government likes to put on a good show of trying to rev up the economy. For this and

other reasons, the stock market is likely to swell by 16% or so as the year wears on.

Since the American bourse acts as a bellwether for the rest of the world, the upswing will

help to lift the stock markets in remote countries as well. In that case, a representative

index of emerging markets should expand by roughly 30% before the year is out.

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In the absence of any big surprises, the markets of the world are slated to press ahead in

2012 along the lines described above. Moreover, the outlook for the equity market in the

years to follow is a tad less sparkling but still cheery even so.

Another benign streak lies in the habit of the U.S. bourse to space out bombshells atintervals of a few years. As things turned out, the smashup of the stock market last year

cropped up in tune with the long-range schedule of crashes.

Given this backdrop, the sequence of blowouts appears to have regained its usual tempo

in spite of the muddled performance before, during and after the financial crisis of 2008. As

things stand, the next crash of the bourse is likely to occur around 2017 in sync with the

long-standing rhythm of flops since at least the autumn of the 20

th

century.

On one hand, any forecast of the marketplace can go awry due to sideswipes ranging from

monstrous earthquakes to terrorist acts. Even so, the most plausible prediction at this

stage is a spell of relative calm for the stock market, in comparison to the past few years,

as the global economy trundles along at a modest pace.

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References

Census, Bureau of. Income, Poverty and Health Insurance Coverage in the United States:2010. 2011/9/13.

http://www.census.gov/newsroom/releases/archives/income_wealth/cb11-157.html

tapped 2012/1/10.

Census, Bureau of. Median and Average Sales Prices of New Homes Sold in United

States: 2010. http://www.census.gov/const/uspricemon.pdf tapped 2012/1/17.

Conference Board, The. Global Economic Outlook 2012. Nov. 2011.

http://www.conference-board.org/data/globaloutlook.cfm tapped 2012/1/16.

Kim, S. Forecast of the Stock Market and the Global Economy: Outlook for 2011 and

Beyond. 2011a/1/22. http://w.mintkit.com/2011/01/forecast-of-stock-market-and-

global.html tapped 2012/1/15.

Kim, S. Forecasting the Next Crash of the Stock Market. 2011b/11/23.

http://w.mintkit.com/2011/11/forecasting-next-crash-of-stock-market.html tapped

2012/1/20.

Kim, S. Wildcats of Finance. 2011b/11/23. http://www.mintkit.com/Wildcats-of-Finance

tapped 2012/1/22.

Labor Statistics, Bureau of. Labor Force Statistics from the Current Population Survey.

http://data.bls.gov/cgi-bin/surveymost tapped 2011/11/8.

Multpl.com. S&P 500 Earnings. http://www.multpl.com/s-p-500-earnings/table tapped

2012/1/9.

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December 2011 - OECD Annual Projections. http://stats.oecd.org/Index.aspx?

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PROSPECTSAPRIL/0,,contentMDK:20381640~menuPK:659183~pagePK:2470434~piPK:

4977459~theSitePK:659149,00.html tapped 2012/1/9.

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Market Outlook for the Early 2010s

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