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Thursday, December 22, 2011 2:02 AM

Bernanke Spreads "Happy Dust"; Did the Economy Respond? Will the Economy Respond? Mish 2011 Predictions Review

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Reader "JB" emailed a link to a Bloomberg article citing a quote by Allen Sinai, co-founder and chief global economist and strategist at Decision Economics in New York that the Fed was spreading "Happy Dust".

Indeed most of the article is about "Happy Dust", that essentially everyone will live happily ever after, and Bernanke merely ran into "Bad Luck" in 2011.

Please consider Bernanke Prods Savers to Become Consumers by Bloomberg columnist Rich Miller.

Federal Reserve Chairman Ben S. Bernanke finally may be catching a break: His easy-money policies are showing signs of speeding up the economic rebound three years after he cut interest rates to zero.

“When the Fed sprinkles happy dust on the economy, we always respond,” said Allen Sinai, co-founder and chief global economist and strategist at Decision Economics in New York. “The happy dust has been out there a long, long time, and I think it finally may be settling in some places.”

He sees growth accelerating in the range of 2.5 percent to 2.75 percent next year from 1.5 percent to 2 percent this year, when the economy was hit by what Bernanke called “some elements of bad luck” in a Nov. 2 news conference. These include a run- up in oil prices caused by the Arab spring and a sell-off (SPX) in the stock market triggered by Europe’s debt crisis.

Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, is even more optimistic than Sinai. Crandall -- the most-accurate forecaster of the U.S. economy as of Dec. 1, based on Bloomberg calculations -- predicts growth next year of just over 3 percent, as companies become more confident about the outlook and expand their businesses.

The resilience of the economy will lift corporate earnings and stock prices, Sinai said. Operating profits of companies in the Standard & Poor’s 500 Index will rise by an average of 8 percent to 10 percent in 2012, and the stock gauge will end the year at 1,400, he forecasts -- up from 1,241.30 at 4 p.m. in New York yesterday.
Happy Dust, Bad Luck, or Wishful Thinking?

Making predictions,  especially about the future, is extremely difficult - to paraphrase Yogi Berra.

Apparently no one could have foreseen the "bad luck" that came in 2011.

However, I can't help wondering what Lou Crandall and Allen Sinai were saying in 2007, 2008, and 2011.

Is there any reason to believe their forecasts for 2012? Perhaps there is. So let's see their forecasts for 2007, 2008, and 2011.

Predicting the Future is Extremely Difficult

I did not do so well predicting 2010. Happy Dust (known as QE II) got in my way. I did not think it would matter, but it did, and I was wrong.

However, I did get the turn in housing on the nose in 2005. In 2007-2008 I got the bond market on the nose with a call for record low yields across the entire yield curve. I also called for deflation (defined as a collapse in credit) and also for the rise in gold.

In a major call I took on Doug Kass in 2008 when Kass said "Sell Bonds Short".

When everyone saw inflation, I saw deflation as well as a rise in gold prices.

However, it is easy to point out good calls while ignoring the bad calls. I have had a number of bad calls as had everyone else who dares make predictions about the future.

2011 Predictions Review

Every year before I make my predictions for the next year, I take a look at how I did the past year. Sometimes it is a humiliating experience, sometimes not. However, I will put my 2011 calls up against anyone, in spite of starting off with a huge miss.

Please consider Ten Economic and Investment Themes for 2011 written December 22, 2010. Each of the 10 predictions is immediately followed by a review in retrospect.

1. US Municipal Bankruptcies Head to Center Stage
Look for Detroit and at least one other city in Michigan to go bankrupt. Also look for increasing discussions regarding bankruptcy from Los Angeles, Miami, Oakland, Houston, and San Diego. Those cities are definitely bankrupt, they just have not admitted it yet. The first major city to go bankrupt will cause a huge stir in the municipal bond market. Best to avoid Munis completely.

1 Review:  Detroit is in trouble and Harrisburg did declare bankruptcy. Jefferson County Alabama became the biggest US bankruptcy in history. Thus, I could spin this into a neutral call if not a correct call. But I won't. The intent behind my call was a troubled Muni Bond market. I missed the mark. Munis in general did well. I got this wrong.

2. Sovereign Debt Crisis Hits Europe
The ECB and EU are hoping things return to normal and they can deal with things more calmly in 2013. The markets will not wait. Expect a new Parliament in Ireland to want to renegotiate whatever horrendous deal Prime Minister Brian Cowen agrees to. Portugal and Spain will need bailouts. The surprise play in Europe will be Italy, a country not on anyone's front burner. Italy will come under intense credit market pressure, and when it does the whole Eurozone comes unglued. Europe's banks are insolvent and ECB president Jean-Claude Trichet will have a choice, haircuts or massive printing.

2 Review: Emphasis in red added. This was a home run. Few if any eyes were focused on Italy or European banks when I wrote that in December 2010.

3. Cutbacks in US Cities and States
With Republican governors holding a majority of governorships, with Republicans holding a majority in the House, and with a far more conservative Senate, there is going to be little enthusiasm for increasing aid to states. There will be some aid to states of course, but nowhere near as much as needed to prevent cutbacks. Expect to see a huge number of layoffs and/or cutbacks in services. Cutbacks in cities and states will be a good thing, but that will counteract other gains in employment. The unemployment rate will stay stubbornly high.

3 Review: The unemployment rate was stubbornly high until perhaps last month (assuming 8.6% is not stubbornly high, although I think it is). There was undoubtedly cutbacks in state government across the board. This was a solid call.

4. Public Unions Under Intense Attack
Public unions will face increasing hostility, not only in the US but also the Eurozone and UK. Look for Congress to consider legislation to kill collective bargaining. If it passes, the president would veto it. The problem however will not go away. Cities and states in distress will increasingly outsource every contract they can.

4 Review:  There was not fireworks at the national level but fireworks in Wisconsin and Ohio exceeded all expectations. Cities and states are indeed in stress. Unions are under attack in the UK, Greece, Spain, Italy, and Portugal.

5. China Overheats, Multiple Rate Hikes Coming
China, everyone's favorite promised land, has a hard landing. China will grow at perhaps 5-6% but that is nowhere near as much as China wants, or the world expects. Tightening in China will crack its property bubble and more importantly pressure commodities. The longer China holds off in tightening, the harder the landing.

5 Review: China did hike multiple times to slow inflation and rein in its property bubble. Growth slowed, but not to the extent I expected, but more than enough to matter. The Shanghai stock index is one of the weakest global markets. I could spin this as a home run, given sentiment on emerging markets and China was extreme to the opposite direction.

6. Property Bubble Bursts Wide Open in Australia and Canada
Australia, having largely avoided the global recession runs out of luck this time around. Look for the Australian economy to fall into outright recession. Look for Canada to slow dramatically as its property bubble pops. The US property bubble is much further progressed, by years, than Australia, Canada, and China. This matters immensely.

6 Review: Half correct. The bubble in Australia burst. The bubble in Canada did not. It will.

7. US Avoids Double Dip
The tax cut extensions and the payroll tax decrease will keep the US out of recession. However, growth estimates are still too high. The tax cut extensions do nothing more than maintain the status quo while the payroll tax deduction is just for a year. Most will use it to pay down bills. Look for GDP at 2.0-2.5%. That is the stall rate.

7 Review: Amusingly, I did better at the beginning of the year than my mid-year forecast of recession in 3rd or 4th quarter. A very good call.

8. Year That Something Matters
For the global equity markets, this will be the year that something matters. Certainly nothing mattered in 2010, and optimism for equities is at extreme levels. I have no targets other than a suggestion this is an extremely poor time to invest in darn near anything.

8 Review: That was a rock-solid call.

9. Decoupling in Reverse
I do not think any countries decouple in 2011, including China. However, on a relative basis, the US could. Europe is a basket case, China is overheating, Australia is headed for recession, the UK is going nowhere, and 2.0-2.5% growth in the US just might look damn good compared to anything else. Bear in mind far more than 2.0-2.5% US growth is priced in, but on a relative basis that is likely to smash the performance of the Eurozone, Australia, and Canada. China may grow 5.0-6.0% but with 10% priced in, overweight China, the emerging markets and the commodity producing countries is a serious mistake. Actually, equities are a mistake in general and so are commodities. Finally, falling commodity prices would be US dollar supportive and supportive of a decreasing US trade deficit as well, especially if grain prices stay high while oil sinks. Should grains stay firm while other commodities sink, it would help boost US GDP.

9 Review: Like my forecast on Italy, I am not aware of anyone else making this exact call. The US outperformed by a mile. European equities, Asian equities, Japanese equities, and Australian equities were hammered. The US was flat. This was another home run.

10. US Dollar to Strengthen
Look for the US dollar to strengthen because of the net effect of all the above issues.

10 Review: Not quite. After a ride in both directions the US dollar is roughly where it was a year ago. Given that most thought the dollar would sink, I will take half credit. 

Overall Score

I will rate that 8 out of 10 with 2 home runs and possibly a couple doubles.

Here is the deal. It is very easy to get one year right or one year wrong. I have made numerous wrong calls, but fortunately more in short-term forecasting than long-term thinking.

The problem I have is mainstream media seeks out those with the hottest recent hand, but only from a list of candidates that manage the most amount of money.

People want to hear "Happy Talk", as well as "Home Runs" (but only from big names). Thus we see one-hit wonders like Paulson, coupled with "Happy Talk" in numerous places in 2007, 2008, and 2011 quoted all the time. Those who got it essentially correct for years are ignored.

In a subsequent post I will make some calls for 2012. Don't expect more home runs. This is a tough act to follow.

Mike "Mish" Shedlock
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