ICangles Investment Post….

As 2012 nears a close, I have made some big predictions about the future in financial markets and have hinted at others. I believe our current period has been fair, bad times are nearing and unexpectedly good times for investors will follow. In my view the future is a mixed bag, heavy with near-term risks and long-term opportunity. One thing I don’t think it will be is boring. As I have grown older I have become more cautious in predicting financial markets. Nevertheless I have never before made as many bold predictions for big changes as I am in the process of now making. In my view we are approaching an inflection point where the market will transition from a secular bear market phase into a secular bull market. The world will give birth to a new age, and it will not be without pain.

Fair, Bad, Good

Only having written my blog posts since 2010 and getting a bit more cautious as I mature, I have not thrown out too many predictions to assess at this point. Some that I have are indeed notable for their mixed bag nature. In February and December 2011, I was positive on the prospects for U.S. stocks in 2011 and 2012, but have also made mention of stock market risk rising in 2013. With stocks flat in 2011, up so far in 2012 and 2013 ahead of us with me yet to make a call to go more defensive this is a forecast that is still playing out. My June 2011 call that the Euro crisis could be managed in the near-term before likely worsening, proved to both be right in that it has been managed so far and to add to the theme of market risk rising in the future. Similarly, my March prediction in “Iran’s Nuclear Rubicon” that an Israeli or American attack would not happen unless Iran crossed a line in its weaponization program after the U.S. elections was confirmed in September when Israel’s Prime Minister drew a red line around Iran’s nuclear program at a U.N. speech. Although still not declaring the need to go defensive on stocks, my more recent postings “This Bull is on its Last Legs” and “Ill Winds Blowing” are further evidence of my concerns for market risk rising post 2012.

Several other blog posts I have written demonstrate that I believe the risks around the size and scope of another market downturn are significant. I stick by my August 2010 prediction that we are in a secular bear market for which I have coined the name the “Three Bears Economy” that will see three downturns, with one still to come, revolving around government debt issues. And that such a future downturn portends negative implications around: the future ability of Western governments to cushion economic pain with debt spending, long-term stability in China, keeping inflation moderate, avoiding a bond bear market, maintaining strong commodity markets and even the sustainability of the current monetary system in Bretton Woods II. In fact I have gone on record predicting the future demise of the current fiat money system and a return to hard money. A transition that will not happen overnight or without economic pain, but which I believe is likely to be driven by forces unleashed in the next downturn and will help set the stage for a sustainable secular bull market.

New Technologies to Drive a New Age

My outlook is indeed mixed, seeing the current period as fair, with bad to come and good to follow. My view remains that another major downturn, which will very possibly be the worst of the three, is likely to also set the stage for a new secular bull market. The repeating cycle of about a decade and a half of a secular bear market will soon transition to the approximately two decade secular bull market that very few will see coming. I also believe new technologies will play a powerful role in creating future wealth. This is a topic I have written on and will delve deeper into, but at the moment my expectation is for a manufacturing Renaissance to unfold in America based on a friendlier regulatory environment and new manufacturing and low-cost energy technologies. Some of those technologies, such as hydraulic fracturing, already exist.

Blog postings were not the first time I wrote on the economy’s potential for growth based on new technologies and government policy. My first viewpoint for EE Times in February 2009 was titled “Counterpoint: Stimulus package faces technology headwind.” Although my thesis that the technology environment was not conducive to strong economic growth and a stimulus plan that inefficiently allocated capital would not be able to drive such growth could be debated, my conclusion that the stimulus would fail to deliver such growth was vindicated. In keeping with the mixed bag theme of this post, since that viewpoint I have become more negative on the downsides of government deficit spending, including central bank balance sheet liabilities. But I have also become much more positive on the technology environment being conducive to creating strong, sustainable economic growth. This was a message I hit upon in my second EE Times November 2011 viewpoint “Assembling Economic Growth.”

My view that bad times to be followed by better investing times is ahead, is one I have spent much time and research developing. This is a theme that ties almost every investment blog post I have written together. I am staking a lot of credibility on this view for the simple reason that I honestly believe this to be our likely future. I would prefer good times to be ahead without any further economic pain or to be able to offer simple solutions. I simply do not believe these are simple or good times. Yet I do believe better times will unfold after the world experiences some more economic pain.

Looking Back

Along with looking to the future, I wanted to take a moment to look back. I would like to think as I get older, I am getting wiser in terms of understanding financial markets. A look back at my past predictions, when I was writing a regular column for Semiconductor Manufacturing Magazine from 2001 until it ceased publication in 2006, continues the theme of a mixed bag. On predicting the residential real estate market I likely had some of the most accurate print predictions made. On the other hand, my view on the bond market proved to be way off. With a professional bent for equities most of my predictions were on stocks, and I have tried to pick out below what I thought were my bigger predictions here and then evaluate their accuracy. There are certainly predictions I made that are not here, including model portfolio allocations, but this hopefully gives a look into the evolution of my thinking. 

2006

Prediction: “Trends are now forming that could lead to a significant price decline in the stock market—possibly sometime in 2007. I must emphasize, however that I remain positive on both stocks and the economy as we head into 2006.”–“The 2006 Rally and 2007 Crash,” January 2006

Outcome: After delivering strong returns in 2006 the stock market would make a top in 2007 and begin a bear market, however a truly steep decline would not take place until 2008.

2005

Prediction: “From the perspective of both stock market returns and economic growth, I expect the next 12 to 18 months to be much better than most people expect.”–“After the Storm,” November 2005

Outcome: The stock market as measured by the S&P 500 would rise over 25 percent over the next 18  months.

Prediction: “Today, with the yield on the on the 10-year Treasury having tested 45-year lows and with investors becoming increasingly complacent in the face of bearish developments, this [bond] bubble is ready pop.”–“The Bond Bubble II,” September 2005

Outcome: This prediction was a complete miss, as the bond bull market would continue.

Prediction: “While I am on the topic of timing, I’d like to modify the prediction I made last year that the real estate market peak would likely occur around 2006. Although I would not be surprised to see the start of a rolling-top in my original time frame, a truly painful decline might not begin until as late as 2008.”–“About the Timing,” June 2005

Outcome: This prediction proved to be very accurate.

Prediction: “Expect 2005 to be full of good surprises. Despite subdued outlooks for economic growth, expect the economy to show unexpected strength. Despite a poor showing last year for growth stocks, expect them to shine once again. Despite worries of a weak U.S. dollar, expect the American stock market to put in a powerful performance.”–“Getting Ahead of the Crowd,” January 2005

Outcome: 2005 would turn out to be only a marginally good, but definitely not a great year as the S&P 500 posted a very modest return of about three percent.

2004

Prediction: “Although I think risk levels in residential real estate are now very high, I also think that prices will go even higher and prove most of the experts (who think prices will only rise modestly at best in the near future) wrong again. I expect a top as soon as 2005 or as late as 2007 but most likely in 2006.”–“Nightmare on Main Street,” September 2004

Outcome: This prediction proved to be very accurate.

Prediction: “I suspect the Nasdaq is already in a secular bear market and over the long-term will produce disappointing returns. Yet, I also think the broad stock market, as measured by the S&P 500, will do just fine throughout the rest of the decade, thanks to other sectors like financials and health care.”–“The Rise and Fall of Tech,” July 2004

Outcome: This prediction was only half right, as both the Nasdaq and S&P 500 produced disappointing long-term returns and proved to be in secular bear markets.

Prediction: “Look for semiconductor equipment and other technology stocks to perform very well after a tough start for the year.”–“Another Hurrah for Tech,” May 2004

Outcome: Technology stocks as measured by the Nasdaq would modestly outperform the broad market for the year, but semiconductor stocks would be laggards.

Prediction: “Expect conditions for the economy and the stock market to get better and the good times to last longer than widely anticipated. Forget any worries about a semiconductor industry downturn starting in 2005. This is going to be a strong and broad-based global economic recovery that is only just now getting started. Expect even Europe to surprise with strength this year…. It would not surprise me in the least to see an over eight percent correction as early as the current quarter and I would be shocked if we got through this year without one. Given my current outlook, however, I would look on such a pullback as a buying opportunity.”–“Unintended Consequences” March 2004

Outcome: The recovery would last for several more years before the stock market reached a top in 2007. The stock market would also decline more than eight percent off its Q1 highs in Q3 before rallying strongly to finish off the year.

2003

Prediction: “Looking ahead to next year, my expectation is that stocks will continue to rise, but that it will not be as smooth of a ride as the one we have enjoyed coming off the March bottom.”–“Curves Ahead,” December 2003

Outcome: The stock market was indeed very choppy in 2004, struggling to stay positive until the S&P500 finished the year with about a nine percent gain off a strong year end rally.

Prediction: “With real reform beginning to take place at nearly all levels of Japanese society, I suspect Japan will post an unexpectedly strong performance over the next 15 years that will shock observers. In fact I believe that the odds are good that Japanese stocks will be among the strongest performers in the years ahead.”–“The Sun Also Rises,” October, 2003

Outcome: Japan would outperform the U.S. until the next bear market, but nine years into the 15 year period is currently trailing other developed nations in performance.

Prediction: “After stating at the beginning of the year that the bond market might see one last hurrah with a surprise cut by the Fed, and more recently recommending under-weighting bonds, I continue to urge investors to take their profits in bonds.”–“The Bond Bubble,” July 2003

Outcome: While it was a smart move in 2003 to underweight bonds and overweight stocks, the bond market was nowhere near a long-term bottom.

Prediction: “People should not be worried about a [Iraq] war this year. They should be concerned about the issue few folks are talking about—the costs of a long-term war effort years hence. After all the war in Vietnam started out small and took years to become a serious problem…. The risks in a war against terrorism and terrorists is that despite military victories, we will end up failing to win “hearts and minds” and become entrenched in far-ranging conflicts.”–“Don’t Worry Now, Worry Later” March 2003

Outcome: Unfortunately this turned out to be a very accurate prediction, as the Iraq war worsened badly after initial successes.

Prediction: “My current expectation is that the S&P 500 will easily post a double-digit percentage gain in 2003.”–“Year of the Bull” January 2003

Outcome: In 2003 the S&P 500 rose over 25 percent.

2002

Prediction: “I am still feeling bullish after reversing my long-held bearishness at the end of July. I now expect October to meet expectations for volatility and to surprise folks with strong gains.”–“Does October Hold a Surprise” October 2002

Outcome: October 2002 delivered in terms of posting both volatility and strong gains.

Prediction: “I believe the stock market hit bottom at the end of July.”–“Climbing a Wall of Worry” September 2002

Outcome: Stock market did put in an intraday bottom in July 2002, but this bottom would be tested in October 2002 in a double bottom pattern.

Prediction: “I expect the S&P 500 to be flat for the year as the performance of the economy confounds many and the semiconductor sector shows no real signs of strength in the second half.”–“Reality Check on Predictions” March 2002

Outcome: Defensive view on stocks was vindicated as the semiconductor sector would not show much in the way of strength in 2002, while the stock market did not even manage a flat performance, declining over 20 percent for the year.

2001

Prediction: “Earlier this year Samsung came out with a product that was more than a mere curiosity, the I300. As a cell phone with a Palm OS, it represents the convergence of two different devices—something that is especially noteworthy because the enormous cell phone market is not a niche as is the market for PDAs. With its web capability, the IS300 also represents the move to connectivity…. It will be the manufacturing, marketing and distribution muscle of global names like Samsung or Sony that bring convergence products, like Sony’s DCR-TRV30 with its ability to both record video and take quality still pictures, to consumers.”–“The Shape of Things to Come” December 2001

Outcome: A good prediction of the coming smartphone boom and drivers of consumerism, connectivity and convergence for the technology industry.