Midyear Economic Outlook

2012 Economic Outlook

Lighthouse Growth ResourcesJune, 2012By Bill Bayer

2012- The Paradox Economy• For four months, it seemed like the

European crisis was solved, the US economy was recovering, and housing and employment were improving.

• But reality returned in second quarter• The UN-Recovery persists• And threatens Obama’s re-election

Copyright William W Bayer 2012

Two Conflicting Scenarios• An end to the recovery caused by

failure to resolve European crisis• Interest rates continue to fall• Europe and then rest of the world

start a new recession• Or the UN-recovery continues with

gradual improvements in the economy over the next 2-3 years.


If New Recession• Unemployment rises• Interest rates drop• Housing market stalls and

possibly declines again• Gold, energy and other

commodity prices drop further• The stock market declines sharply


If Continued UN-Recovery• Unemployment drops slowly• Interest rates stabilize and then

move upward as European crisis is resolved

• Housing market continues slow recovery

• Gold, energy, commodity markets and the stock market will move upward slowly but be volatile.


Agenda For Today• Interest Rates• Europe (by country)• Inflation / Deflation• Employment• Housing• Gold, Oil and commodities• The Stock Market• The Election• Outlook for Small Business & What to Do

NowCopyright William W Bayer 2012

Interest Rates

• Bond market has focused on European crisis and potential for global recession

• Record low LT US Bond Interest Rates• Under 1.50% for 10 YR Treasury

• Markets are ignoring LT inflation threat• Markets are saying that solution to

European debt crisis and eventual US Debt crisis will be very poor economic growth

• Possibility of Deflation


Interest Rates - f(x)• Perceived Credit Risk• Economic Growth Outlook• Inflation (Or Deflation)

Expectations• Confidence in Government/

Country’s Economy


GDP Growth by Country – 2012/2011

• Euro Area – (-0.10) / 2.40• Switzerland – 2.00 / 2.50• Germany – 1.70 / 4.70• France – 0.33 / 2.10• Greece – (-6.50) / (-8.00)• Ireland – 0.70 /(-0.20) (4th quarters)• Italy – (-1.40) / 0.80• Spain – (-0.40) / 0.80


Inflation by Country – 2012 / 2011

• Europe Area – 2.60 / 2.70• Switzerland – (-1.00) / (-0.70)• Germany – 1.90 / 2.10• France – 2.10 / 2.50• Greece – 1.40 / 2.40• Portugal – 2.90 / 2.70• Italy – 3.20 / 3.30• Spain – 2.10 / 2.40


Interest Rates by Country – Govt. 10 YR Bonds

• Switzerland - 0.54 / 1.63• Germany – 1.31 / 2.96• France – 2.56 / 3.33• Greece – 28.91 / 16.73• Ireland – 8.21 / 11.24• Italy – 6.04 / 4.79• Spain – 6.51 / 5.47• Portugal – 10.67 / 10.43


Other Large Nations – 2012/2011


CountryGDP

GrowthInflation

Interest Rates

United States 2.00 / 1.60 2.30 / 3.00 1.60 / 2.99

United Kingdom

0.00 / 0.50 3.00 / 4.20 1.65 / 3.25

China 8.10 / 9.10 3.00 / 4.10 3.34 / 3.89

India 5.30 / 6.10 7.23 / 7.50 8.33 / 8.24

Japan 2.70 / (-0.50) 0.40 / (-0.20) 0.87 / 1.15

Australia 4.30 / 2.30 1.60 / 1.80 3.07 / 5.17

Canada 1.80 / 2.20 2.00 / 2.30 1.78 / 3.00

Unemployment Around the World – 2012/2011 (1)


Country2012

Unemployment Rate

2011 Unemployment

Rate

Spain 24.44 22.85 Greece 21.90 20.70 Portugal 14.90 14.00 Ireland 14.30 14.30 Italy 10.20 8.90 France 9.80 9.80 United Kingdom 8.20 8.40

Unemployment Around the World – 2012/2011 (2)


Country2012

Unemployment Rate

2011 Unemployment

Rate

United States 8.20 8.50 Germany 7.40 6.60 Canada 7.30 7.50 Brazil 6.00 4.70 Australia 5.10 5.20 Japan 4.60 4.50 China 4.10 4.10

Inflation or Deflation?• Data from 2011 to 2012 indicates:

• Lower economic growth• Lower Inflation• Interest rates higher for RISKY countries

and rates have gone very low for “Safe” Countries.

• Risk of world-wide recession and potential deflation is significant.

• Deflation is brutal economic environment!


Slowest US Employment Recovery in 65 Years


Lowest Employment Population Ratio Since 1975


Construction Employment Down 29% from Peak


Employment is Still Only at 96% of Previous Peak


Small Business Hiring Plans are Improving


Missouri Unemployment is at 7.2% versus 9.8% Peak


New Home Sales Remain Below Previous LOWS!


Divergence of New Home Sales and Existing Home Sales


Home Prices Flutter Around +/- 5% Year Over Year Change


Home Price Index Still Off Over 30% From Peak


Real Housing Prices Have Declined Over 40%


And Look Like a Good Deal Versus Renting - BUT


Housing Market Conclusions• Houses look like a good deal, BUT• Have attitudes about housing changed?

• Many people no longer see rising housing prices as an excellent investment.

• Lack of price appreciation makes it easy for people to postpone purchases

• Mortgage availability is still tight and paperwork is punitive.

• Housing grows AFTER employment!Copyright William W Bayer 2012

The Markets• In 2012, Markets have been volatile• Up moves have been followed by sharp and

quick reactions• Difficult market for investors due to lack of

sustained trends• Tricky market for traders• Professionals and large institutions have lost

huge $ - Example JP Morgan• Overall returns are disappointing


Treasury Bonds – Prices Rise / Safety Haven Purchases


CRB Index (Inflation) has dropped sharply (24%) Since early 2011


Corn and Other Crop Prices have Moderated Or Are Falling


Slowing World-Wide Economic Growth has Caused Oil Price Decline


US Dollar has Rallied as Alternative to Euro and Due to T-

Bond Rally


Euro is Near 4 Year Low – What if The Lows Are Broken?


Gold Remains in Long Term Uptrend, But has Reacted to Support at 1525-1550


SP 500 has Dropped Sharply From April Highs – Topping? Or Rally Again?


The Election - Obama

• When the economy is poor, incumbent Presidents seldom win

• Obama’s handling of the economy has been weak.

• ObamaCare is unpopular• Favorable Press coverage and large

(and growing) Democratic(Entitlement) base favors Obama

• Obama states - 221 Electoral Votes


The Election - Romney

• Republicans, except for Reagan, generally run poor campaigns

• Romney’s communication skills are poor compared to Obama

• Romney needs to focus on key issues – economy, size of government, tax policy – And avoid emotional social issues (which are losers.)

• Romney states - 170 Electoral Votes


Election Forecast

• Obama needs 50 of remaining 147 Electoral Votes to Win; Romney needs 100

• Midwest, Colorado, Arizona, Florida, North Carolina are key to Romney

• Economic slowdown will tilt the election to Romney

• Romney wins a close one!


Small Business – What to Do

• Get ready to survive in slowing economy• Avoid risky investments• Round sales forecasts down, not up• Delay all non-sales hiring• Increase spending on effective marketing

and sales activities• Cut poor performers• Build liquidity – in Business and

Personally


If Economic Crisis Occurs

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

where-ever 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.


Closing Thoughts

• I still expect 2012 to be a good year.(I do not expect a Crisis.)

• If you made money in 2011, you should make about the same in 2012.

• Actively manage your business. Be alert.• Focus on improving your sales & marketing

functions• Refinance if possible (last chance?)• Cut marginal people – make this an ongoing

discipline


Economy & Finance

Midyear Economic Outlook