(03/22/12) Global Concerns for the Next Six Months

There are some signs of hope and some of worry, so it's important to stay focused, take advantage of the strengths, and avoid the weaknesses, writes Marc Johnson of The Investment Reporter.

We’re going out on a limb to make a 180-day forecast for the economy and stocks.

Just remember to put little faith in predictions, including ours. Predictions are the weak link in the investment process. As we noted last time, US billionaire Warren Buffett once said, “Stock market forecasters exist to make fortune tellers look good.”

It’s said that if you spend 20 minutes examining the economy, then you’ve wasted 15 minutes. With these caveats in mind, here are our expectations.

In 2012, Canada’s gross domestic product is expected to expand by 2%. One concern, however, is the sputtering of Canada’s job market. In February, Canada lost 2,800 jobs—the second consecutive month of weakness.

What’s more, the "quality" of the jobs deteriorated. The public sector lost 13,400 jobs, while the private sector lost 1,700.

The only thing that kept the job losses from looking worse was a rise of 12,300 jobs by the self-employed. The trouble is, such jobs often pay poorly and offer few, if any, benefits. Indeed, some people may prefer to say that they are self-employed rather than admit that they’re unemployed.

One bright spot is the US. Its GDP is expected to grow by 2.1% in 2012. And, unlike Canada, the US is creating lots of jobs. In February, non-farm jobs rose by 227,000. That follows job creation of 284,000 in January and 223,000 in December.

Other areas, however, are expected to do worse this year. The Eurozone’s GDP is expected to shrink by 0.6% in 2012. True, Germany’s GDP is expected to grow by 0.4% and Austria’s by 0.5%. But Greece’s GDP is expected to fall by 7.1%; Italy’s, by 1.6 percent; and Spain’s, by 1.4%. Even France, Belgium and Holland are expected to see their GDPs contract slightly.

And if the recent mistreatment of investors by Greece leads to too much distrust and suspicion, the Eurozone recession could become a lot worse.

Greece inflicted major losses on private bondholders. Its swap of new bonds for old ones cost investors €105 billion. That’s how much the country’s debt of €368 billion has fallen by—to €263 billion.

Private investors lost more than 70% of their money in the old Greek bonds. The European Central Bank, by contrast, lost nothing.

Naturally, investors distrust the new Greek bonds. They immediately plunged in price. As a result, the 11-year bonds now yield 13%. The 30-year bonds now yield 19%. Greece will find this distrust costly if it is ever able to issue bonds again.

Investors are likely worried about their Irish and Portuguese bonds. Both countries also received bailouts. They, too, may want to force investors to take a Greek-style "haircut." After all, some politicians would rather inflict losses on faceless investors than face angry citizens. Investors may also worry about the bonds of Italy and Spain.

We expect the loss of confidence to drive up the yields that any vulnerable Eurozone countries must pay. Banks may become reluctant to lend to one another. That’s because they don’t know how much each bank has lost and how much they may lose in the future.

If the Eurozone’s financial system ceases to function, then this year’s recession may get a lot worse. This, of course, would hurt stock prices worldwide.

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