John Ransom
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There are many wildcards in any political, economic and market forecast. For example, no one could have predicted the tsunami in Japan that affected global GDP growth negatively in 2nd quarter of 2011. No one could have predicted that Obama, all by himself, could have tracked down and killed, barehanded, Osama Bin Laden- while also playing a round of golf.

But that’s a column for a different day.   

For 2012 the biggest known wildcards will of course be the presidential election, followed by the other federal elections.

While people like to think that presidents get too much blame or too much credit for the economy, I think it’s impossible to overstate the blame that should be assigned to Barack Obama and his economic team for the miserable performance of the economy under the policies of the Democrats. It’s not just that they did things that didn’t work; it’s that they undermined the confidence the American people need to have in government as a fair arbiter between sections of the country.

In order for America to work, citizens need to see their government sometimes go the nonpartisan route- the route that actually works. Obama should try that once, like for example on the XL Pipeline. Bill Clinton did it on welfare reform and it got him reelected.      

I believe that a win by Republicans for the top spot could give a significant boost to the chances of a fall market rally as the contours of the race for the White House become clear. A win by Obama could keep the markets choppy, but somewhat optimistic if accompanied by GOP wins in both the House and the Senate. A win by Obama with gains by Democrats in the House or the Senate and all bets are off: The market will react extreme adversely to this last scenario.

Right track/wrong track numbers have trended steadily against Obama since June of 2009. While political polls are relatively meaningless at this stage, consumer confidence numbers, which are slower to turn, have bad new for Obama.

Despite a recent rise in consumer confidence- from 64 to 69- the number still remains well below the century mark that Obama needs for reelection.

"There is plenty of time for the national mood to change, but the decline in income expectations is particularly telling," Steve Blitz, senior economist at ITG Investment Research told his clients according to the WSJ. "When the income up percentage is on the downswing, incumbents do not get re-elected."

The Journal cites loss of consumer confidence and high unemployment for the defeats of incumbent presidents Jimmy Carter and George H.W. Bush.

“A soft economy kept the U.S. consumer sentiment index low prior to former president Jimmy Carter's failed re-election bid in the early 1980s and George H.W. Bush's failed bid in the early 1990s [Eighteen months before each election it stood below 100: at 76.4 in May 1991 and at 96.0 in May 1979.],” says the Journal. 

“Just like Carter and Bush senior, Obama is likely to face an unemployment rate that is higher than 7.5% in the months before the next elections. The jobless rate now stands at 9%, and the Federal Reserve predicts it will be between 7.6% and 7.9% at the end of 2012.”

In fact, unemployment will probably remain over 8 percent through the fall elections. Even more, U6 unemployment will likely remain higher than 15 percent. U6 accounts for those unemployed who have stopped looking for work and those who work only part-time for economic reasons.

While I don’t think GDP will be negative, it will be anemic; not enough to drive job growth or consumer confidence. Expect GDP to be lower than 1 percent for the full year, below the forecast by the OECD, although it probably won’t be apparent until the last half of the year. I expect that GDP forecasts will rise through the 2Q of 2012 as the Federal Reserve uses the last little liquidity tricks it has at its disposal to inflate GDP. By mid-summer however it will be apparent that the economy is slowing down- again.

Slow growth or outright contraction in Europe and in Asia will negatively affect US industry, but this will be offset a little by falling commodity prices, which will be beneficial to the domestic economy in that imports will be cheaper.

Let’s get something straight though: A year ago we were hearing about a dominant China or a dominant Europe. Both Europe and China are dependent upon a robust US economy for success. The world economy will not get better without the US as the driving engine of recovery. In order for the global economy to be jumpstarted, the world needs regime change in the US of A. 

Let’s look at some figures:

China’s GDP is expected to be just under $6 trillion with per capita income of about $4,500 per year compared to the US economy at $14.6 trillion and per capita income of $47,000 per year. The EU combined GDP is $16 trillion, but has per capita income of about $32,000 or about 68 percent of the US. From 2008 to 2009 as our economy tanked, the imports from China shrank $41 billion. Currently, US purchases make up about 6 percent of China’s GDP. Imports from China made up about $365 billion as of the end of 2010 and will approach $400 billion this year. $365 billon is equivalent to about 2.4 percent of our GDP.  A sustained hit from slower imports would be devastating to China.  

It’s important to realize when looking at any economic and market forecast that the economic side represents what the economy will actually produce and the stock market side represents market sentiment for what will happen in the future.

Market sentiment will improve the second half of the year, as two significant things happen: 1) We’ll stop digging a hole on debt; 2) The election will draw nigh.       

I forecast that the stock market will rally a little through the first of the year, but by the end of 2Q I expect prices to go to depressed levels with bursts of “irrational exuberance” based on short-term signs of an improving economy. To sum it up, the market will reflect anemic growth prospects through the summer until Obama looks like he could lose, at which point the market will rally on the expectation that a new, economic-friendly administration will be sworn-in in January.

However a systemic failure of the Euro  (or elsewhere) could change things quite dramatically for the worse. I consider that a remote possibility however. I think that the Obama administration will ship as many suitcases of $100 bills to Europe as necessary to keep the Euro going until things stabilize. This increased liquidity is one reason why I think the market will rally. It’s also why I think that ultimately the US will grow disappointed by the summer. After a while it will become apparent that the liquidity measures taken here and abroad were little more than a magic trick, more apparent than real. After a period of inflationary activity that will mask economic weakness, the market will reverse course until after Labor Day. 

At the end of the year, I expect that the market will remain little changed from its open at the beginning of the year, despite projected spring and fall rallies

Summary:

    • Market will rally as economy apparently expands through the 1st quarter. By the end of the 2nd quarter the market will reverse course as it becomes apparent that GDP is not expanding due to organic growth. Market to finish flat-ish for year. Margin gain or loss.
    • Choppy bottom in the market through the fall when change-of-party rally takes place as election looms.
    • Obama defeated; gains in Senate (too many seats for Dems to defend) and House for GOP.
    • GDP to come in at 1 percent or lower for 2012

Conclusion: The problems we have in the country are political, not economic. Solutions will come only when the Gordian Knot is cut politically. The GOP needs to look for a watershed. Voters will vote in 2012 for a Brand New Deal, with Obama and the Democrats playing the part of Herbert Hoover, if the GOP is wise enough to offer it. 

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John Ransom

John Ransom is the Finance Editor for Townhall Finance.
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