I thought now would be a good time to see how my ten surprises for 2012 are tracking as we are nearly a third of the way through the year. These are events that have 1-in-3 odds of happening but which I believe have a more than 50 percent likelihood of occurring in 2012.
- Greek investors finally take their writedowns: This has already happened although the workout phase is still occurring. But this prediction has proved accurate. Bingo.
- Romney will be elected President: My thinking here was that the Republicans can’t win if the economy holds and that the Republicans also cannot win with anyone but Romney. My sense was that the economy would not hold, however. So far, Obama is leading in the polls by 6 or 7 percent. if the economy holds, he should win. Not tracking yet.
- China will have a hard landing: I still have a tough time on this one. But in keeping with the theme of 50% odds when everyone else gives it one in three, I think China is the big story here. I predicted China would pull forward stimulus and they have. But I also said "the stimulus won’t be enough to prevent quarterly growth from stalling to say 5% annualised by the end of this year." Still looks good.
- India will be worse than China: This has proved on the money as India has just been put on negative ratings watch by S&P. I expect things here to deteriorate because the macro fundamentals are still not where they need to be. Tracking well.
- Australia’s housing bubble will pop: I haven’t got a lot of data on this so I can’t say it is tracking. I can’t say it’s not tracking. I will make sure I follow it closer. Unsure.
- European equities will outperform: Well Germany has performed well. But Spain has been terrible. The ISHS MSCI Europe is about flat year to date. If I were to change this prediction I would change Europe to Germany and it would look good. We know that there is a big multiple gap to the US from what Niels Jensen wrote in October. To me, that’s still bullish on a relative basis despite the real economy. Not tracking.
- US real GDP growth is below 3% and while unemployment does drop, it rises again. This is on target so far in that growth is not stellar in the US. We will soon get Q1 numbers. But unemployment has come down. My thinking is that the employment numbers will soften in the second half, one reason to expect Obama to be under pressure electorally. Tracking on limited data.
- German GDP growth weakens significantly: I wrote in January "As I have been saying for two years, I don’t see how you get a recession in Spain (or Italy) as well as elsewhere in the periphery and in France and Belgium now without Germany faltering." The data have been weak in Germany. Tracking well.
- Gold continues to lose its luster: I said "gold wins when financial repression, defined as negative real interest rates, is the greatest… I think the inflation cycle has peaked… And policy rates, particularly in the US and Europe have no room to go much lower. That’s not gold bullish. Tracking well.
- The ECB becomes more explicit about its backstops: I said "the ECB will then face a stark choice. Make their Italian backstop more explicit or go through a debt deflationary and depressionary crisis and cease to exist as an institution as the euro unwinds. I think they will choose inflation." So far, this is coming to a head more with Spain than with Italy but the choices will be the same. However, real crisis is not upon us yet and so the ECB can sit pat. Not tracking yet.
I still stand by all of these calls. Where I feel most nervous is in the more bearish ones i.e. Australia and China. China is tracking but it is early days and there is no indication yet my call on China/Australia will fall into alignment by the end of the year. I do feel like my call on European share outperformance also looks a bit weak now but again I expect the second half to be weak in the US and this will make the difference. More updates to come as the year progresses.