Market Overview

Pain Ahead: 3 Predictions For 2012


Europe Will Experience Hard Defaults - While the market is not currently anticipating hard defaults in the Eurozone, some of the world's top investors are predicting just that outcome. Specifically, Greece will default in the early part of the year and this could set off a "cluster" of sovereign defaults. This is the outlook of Normura's Bob Janjuah, Hayman Capital's Kyle Bass, and BlueCrest Capital's Michael Platt, who runs one of the largest hedge funds in the world. While the market may be hoping that crisis can be averted in 2012, many of the world's best investors are preparing for an ugly year on account of Europe.

Bob Janjuah told Bloomberg at the beginning of December that he thinks the next likely domino to fall after Greece is Portugal and both Bass and Janjuah are warning that this could set off a "cluster" of defaults in the region. Furthermore, Kyle Bass, who sealed his reputation by making billions for his investors betting against subprime mortgages, thinks that the crisis will quickly spread to Japan. He has made big bets against both the Japanese Yen and Japanese government bonds using high convexity options trades. Bottom Line: Many sage investors see trouble ahead, and 2012 is likely to be another very volatile, and potentially calamitous, year.

The S&P 500 Will Fall 30-40% - If the first prediction comes true, U.S. equity investors are in for a world of pain. Nomura's Janjuah sees roughly 35% downside from current levels. His target for the S&P in 2012 is 810. Currently, the S&P is trading at 1,262. Speaking about the situation in Europe, he said "I think the worst is ahead of us. I think the first half of next year is going to be pretty tough for people. I do think we will have a hard default in Greece which is not in the market." The outlook of Bass and Platt, and a number of other bearish investors, is just as dire.

What is interesting about Janjuah's downside target for the S&P is that it doesn't even factor in a recession in the United States - which is a very real possibility if Europe implodes. BlueCrest's Platt is so concerned about the banking system, which is under enormous strain due to its exposure to Eurozone sovereign debt, that he doesn't keep any of his hedge fund's $30 billion with banks. He said, "I do not take any exposure to banks at all if I can avoid it. All the money at BlueCrest Capital Management is in Two-Year U.S. government debt and Two-Year German debt." Bottom Line: 2012 could be a redux of 2008 with financial stocks leading the stock market dramatically lower.

Gold Will Fall Amid More De-Leveraging - In 2012, gold prices will fall moderately and spend most of the year in a consolidation pattern. For a look at what could happen in the gold market in 2012, refer to a chart of 2008. In the wake of Lehman Brother's collapse, gold fell, but it was not as dramatic as what was occurring in stocks. In fact, the dip in gold in the Fall of 2008 was an absolutely terrific buying point. Expect something similar to happen in 2012. Gold will pullback as fearful investors who need liquidity sell some of their holdings. Also, a very risk averse atmosphere will push the Dollar higher and exert some pressure on the gold market.

These dynamics, however, will be offset to a large degree by buying from investors who are able to draw the parallels between 2008 and 2012 - namely that the next phase of the crisis will be defined by more massive money printing programs by global central banks in an effort to combat the spreading sovereign debt crisis. While 2012 may not be a great year for gold, it will be an opportune time to be a big buyer of precious metals.

The coming year will be followed by a parabolic move higher in gold prices as investors around the world continue to become ever more distrustful of global central banks and fiat money. Expect the final and most powerful phase of the gold bull market to begin sometime between late 2012 and mid-2013. It should culminate in a massive, parabolic, blow-off top which sends the shiny metal to previously unthinkable prices followed by a sharp collapse.

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