BarroMetrics Views: 2012 In With a Bang?

The world stock markets started 2012 with a bang. Seasonally this is what the first day of the New Year usually brings.  I am more interested to see what today brings.  Today will mark the end of the ‘Xmas Rally’ period, I use it together with the January effect to give me a handle on the direction of the first quarter.

Based on my view of the fundamentals, I am bearish for 2012, looking for a bear market to start no later than the third quarter and perhaps as early as the beginning of the second:

• It’s unlikely that Europe will fix its mess. The results of the ECB loans show that the European Banks will follow the US banks and not lend. As the stresses continue on the European economies, we’ll see more pressure on the ECC to ‘reform’. I doubt if the ECC in its present format will last beyond  2012.
• The US will continue to muddle along, at best (if you accept US Government data)  and will slip back to official recession, at worst (if you accept the ShadowStats data). One thing is clear:  at some point the US government will take the view that if US employment is to be resume a healthy growth,  the funds deposited in the St. Louis FED Reserve will need to be released. Inflation will then become a major problem for the FED. The question is will Bernanke (or his successor) have the courage to take the necessary steps to prevent hyperinflation. And
• This brings us to China. Unlike the West, the Chinese banks lent when their Government ‘quantitatively eased’. The Chinese Government then took the steps that dampened the resultant inflation. As a result we are starting to see economic slowdown. It will be interesting to see what happens next.

All in all, not attractive prospects. But the great thing about being a trader is we can take advantage of what the market offers - in whatever type of market condition and structure. And so, I wish you a very prosperous 2012.

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