The same trends that have defined the global economy for much of the last two years will remain in place in 2012, says hedge fund manager Mark Dow of Pharo Management, who recently shared his outlook with us.
Specifically, countries and consumers still have way too much debt, and their efforts to reduce it will constrain spending and GDP growth in Europe and the U.S.
Europe's sovereign debt crisis will also continue to plague the markets, Dow says. Last week's much-ballyhooed "summit" didn't solve anything. The trouble in Europe is that inefficient countries in the south are being forced to work on the same currency as the more efficient countries in the north, and the inability of the southern countries to depreciate their currencies is making their economies less competitive. This, combined with the weak global economy, is leading to big budget deficits, higher borrowing costs, and, increasingly, a debt crisis. And nothing the EU leaders agreed to last week, says Dow, will solve that.
In fact, says Dow, Europe is "like a drowning man bobbing to the surface." Each new breath provides hope that the situation is finally under control. But in reality it just brings us one step closer to Europe going down for the last time. (See: Europe Is "Like the Drowning Man," Dow Says: Policymakers Fix Engine on Car with Faulty Breaks)
And what about commodities? And the dollar? Will the Fed's frantic money-printing drive commodity prices through the roof?
Not in 2012, says Dow. Most people still misunderstand the impact of the Fed's "money-printing." What the Fed is really printing is bank credit, and because consumers and companies are still trying to reduce debts, not borrow more, this money is remaining as bank credit. And it is therefore not finding its way into the economy and reducing the value of existing dollars (see chart here).
In other words, get ready for another mediocre year.