Bear Tidings

In an apparent attempt to subject them to obloquy, Bloomberg published a catalog of bearish economic opinions.

Only the gloomiest of Wall Street’s prognosticators got it right in 2008 and 2009. Since then, their pessimism has been infectious. On almost any investing topic — from emerging markets to U.S. stocks, from commodities to sovereign debt — there are respected experts predicting the worst.

So far, apocalypse hasn’t arrived. The U.S. economy shows signs of life. Europe is muddling through its debt concerns. The economies of China and India have slowed but not stalled.

If these commentators, who range from short-seller Jim Chanos to GMO’s Jeremy Grantham, prove prescient — and will check in later this year to see if they are — the biggest surprise in 2012 would be some truly good news.

Are “signs of life” the same as the “green shoots” that we have seen in the past, only to wake up to scorched earth? To paraphrase Yoda, “Grow or decline, there is no muddle through.” Here are a few reality checks:

Unemployment in Spain reached 23.3% in Q4. That, folks, is a Depression. Portugal has already been cast loose to join Greece in the maelstrom, as the ECB has stopped buying its bonds. Spain is clearly next in line as with those numbers there is no hope of meeting its commitments in the short term.

The U.K. is in deep trouble. “the fall in UK GDP in 2007-2010 was $562 billion compared to the next worst performing national economy, Italy, with a decline of $65 billion – i.e. the decline in UK GDP in the common measuring yardstick of dollars was more than 8 times that of the next worst performing national economy.”

Japan is entering the end game. There is no way off the debt treadmill that does not end in disaster. Japan can continue to borrow, but it already funding more than half of all government expenditures from debt. At some point, interest rates will go up, either as a result of loss of creditworthiness or because of inflation. Then Japan will either be forced to default or dissolve in a hyperinflationary spiral.

Austerity is crippling Europe. Reducing government spending means reducing consumption, which will reduce GDP euro for euro. As S&P implies, that is not a strategy for growth. What is essential, as economists fail to realize, is to reduce consumption while increasing investment, from which comes productivity. This is not something government can do, because it inevitably makes politicized investments (Solyndra, for example) which then fail after everybody involved has helped themselves to their share of the spoils.

A global pension crisis is looming. “Pay as you go” pension strategies are doomed to demographic disaster. I’ve talked about the largest Ponzi scheme in the world, Social Security in the U.S.. But Europe has its own problems, 39 trillion euros worth:

State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.

Omittted from Bloomberg’s catalog of bears was Bob Janjuah, whose forecast worked last year and bodes well for this year, in my opinion.

The secular outlook remains unchanged – for 2012, it is again Risk-Off, long core high quality bonds and strong balance sheets/short risk and weak balance sheets.

Or perhaps more to my taste, here are some points from Steen Jakobsen, chief economist of Saxo Bank in Denmark:

  1. More austerity cannot possibly work.
  2. Voters have lost the faith and willingness needed to repair the current EU and Eurozone construct
  3. Credit and debt cycle is busted. Irving Fisher’s Debt-Deflation Model is in progress.
  4. The end-game is near for Europe. Prepare for a meeting of the cardinals
  5. Nicolas Sarkozy is falling apart and likely to lose to Marine Le Pen in the first round of French elections
  6. The “Hope Trade” in equities is in Extreme Overvaluation. Be nimble and cash-rich now to be able to take advantage of deep discounts coming up later
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