Midyear Economic Outlook

2012 Economic Outlook

Lighthouse Growth Resources
June, 2012
By Bill Bayer

2012- The Paradox Economy
• For four months, it seemed like the
European crisis was solved, the US
economy was recovering, and
housing and employment were
improving.
• But reality returned in second quarter
• The UN-Recovery persists
• And threatens Obama’s re-election
Copyright William W Bayer 2012

Two Conflicting Scenarios
• An end to the recovery caused by
failure to resolve European crisis
• Interest rates continue to fall
• Europe and then rest of the world start a
new recession
• Or the UN-recovery continues with
gradual improvements in the economy
over the next 2-3 years.

If New Recession
• Unemployment rises
• Interest rates drop
• Housing market stalls and possibly
declines again
• Gold, energy and other commodity
prices drop further
• The stock market declines sharply


If Continued UN-Recovery
• Unemployment drops slowly
• Interest rates stabilize and then move
upward as European crisis is resolved
• Housing market continues slow
recovery
• Gold, energy, commodity markets and
the stock market will move upward
slowly but be volatile.

Agenda For Today
• Interest Rates
• Europe (by country)
• Inflation / Deflation
• Employment
• Housing
• Gold, Oil and commodities
• The Stock Market
• The Election
• Outlook for Small Business & What to Do Now

Interest Rates
• Bond market has focused on European
crisis and potential for global recession
• Record low LT US Bond Interest Rates
• Under 1.50% for 10 YR Treasury
• Markets are ignoring LT inflation threat
• Markets are saying that solution to
European debt crisis and eventual US Debt
crisis will be very poor economic growth
• Possibility of Deflation


Interest Rates - f(x)
• Perceived Credit Risk
• Economic Growth Outlook
• Inflation (Or Deflation)
Expectations
• Confidence in Government/
Country’s Economy


GDP Growth by Country – 2012/2011

• Euro Area – (-0.10) / 2.40
• Switzerland – 2.00 / 2.50
• Germany – 1.70 / 4.70
• France – 0.33 / 2.10
• Greece – (-6.50) / (-8.00)
• Ireland – 0.70 /(-0.20) (4th quarters)
• Italy – (-1.40) / 0.80
• Spain – (-0.40) / 0.80

Inflation by Country – 2012 / 2011

• Europe Area – 2.60 / 2.70
• Switzerland – (-1.00) / (-0.70)
• Germany – 1.90 / 2.10
• France – 2.10 / 2.50
• Greece – 1.40 / 2.40
• Portugal – 2.90 / 2.70
• Italy – 3.20 / 3.30
• Spain – 2.10 / 2.40

Interest Rates by Country –
Govt. 10 YR Bonds

• Switzerland - 0.54 / 1.63
• Germany – 1.31 / 2.96
• France – 2.56 / 3.33
• Greece – 28.91 / 16.73
• Ireland – 8.21 / 11.24
• Italy – 6.04 / 4.79
• Spain – 6.51 / 5.47
• Portugal – 10.67 / 10.43

Other Large Nations – 2012/2011

Interest
Country GDP Growth Inflation
Rates
United States 2.00 / 1.60 2.30 / 3.00 1.60 / 2.99

United Kingdom 0.00 / 0.50 3.00 / 4.20 1.65 / 3.25

China 8.10 / 9.10 3.00 / 4.10 3.34 / 3.89

India 5.30 / 6.10 7.23 / 7.50 8.33 / 8.24

Japan 2.70 / (-0.50) 0.40 / (-0.20) 0.87 / 1.15

Australia 4.30 / 2.30 1.60 / 1.80 3.07 / 5.17

Canada 1.80 / 2.20 2.00 / 2.30 1.78 / 3.00

Unemployment Around the World –
2012/2011 (1)
2012 2011
Country Unemployment Unemployment
Rate Rate
Spain 24.44 22.85
Greece 21.90 20.70
Portugal 14.90 14.00
Ireland 14.30 14.30
Italy 10.20 8.90
France 9.80 9.80
United Kingdom 8.20 8.40

Unemployment Around the World –
2012/2011 (2)
2012 2011
Country Unemployment Unemployment
Rate Rate
United States 8.20 8.50
Germany 7.40 6.60
Canada 7.30 7.50
Brazil 6.00 4.70
Australia 5.10 5.20
Japan 4.60 4.50
China 4.10 4.10

Inflation or Deflation?
• Data from 2011 to 2012 indicates:
• Lower economic growth
• Lower Inflation
• Interest rates higher for RISKY
countries and rates have gone very low
for “Safe” Countries.
• Risk of world-wide recession and
potential deflation is significant.
• Deflation is brutal economic environment!


Slowest US Employment
Recovery in 65 Years


Lowest Employment Population
Ratio Since 1975


Construction Employment Down
29% from Peak


Employment is Still Only at 96%
of Previous Peak


Small Business Hiring Plans
are Improving


Missouri Unemployment is at
7.2% versus 9.8% Peak


New Home Sales Remain Below
Previous LOWS!


Divergence of New Home Sales
and Existing Home Sales


Home Prices Flutter Around +/-
5% Year Over Year Change


Home Price Index Still Off Over
30% From Peak


Real Housing Prices Have
Declined Over 40%


And Look Like a Good Deal
Versus Renting - BUT


Housing Market Conclusions
• Houses look like a good deal, BUT
• Have attitudes about housing changed?
• Many people no longer see rising
housing prices as an excellent
investment.
• Lack of price appreciation makes it easy
for people to postpone purchases
• Mortgage availability is still tight and
paperwork is punitive.
• Housing grows AFTER employment!

The Markets
• In 2012, Markets have been volatile
• Up moves have been followed by sharp
and quick reactions
• Difficult market for investors due to lack
of sustained trends
• Tricky market for traders
• Professionals and large institutions have
lost huge $ - Example JP Morgan
• Overall returns are disappointing

Treasury Bonds – Prices Rise /
Safety Haven Purchases


CRB Index (Inflation) has dropped
sharply (24%) Since early 2011


Corn and Other Crop Prices have
Moderated Or Are Falling


Slowing World-Wide Economic Growth
has Caused Oil Price Decline


US Dollar has Rallied as Alternative
to Euro and Due to T-Bond Rally


Euro is Near 4 Year Low – What if
The Lows Are Broken?


Gold Remains in Long Term Uptrend, But
has Reacted to Support at 1525-1550


SP 500 has Dropped Sharply From April
Highs – Topping? Or Rally Again?


The Election - Obama
• When the economy is poor, incumbent
Presidents seldom win
• Obama’s handling of the economy has
been weak.
• ObamaCare is unpopular
• Favorable Press coverage and large
(and growing) Democratic(Entitlement)
base favors Obama
• Obama states - 221 Electoral Votes

The Election - Romney
• Republicans, except for Reagan,
generally run poor campaigns
• Romney’s communication skills are
poor compared to Obama
• Romney needs to focus on key issues –
economy, size of government, tax
policy – And avoid emotional social
issues (which are losers.)
• Romney states - 170 Electoral Votes

Election Forecast
• Obama needs 50 of remaining 147
Electoral Votes to Win; Romney needs
100
• Midwest, Colorado, Arizona, Florida,
North Carolina are key to Romney
• Economic slowdown will tilt the election
to Romney
• Romney wins a close one!


Small Business – What to Do

• Get ready to survive in slowing economy
• Avoid risky investments
• Round sales forecasts down, not up
• Delay all non-sales hiring
• Increase spending on effective marketing
and sales activities
• Cut poor performers
• Build liquidity – in Business and
Personally

If Economic Crisis Occurs

• Sell all stock market holdings
• Buy treasury bonds
• Identify key employees and cut staff
where-ever possible
• Preserve cash
• Cash is king in a crisis
• Reduce life style expenditures
• Act quickly and act quickly again to
reverse positions if crisis passes.

Closing Thoughts
• I still expect 2012 to be a good year.(I do
not expect a Crisis.)
• If you made money in 2011, you should
make about the same in 2012.
• Actively manage your business. Be alert.
• Focus on improving your sales & marketing
functions
• Refinance if possible (last chance?)
• Cut marginal people – make this an ongoing
discipline


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