bill bayer 2013 economic forecast

2013 Economic Outlook

Lighthouse Growth ResourcesJanuary 17, 2013By Bill Bayer

2013 -Calm Before the Storm• Topped with periodic surprises,

crises and panic• Stronger growth than in last few years• Unemployment will fall under 7.00%• Housing prices will increase 5-10%• Higher inflation during 2nd half• Interest rates will begin to rise (finally)

Copyright William W Bayer 2013

2012 Forecast Result - Overall

Forecast Result• It won’t be the best of

times• It wasn’t. Election noise,

dysfunctional government, fiscal cliff nonsense

• But it could start the worst of times

• President and Congress kicked the can down the road

• Will we muddle through with the Un-Recovery (75%)

• Slow GDP growth• Stubborn unemployment• Cautious businesses

• Or have a major economic crisis with the potential failure of the world economic system. (25%)

• Did not happen. But publicity since the election brought out of control US spending to the forefront.

• Will US deal with the issue?


2012 Forecast Result – End of 2012 Expectation

Forecast Result• Un-Recovery will

continue but a somewhat better than 2011

• Correct.

• European crisis & Election will cause periodic market drops and recession fears

• Correct

• By end of year, expect stronger economic growth, higher employment and higher interest rates.

• GDP grew about 2.3% in 2012.• Unemployment fell to 7.8%.• Government bond rates rose to

2.4% in March but finished at 1.8%, same as end of 2011.


2012 Forecast Result - Housing

Forecast Result• Continuation of

moderate recovery in prices

• Price growth in most markets but some key markets still not improving. Up 4.3% to 5.0%

• Forecasts of strong recovery in housing starts is wishful thinking

• Existing sales up; New home sales flat. Both far below 2006 peaks. E=(-31%),N=(-72%)

• More strength to begin in upper part of market

• Ridgley Woods Indicator had fantastic year.

• It will increasingly be accepted that housing market will not lead recovery

• Government and most prominent economists have not adjusted to the reduced role of housing in our economy. Housing index at 34% of peak


2012 Forecast Result -Commercial Real Estate

Forecast Result• Stronger market than

2011. Expect prices to be stable or grow slightly

• Slight improvement(up 1.1%) Vacancies down but still at high level

• Apartments very strong

• Investment in low-leveraged cash flow positive opportunities will have good payoff over next 5-10 years

• Opportunities dried up by second quarter.

• Long term payoff contingent on US avoiding financial meltdown.


2012 Forecast Result –Employment

Forecast Result

• Employment will continue to grow slowly

• Unemployment rate declined slowly and ended year at 7.8%

• We will not return to employment levels of 2007 for many years

• Still true

• Businesses will struggle to find qualified workers

• Still true

• Unemployment rate will decline to 7.5% to 8.05 by end of year

• December unemployment rate was 7.8%


2012 Forecast Result - Energy

Forecast Result• Energy prices will stay in

range around $100/brl.• Range for year was $80-113

• If eco growth is strong, oil will stay over $100/brl

• After economy slowed in summer, oil stayed < $100

• If weaker economy, oil in $80-90 range

• True: Range since July was $80 to $100 per barrel

• Election will influence energy policy and LT energy supply

• True. Example – Canadian oil going to China while East Cost imports oil due to lack of pipeline

• High dividend oil stocks still good investment

• Exxon - $78-93, div = 2.55%• Con/Phillips – $50-60, 4.47%


2012 Forecast Result - Economy

Forecast Result• GDP growth of 3.00% to

4.00% • 2.6 percent through 3rd quarter.

Probably about 2.4% for year

• Core Inflation of 2.00 to 3.00%

• About 1.70%

• Higher long term interest rates

• Up early in year but finished flat to 2011 year-end

• Slightly higher short term interest rates

• Still near zero due to more Fed Reserve easing programs

• Dollar stronger due to high rates & Europe issues

• Dollar about the same.• Euro weak early in year, finished

strong; ended flat to YE 2011


2012 Forecast Result – US Dollar

Forecast Result• US Dollar will compare

well vs. Euro and other more risky currencies

• Finished 2012 near 2011 EOY level. Was strongest in summer.

• Dollar should remain strong as hedge to European debt issues

• True

• US Election is key. If US starts to address debt issues, dollar will remain surprisingly strong. If not . .

• Too soon to tell. Dollar has not moved since September


2012 Forecast Result – The Markets

Forecast Result• US will remain the world’s

choice for safety since US is still perceived as safe.

• Still true. Each crisis causes rise in Treasury Bond prices

• US still “safer” than the world

• Stock market – trading range with upward bias. Range from 10,500 to 14,000.

• Range 12,221 to 13,661. Ended year at 12,398, up from 12,218 at beginning of year.

• Interest rates stable early, increase late in year

• Up a bit early in year. Dropped slightly after election. Flat year over year

• Bond Prices will decline • Flat to up. Not much change year to year


2012 Forecast Result – China

Forecast Result• China will continue to

outgrow US, Europe, India and Japan

• Grew 7.4%; India grew 5.3%.• Japan grew 0.5%; US 2.4%• Euro area down (-0.60%)

• But China’s long term issues will start to become known

• True. Some social unrest.• Demographic issues. • Political change coming

• Walmartization or China-fying the US will begin to end

• Highly automated manufacturing in the US is growing.

• Some move from Walmart to Target, etc.

• China’s modern long term issues will begin to challenge their culture and system

• True• Ironically, they have their own

version of class warfare – culture conflicts


2012 Forecast Result – Election

Forecast Result• Mitt Romney will win the

Republican nomination• Race will be over by

May 1.

• Correct

• Correct

• Romney will defeat Obama with 53% of popular vote

• Wrong. Obama won 50.6 to 47.8

• Republicans will increase seats in House and Senate

• Wrong and Wrong. Democrats increases seats in both houses

• Stock market will rally into the election but decline in November and December

• Rallied 12% from 1/1/12 until the election

• Ended year down 1% from election day. Hit low 4% down from election day in mid November.


2012 Forecast Result – Small Business Environment

Forecast Result• You should be making

money in the Un-Recovery environment

• If not – fix your business. It is not the economy’s fault

• Government interference will increase

• True – more nuisance paperwork than I have ever seen in 35 years of business

• Business climate in 2012 will be similar to 2011

• True – and 2013 only marginally better although some industries (defense related) are likely to get worse.


What I missed in 2012

• US Bonds remained strong all year due to the continued Impact of European crisis and US recession fears. Markets ignored long term US issues.• US Bonds continue to be the the “Risk Off”

alternative despite returns of near 0.00%• LT and ST interest rates stayed relatively low

due to US being seen a safe haven vs. Europe• Recession fears in the fall also kept bonds

strong• Loss of confidence in US Bonds will be a growing

in 2013 and beyondCopyright William W Bayer 2013

What I missed in 2012

• Obama won 2012 election despite good Romney campaign

• Obama used non-traditional, populist, hip(rock star) tactics. Avoided being seen as traditional Presidential candidate

• Obama successfully created huge voter turnout from previously unlikely voters – Youth and Minorities

• Republican party must radically change to survive. Its constituency is made up of groups with declining population. Must revise message to women and Hispanics to have a chance of survival


The 2012 Surprise Most Relevant to 2013• Stock market action, particularly in the second

half, suggests that the underlying market is stronger than price action indicates.

• Smart money is buying dips during each crisis.• This suggests smart money believes crisis are

either going to get solved or real crisis is a long way off.

• Reaction to European “solution” suggests that markets believe debt issues will be solved gradually over time without “Shock” to system.

• Remember – A crisis that is forecast often will not be a crisis. Crises result from the unexpected!Copyright William W Bayer 2013

2013 Forecast - Summary • Calm Before the Storm• Periodic surprises, crises and panic• Stronger growth than in the last few

years• Unemployment will fall to 6.50% - 7.00%• Housing prices will increase 5-10%• Higher inflation during 2nd half• Interest rates will begin to rise (finally)• Good feelings going into 2014


Possible Crisis/Panic Triggers

• Debt Ceiling negotiations• Sequester & Continuing Resolution• European Debt issues – Greece, Spain,

Italy• European elections – Germany in

particular• Federal Reserve Insolvency Fear• Long Term US Debt concerns• Rising interest rates• The unknown!


Don’t Overreact

• These Crises will cause short term drops in all markets except Treasury Bonds (and oil if Mideast crisis.)

• They represent an opportunity to add positions in stocks, gold, commodity related, and oil.

• Key is risk control – Set an amount to risk and if short term crisis becomes a major panic, GET OUT FAST


Key Learning from 2012

• European and US leaders were able to address long term issues enough to calm the markets and restore short term confidence.

• Each crisis was solved near the last minute• Markets quickly recovered sharply up• Markets were willing to reward

governments for partial solutions that postponed the crisis

• Markets are not looking for real solutions that cause short term pain.


The Crisis Sequence• An artificial deadline gains visibility -

Example – the debt ceiling• Airwaves fill up with predictions of potential

for new recession, or government default • Rhetoric increases; negotiations break down• Near, or just past the deadline, a weak ST

solution is agreed to• Markets recover and look forward to next

crisis. Happy to not deal with the pain required to solve the real issues


2013 Forecast - General

• Economy will be stronger than in the last few years. Resilience in last half of 2012 was impressive.

• Short term crises will cause sharp market reactions but market will quickly recover

• Short term solutions will give impression that long term issues are being addressed

• GDP growth, housing, employment, world economy – all are trending up


2013 Forecast - General

• Euro-debt progress, fiscal cliff tax compromise, and election results have created ST certainty

• Impact of Obama Care will become better known as the year goes on and will hover as a thunder-cloud over small businesses.

• Class warfare will increase as the conflict between the Entitled and Tax Payers increases. Expect riots and violence.


2013 Forecast - Specifics

• Housing – Best market since 2006; Prices up 5-10% overall. Some markets will lag

• New housing starts will increase, but still nowhere near 2006 peak

• GDP growth about 3.0% for the full year versus 2.20% in 2012. Second half of 2013 will grow at about 3.50–4.00%

• Unemployment will drop under 7.0% by midyear and to about 6.5% by mid-year



• Inflation will remain low, under 2.0%; But inflation pressures will increase in last half of 2013 leading to interest rate increases

• Interest rates will remain low until fall. Crises will cause short term runs to safety of US Bonds when stock markets and other “risk on” assets fall sharply

• Markets will be remarkably resilient and drops will be buy opportunities



• Stock market will hit new highs on the Dow in the first half of the year.

• Market will peak mid to later part of the year as long term issues become greater threat and Obama Care and other government intervention expands its impact.

• Reckoning day for US and European Debt will continue to be postponed



• Hard assets will have a good year as economic growth increases.

• Gold prices will fall into the first quarter and rally in second half of the year to $1800 to $2000 and possibly higher

• Oil prices will be in $80 to $100 range until spring and then move above $100 per barrel. If Mideast blows, prices could exceed $130, $150, and up to $200/brl.


2013 Forecast - World

• China will remain strongest economy – GDP growth of 7-8%.

• European economy will improve. Greece, Spain, Italy will slow their contractions.

• South America and Canada will grow• Mid-East represents serious risk due to

Syria and the probable acquisition of nuclear capability by Iran

• US Dollar – Solid (+/- 10%) until mid-2014


Forecast – Long Term

• 2013 will be the calm before the storm. By mid- 2014, the patchwork solutions to excessive government spending and the continued moderate economic growth will cause US Debt to require an interest rate premium.

• Annual interest expense, currently $225 billion annually, will increase and the reality of the debt crisis will be undeniable.


Forecast – Long Term

• Interest expense will move from the fourth highest budget item to third highest after Defense and Medicare.

• Overall interest rates will increase due to government sucking up capital, concern about debt repayment, and inflation concerns.

• By 2014-2015, inflation and higher interest rates are inevitable.


Recommendations

• Refinance one last time.• Pay down debt.• Downsize if it is in your plans.• Build up cash and liquidity.• Buy stocks on dips and take short term

profits when you can.• Don’t worry about long term gains

because it is likely the stock market will have a sharp drop in 2014 that will wipe out most gains.


2013 -What to Do if Crisis Happens

• Sell all stock market holdings• Buy treasury bonds• Identify key employees and cut staff

wherever 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.Copyright William W Bayer 2013

Closing Thoughts

• 2013 will be a good, but not great year. • If you made money in 2012, you should

make more in 2013.• Actively manage your business. Be alert.• Implement a strong sales and marketing

function so you can grow your business – take market share!

• Take advantage of the last chance to refinance

• Cut marginal people.


Next Briefing-Obama Care

Action Items and Decisions Facing Employers with the

Patient Affordable Care Act

Chris HodgesOasis Outsourcing

February 21, 2013

bill bayer 2013 economic forecast

Economy & Finance