Bill bayer 2013 economic forecast

2013 Economic Outlook

Lighthouse Growth Resources
January 17, 2013
By 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 • It wasn’t. Election noise,
times dysfunctional government, fiscal
cliff nonsense
• But it could start the • President and Congress kicked
worst of times the can down the road
• Will we muddle through • Slow GDP growth
with the Un-Recovery • Stubborn unemployment
(75%) • Cautious businesses
• Or have a major • Did not happen. But publicity
economic crisis with the since the election brought out of
potential failure of the control US spending to the
world economic system. forefront.
(25%) • Will US deal with the issue?

2012 Forecast Result – End of
2012 Expectation
Forecast Result
• Un-Recovery will • Correct.
continue but a somewhat
better than 2011
• European crisis & • Correct
Election will cause
periodic market drops
and recession fears
• By end of year, expect • GDP grew about 2.3% in 2012.
stronger economic • Unemployment fell to 7.8%.
growth, higher • Government bond rates rose to
employment and higher 2.4% in March but finished at
interest rates. 1.8%, same as end of 2011.


2012 Forecast Result - Housing
Forecast Result
• Continuation of • Price growth in most markets
moderate recovery in but some key markets still not
prices improving. Up 4.3% to 5.0%
• Forecasts of strong • Existing sales up; New home
recovery in housing sales flat. Both far below 2006
starts is wishful thinking peaks. E=(-31%),N=(-72%)
• More strength to begin in • Ridgley Woods Indicator had
upper part of market fantastic year.

• It will increasingly be • Government and most prominent
accepted that housing economists have not adjusted to
market will not lead the reduced role of housing in our
recovery economy. Housing index at 34%
of peak

2012 Forecast Result
-Commercial Real Estate
Forecast Result
• Stronger market than • Slight improvement(up 1.1%)
2011. Expect prices to Vacancies down but still at high
be stable or grow slightly level
• Apartments very strong

• Investment in low- • Opportunities dried up by
leveraged cash flow second quarter.
positive opportunities will • Long term payoff contingent on
have good payoff over US avoiding financial meltdown.
next 5-10 years


2012 Forecast Result –
Employment
Forecast Result
• Employment will • Unemployment rate declined
continue to grow slowly slowly and ended year at 7.8%

• We will not return to • Still true
employment levels of
2007 for many years
• Businesses will struggle • Still true
to find qualified workers

• Unemployment rate will • December unemployment rate
decline to 7.5% to 8.05 was 7.8%
by end of year

2012 Forecast Result - Energy

Forecast Result
• Energy prices will stay in • Range for year was $80-113
range around $100/brl.
• If eco growth is strong, • After economy slowed in
oil will stay over $100/brl summer, oil stayed < $100
• If weaker economy, oil in • True: Range since July was $80
$80-90 range to $100 per barrel
• Election will influence • True. Example – Canadian oil
energy policy and LT going to China while East Cost
energy supply imports oil due to lack of
pipeline
• High dividend oil stocks • Exxon - $78-93, div = 2.55%
still good investment • Con/Phillips – $50-60, 4.47%

2012 Forecast Result - Economy

Forecast Result
• GDP growth of 3.00% to • 2.6 percent through 3rd quarter.
4.00% Probably about 2.4% for year
• Core Inflation of 2.00 to • About 1.70%
3.00%
• Higher long term interest • Up early in year but finished flat
rates to 2011 year-end
• Slightly higher short • Still near zero due to more Fed
term interest rates Reserve easing programs
• Dollar stronger due to • Dollar about the same.
high rates & Europe • Euro weak early in year,
issues finished strong; ended flat to YE
2011

2012 Forecast Result – US Dollar

Forecast Result
• US Dollar will compare • Finished 2012 near 2011 EOY
well vs. Euro and other level. Was strongest in summer.
more risky currencies
• Dollar should remain • True
strong as hedge to
European debt issues
• US Election is key. If US • Too soon to tell. Dollar has not
starts to address debt moved since September
issues, dollar will remain
surprisingly strong. If
not . .


2012 Forecast Result – The Markets

Forecast Result
• US will remain the world’s • Still true. Each crisis causes rise in
choice for safety since US Treasury Bond prices
is still perceived as safe. • US still “safer” than the world
• Stock market – trading • Range 12,221 to 13,661. Ended
range with upward bias. year at 12,398, up from 12,218 at
beginning of year.
Range from 10,500 to
14,000.
• Interest rates stable • Up a bit early in year. Dropped
early, increase late in year 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 • Grew 7.4%; India grew 5.3%.
outgrow US, Europe, • Japan grew 0.5%; US 2.4%
India and Japan • Euro area down (-0.60%)
• But China’s long term • True. Some social unrest.
issues will start to • Demographic issues.
become known • Political change coming
• Walmartization or China- • Highly automated manufacturing in
fying the US will begin to the US is growing.
end • Some move from Walmart to Target,
etc.
• China’s modern long • True
term issues will begin to • Ironically, they have their own
challenge their culture version of class warfare – culture
and system conflicts

2012 Forecast Result – Election
Forecast Result
• Mitt Romney will win the • Correct
Republican nomination
• Race will be over by • Correct
May 1.
• Romney will defeat Obama • Wrong. Obama won 50.6 to 47.8
with 53% of popular vote
• Republicans will increase • Wrong and Wrong. Democrats
seats in House and Senate increases seats in both houses
• Stock market will rally into • Rallied 12% from 1/1/12 until the
the election but decline in election
November and December • 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 • If not – fix your business. It is not
money in the Un-Recovery the economy’s fault
environment

• Government interference • True – more nuisance paperwork
will increase than I have ever seen in 35 years
of business
• Business climate in 2012 • True – and 2013 only marginally
will be similar to 2011 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 beyond


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!

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 2 half
nd

• 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 W Bayer 2013
Copyright William 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.

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 Hodges
Oasis Outsourcing

February 21, 2013

Bill bayer 2013 economic forecast

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