The two biggest visible players on the economic front in 2012 are the teetering European Union and the US elections. It would seem like the Euro as a monetary unit is “date stamped” and will undergo some changes. It is just hard to imagine the hard working Germans will underwrite the Greek’s ability to retire with a full pension at the age of 50. The EU will likely remain intact as a political organization but the Euro will see some adjustment; either to a limited number of countries or possibly fail altogether. Financial Markets are generally factoring this in to their pricing already.
A lot of economic activity in the US and Canada will be “on hold” until it becomes clear which way the US election is going to go this November. If it is too close to call this will remain true throughout the year. If the outcome appears predictable, markets and businesses will react and plan accordingly. Depending which way the election goes, there could be a sharp upturn in economic activity by the fall.
China, India, Brazil, Indonesia, Russia and Argentina will increase as economic powers and lead the world out of recession. People are fond of saying that the China “owns” the US. This is partially true but not to the extent that people think. Of US bonds held, only 50% are held outside the US. Of those bonds held outside the US, only 50% are held by China giving them 25% ownership of US bonds. A potential limiting factor for China is the dualistic economic and political systems they currently operate. There will be another “Tiananmen Square” moment with unpredictable outcomes. A positive for China is the unprecedented growth of Christianity there.
Real Estate is by far the most undervalued asset around the world. Since the crash of 2007 the real estate markets have lost trillions of dollars of net value. In the US right now one in every four houses is underwater, meaning individuals owe more on their mortgage than what their home is currently worth. Though this is discouraging, these individual should tough it out and over time the value of their homes will rise again. This decline in value is squeezing home equity line of credits which is making it hard for new small businesses to start.
Currently one in seven mortgages in the US is in foreclosure. This will keep the house prices down for at least another year and maybe longer. It will take 5-10 years for Real Estate markets to get back to 2007 levels. This is the perfect time for individuals to get in to homes; currently home prices, construction costs and mortgage rates are all low. If you can manage this or help someone get into a property now is a great time to do this.
Energy is seeing some historic shifts as well. Energy companies are shifting away from politically unstable countries to invest in the more stable Western and developing countries. Lessons have been learned in places like the Middle East, North Africa and Venezuela, where turbulent economies and political changes have led to the loss of multiple billions of dollars of investment. Conversely, in 2011 the US became a net exporter of petroleum products, mostly refined gasoline and diesel. Canada has been a net exporter for years.
Is the world a very volatile, unpredictable place? Yes and some are predicting economic collapse. There will be economic changes to be sure. However, we must have confidence as Noah did that whatever is coming, God will prosper us on the other side.
All of the above is the author’s opinion and not investment advice.