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Barone: 2013: Forecasts for the unsettled road ahead

Forecast 1: Slow economic growth in 2013’s first half; second half could be better.

Whether we go over the “fiscal cliff” or not, the first part of 2013 will be quite slow with the possibility that even the “official” numbers could show up as negative. At this writing, it does not appear that the Washington politicians will reach any sort of meaningful deal by year’s end. But, even if they do:

• Economic confidence already has plummeted.

• There are significant 2013 tax increases in Obamacare and a return to normalcy in the employee portion of the Social Security tax; furthermore, the end of extended unemployment benefits is a significant hit to consumer income.

• The job market remains weak; much of it due to a skills mismatch, which is a very long-term structural issue.

• Consumers’ real incomes continue to fall.

The second half of the year might be a different story. If some fiscal certainty is delivered in January, U.S. business investment spending, currently at a six-decade low, easily could pick up and spur the economy above the 1 to 2 percent growth rates we have seen in recent years.

Forecast 2: Nevada’s housing market will continue to struggle.

The housing market in Nevada appears to have been a bright spot for 2012. Realtors indicate that the rise in the median price is due to a shortage of supply, not an increase in demand. Nevada’s AB284, effective in October 2011, all but halted foreclosures. There remains a dearth of first-time and move-up homebuyers. I suspect this scenario will change in 2013 as the Legislature, prodded by the powerful banking lobby, deals with the technical issues in AB284 that now make it difficult and dangerous for mortgage holders to foreclose. That means more supply in 2013’s second half, and, perhaps, a plateau in home prices.

Forecast 3: Europe will sink further in 2013.

The markets are thrilled that Europe is uniting to save its insolvent banking system. While the immediate crisis has been averted through the injection of liquidity, the insolvency issues remain. The chosen path for Europe is to inflate its way out.

In 2013, the European Union will continue to be ensnared in a significant recession (depression in Greece, Spain and Portugal). France, considered to be part of the strong northern European core, also will enter recession in 2013. Even the mighty Germans will be hard-pressed to show more than a flatline.

Forecast: We have not yet seen the last of the European Union implosion. It has just been placed on the back burner with the European Central Bank’s adoption of Bernanke-style money printing policies.

Forecast 4: The Chinese miracle will continue in 2013.

China avoided a “hard landing” in 2012. The reason: A one-party political system doesn’t end up in policy gridlock. There is hot debate as to the sustainability of the current Chinese turnaround, but one thing is for sure: Economic policies, be they right or wrong, are carried out quickly and the economic impacts are felt with minimal time lags.

Forecast 5: The currency race to the bottom will intensify in 2013.

All of the world’s major central banks (the Fed, Bank of Japan, ECB and Bank of England) are printing money at breakneck speed.

The Fed is printing at least $85 billion per month, which, at least temporarily, allows the Washington politicians to shirk their fiscal responsibilities. After all, even if foreign demand for U.S. treasuries (i.e., Japan and China) dries up, the Fed will purchase any new debt due to the tax and spending imbalance.

The same scenario is true in Japan where the newly elected Prime Minister Shinzo Abe has successfully attacked the independence of the Bank of Japan, which now appears willing to print enough to cover the fiscal deficits on which Abe campaigned. Ditto for the U.K.

All of this money printing is really a form of mercantilism, i.e., policies aimed at producing a positive trade balance, resulting in higher factory output and employment levels at home. China is the world’s role model in this regard.

I call this the “race to the bottom,” because when every country does this, as is the current situation, not only is it a zero-sum game (i.e., no one wins), but there are significant unintended consequences. We see this throughout the world with zero interest rate policies penalizing seniors and savers.

Forecast 6: Precious metal, art and gem nominal prices will rise in 2013.

After 10 years of strong gains, the prices of precious metals recently have seen downward pressure due, in part, to profit taking ahead of inevitable capital gains tax increases in the U.S. in 2013. There also is a rumor of significant liquidations in a large hedge fund (Paulson), which has heavy gold investments.

Nevertheless, the underlying demand for precious metals, art, gems and other hard assets is strong, especially in the face of the “race to the bottom.” My forecast is for the nominal prices of these assets to continue their upward trajectory as every country in the industrialized world has chosen inflation over fiscal austerity.

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs. Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.


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