Forecasting Crisis Year 2013

In the course of history, some of the great crises of the past were beyond the pale of human control. Other crises, however, were created by the very people who suffered the effects of them. The coming year could well afford a testament in how a “crisis of our own making” leads to economic destruction.

We have an excellent example of a created crisis in the ongoing fiscal cliff debate in the U.S. Congress. The debate centers on whether or not Congress intends to extend the Bush-era tax cuts or allow taxes on the middle class to rise in 2013. This is no small consideration, for if taxes are allowed to increase in the coming year it would mean almost certain death to the 4-year economic recovery. Investors would also likely suffer.

Even with a compromise that prevents middle class taxes from rising, the very fact that Congress is struggling with an issue as simple as this – namely, the truism that rising taxes in a recessionary environment are contractionary in nature – displays an appalling lack of understanding among our elected leaders. Is it any wonder that many Americans are fed up with the dearth of political and economic wisdom to be found in the nation’s capital?

Moreover, the ongoing fiscal cliff debate is another piece of evidence that the next major economic crisis is likely to be political in origin instead of financial. The previous crisis of 2008 was of course a financial event which began in the housing sector and extending to the credit market. Linear extrapolation leaves much to be desired as a market forecasting tool.

This is one reason why scientists and economists (who are the chief exponents of linear forecasting) often miss their predictions. But when applied to the realm of politics, linear extrapolation is one of the most accurate forms of prediction there is. This is because government and bureaucracy, by very nature, are imminently predictable. The men and women who fill the roles of elected officials aren’t forward thinking and are more apt to be reactionary rather than proactive. That is, politicians invariably respond to crises with after-the-fact remedies which rarely address the underlying causes of the crises and often do more harm than good. Because politics and bureaucracy move with all the speed of a glacier, you can see the trends emerging within this sector from miles away and easily predict what’s coming next.

The next major crisis will undoubtedly originate within government itself. Short-sighted politicians in European and Middle East countries have already shown the blueprint for engineering economic calamity in the face of a worldwide deflationary undercurrent. Even if the U.S. Congress manages to dodge the fiscal precipice in early 2013, there are myriad opportunities for them to wreak economic havoc in the coming year. Indeed, the temptation to embrace counterproductive policies in the hopes of stimulating the economy a’ la Europe is ever present. It would be surprising indeed if Washington manages to dodge a self-inflicted economic crisis in 2013, especially as the major yearly Kress cycles are all in the “hard down” phase until late 2014.

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Let’s now take a look at what some of the leading minds on Wall Street have to say about the 2013 outlook. Echoing our sentiment for a “crisis of their own making” in 2013, veteran market forecaster Bert Dohmen of recently observed:

“Materials stocks (coal, steel, iron ore, etc.) had a horrible 52% drop from early 2011 through the middle of [2012], but have been etching a bottom for months; they’re now working on breaking above their 200-day moving average for the first time since September 2010.”

See the SPDR S&P Metals & Mining ETF (XME) chart shown below: