Why stockmarkets will rise 50% in 2012
Waiting for my host in Zafferano, an Italian restaurant in Knightsbridge, I eavesdropped on my lunchtime neighbours and found myself surrounded by the themes of the moment. The husband and wife couple to my left were Germans, on a romantic weekend break in London, accompanying the gourmet menu with a bottle of Crystal champagne and undoubtedly heading to their hotel bedroom for an afternoon of nookie. They had an air of confidence, as befits the new masters of Europe.
On my right, the 35-year old Scottish redhead was working hard. He was making predictions for markets in 2012 in a desperate attempt to convince the bored investor sitting on the other side of the table to leave some of his funds with him, having clearly lost money in 2011. The air of bravura dissipated in the air, leaving the smell of his lack of confidence.
The myth that anyone can accurately predict what is going to happen in 2012 has been dispelled. The catchphrase of 2008, ‘return of capital rather than return on capital’, is back in vogue. Inflation, albeit much higher than any index reveals, is an acceptable price to pay on cash when compared to the risks of investing in other instruments.
The other myth, that money is cheap, also needs to be dispelled. Real interest rates are negative but the usual mechanisms of transmission are clogged up. Banks are being forced by markets, regulators and their (increasingly) non-performing loans to shore up capital. Not only are they not lending but when they do, they are arguably pricing risk correctly and demanding interest rates way above their apparent cost of capital, which makes the loans often unaffordable. Additionally, the private sector has been pushed out of the market by desperate sovereign states with acute financing needs. There is thus less money available and at a higher price, pace quantitative easing.
But this could turn tomorrow.
Close your eyes, dear reader, and imagine the degeneration of the Iranian situation. Another internal rebellion by the Green opposition street movement leads President Mahmoud Ahmadinejad to seek salvation via the unifying power of an external enemy. Using the excuse of the EU’s oil embargo and the US posting of an aircraft carrier in the Gulf, Iran closes the Strait of Hormuz, through which 35% of all seaborne traded oil passes. The price of oil explodes, rising 50%.
President Barack Obama declares war. The US economy takes off as it goes into war production mode. Investors and companies who have been sitting on piles of cash – estimated in the trillions – move quickly to invest it. Historians draw parallels with the end of the 1930’s depression on the back of World War II. Economic growth and inflation (which conveniently chips away at high sovereign debt levels) take off. The euro survives in its present form for no other reason than the arrival of positive growth numbers for most of the developed world and more profitable money-making opportunities; investors focus on riding the stockmarket bull.
By the end of 2012 share prices are up 50%. The fact that global equity markets lost almost $6.3 trillion in 2011 is a distant memory.
President Barack Obama is re-elected on the back of his successful waging of the war. Patriotic reasons ensure that enough Republicans shift their vote to him and the Democrats, thus changing Congressional voting patterns and breaking the Washington impasse. There is a bittersweet taste to Obama’s victory, but like all politicians, being in power erases any conscience prickings on how he got there.
Skiing blind over much of the Christmas break was a revelation. As snowstorms raged we fixed our eyes determinedly on ski guide Harry’s red bottom and followed him over the Austrian Alps. The glory of the endless powder snow, more than we had seen in decades at that time of year, was balanced by the fear of inadvertently heading over a cliff.
Courage comes in many different forms, not just physical. In Spain, new Prime Minister Mariano Rajoy vowed to move mid-week holidays, of which there are many, to the nearest Monday, thus eliminating the emblematic puentes. These create ultra-long weekends by bridging isolated working days. There are enough of them in a year to lower Spain’s productivity. His willingness to take an axe to the sacrosanct is hopefully indicative of the courage he will show in tackling labour reform. The country’s most damaging structural impediment to job creation is the elevated cost of firing workers. Explaining that to the Spanish public is not an easy task.
Meanwhile, Mervyn King, governor of the Bank of England, has reportedly been busy with road shows to convince other countries of the wisdom of the Vickers plan. He has been working especially hard on Germany, as the German adoption of the plan to separate retail/commercial and investment banking would lend credence to this counter-productive and expensive notion, which ignores the lessons of history and is set to be implemented only in the UK.
Banking crises are generally mundane, based simply on too many banks piling in together to lend money to people and institutions that cannot afford to pay them back. Examples range from the Latin American debt crisis to the more recent subprime and Greek debt crisis. The increased interconnectedness of the global banking system amplifies calamities from a domestic arena to an international one. I fail to see how Vickers’s recommendations tackle any of this.
The overturning of the old order even happened at the Loruenser Sporthotel in Zuers, Austria. Not in the form of London-style riots, nor the civil unrest seen in Cairo and Tunis. Instead, on opening the Christmas Eve menu, guests who had been going there for generations saw a Russian translation of the classic wishes for peace. There was a sharp intake of breath. The hotel’s owner, who had sworn never to let Russians into the hotel only four years ago, had broken his vow. A family of five were later spotted in the bar.
A revolution also occurred in Italian politics. Silvio Berlusconi’s babes, those glamour girls with stuffed lips who he appointed to political posts, vanished from the pages of the newspapers. Mario Monti, the new prime minister, took special pride in appointing women to his cabinet with technocratic skills and wrinkles. One is even overweight. In fact, dare I say this, she looks not unlike Angela Merkel.Read More