By Ross Kaminsky on 1.2.12 @ 6:09AM
Abroad and at home, it will be the year of a lifetime.
2011 was a year of worldwide turmoil and great change. I expect -- and to a certain degree fear -- that last year was the warm-up act to 2012 which, both internationally and domestically, seems likely to be one of the most consequential years in recent history.
Imagine a boulder which had been sitting atop a mountain for longer than anyone can remember suddenly being pushed off. That was 2011. Imagine the unpredictable turns, bounces, and destruction the boulder will cause as it hurtles down the mountainside toward its next, if not final, stopping point. That is 2012.
On the global scene, some of 2011's most significant events pose very different short- and long-term results. For example, the Arab Spring initially appeared to be a move toward freedom in an historically repressive part of the world but is now drifting toward other forms of tyranny. The Middle East remains likely to be the biggest source of turmoil in the coming year.
Egypt's long-time dictator Hosni Mubarak was removed in what was essentially a military coup given cover by both real and fake pro-democracy demonstrators. (By fake, I mean supporters of the Muslim Brotherhood and other Islamic groups whose goal is not democracy but rather immediate governance under Sharia law, followed by a continued regional push for a caliphate.)
It's not just Egypt where 2012 has the potential to be more significant and more bloody than 2011. Yemen, where al Qaeda has infiltrated in much the way that mold infiltrates inside the walls of an unlucky homeowner's dwelling, will be heading into a critical situation with their dictator of three decades, President Saleh, playing cat and mouse with his intentions to give up power while those who surround him work to make sure that they, rather than Islamists or democrats, fill the vacuum.
Libya, which is mostly off the news pages these days, is now seeing efforts by al Qaeda to recruit terrorist fighters. Libya's new government is probably strong enough to fend off the extremists, but nothing should be taken for granted except that people, including innocents, will die before the answer is truly known.
Libya's place in the news has been replaced by Syria, where Bashar al-Assad, the man who perhaps not coincidentally maintains Hitler-like facial hair, is following in his father's footsteps, ruthlessly killing civilians to protect his family's and tribe's power. The Assad family are Alawites, a Shi'ite sect of Islam which makes up about 12 percent of Syria's population of about 22 million, versus the three quarters of Syrians who are Sunni. In other words, Assad and his co-religionists recognize that if they lose power, they're likely to face intense reprisals from a large national majority for their years of tyranny. Assad will have help from Iran which wants to support the current Shi'ite regime both to assist in the mullahs' power projection into Lebanon and to maintain access to a major direct path into Israel. This, along with the fact that Syria's geography and western politics make NATO or other intervention unlikely, means that Assad will hold on longer and kill more people than Libya's Gaddafi did in his final months. The question will certainly be raised "If Libya was worth western involvement, then why not Syria?"
But the biggest problem in the Middle East will be Iran which, despite the incoherent denials by soon-to-be-ex-Congressman Ron Paul, is rapidly progressing toward the development of a nuclear weapon. In recent days, Iran has said they are ready to resume six-party nuclear talks while insisting that their nuclear ambitions are peaceful. The West may agree to these talks for two main reasons: France, Germany, and Russia make a lot of money trading with Iran. And Barack Obama along with Baroness Catherine Ashton, a Labour Party member whose résumé reads like a leftist's dream career and whose current title is "High Representative of the European Union for Foreign Affairs and Security Policy," will delude themselves into thinking that Iran is interested in honest discussion.
These people never learn. But Israel does. And one thing Jews have learned is that when the leader of a country says he wants to eliminate us, believe him -- he really does want to. Rumors have swirled for months of Israel's considering a pre-emptive strike on Iranian nuclear facilities. This is certainly part of the reason for Iran's most recent pretending that they're interested in multilateral talks.
The Iranians learn as well, and they remember 1981 when the American embassy hostages were released after 444 days in captivity at the very moment that Ronald Reagan took his first presidential oath of office. The Iranians were not afraid of the weak and anti-Israel Jimmy Carter and felt free rein to act while Carter was president. They feel the same way about Barack Obama. And why shouldn't they? This is a man whose first major foreign policy speech as president was given in Cairo and offered little more than reverence for Islam couched in an apology for the United States. This is a man who pulled all U.S. troops out of Iraq, leaving the Iranian mullahs laughing in delight at how the Great Satan could spend so many lives and so many hundreds of billions of dollars just to clear the way for Iranian regional hegemony. Iran knows that Barack Hussein Obama stands a real chance of, like Carter, being a one-term president and they are working as fast as they can to reach their multiple nefarious goals in Libya, Syria, Iraq, and their own nuclear weapons program.
President Obama's consistent projection of weakness and his obvious anti-Israeli views will invite Islamist and Palestinian adventurism until the inauguration of a Republican president a year from now. Given how rapidly things have changed in the Arab world in 2011, there is no reason to think that 2012 will be any less dramatic without the restraining force of fear of the United States which, thanks to Barack Obama, no dictator currently shares.
China will continue its goal of earning true superpower status by spending tens of hundreds of billions of dollars on enlarging and modernizing its military, especially its navy, while also embarking on an aggressive space exploration program -- just as America's space program retrenches under the twin pressures of reduced budgets and a less than enthusiastic president. China is not America's enemy, but throughout 2012 it will increasingly become a strategic competitor as its continues down its path toward controlling many of the world's commodity resources, particularly in Africa.
Elsewhere in the world, Hugo Chavez has cancer but, sadly, probably not a cancer which will kill him soon. Chavez has suggested that the US may be responsible for causing his cancer (and the cancers of other South American leaders). Thus, when Chavez calls President Obama a clown, it's hard not to think "it takes one to know one." South America will likely continue to be relatively quiet in 2012, with Brazil working hard to become an energy superpower.
Criminal paramilitary drug gangs in Mexico will continue to roil that nation's daily life and its government, with murder and mayhem spilling across the U.S.'s southern border. According to Forbes, the town of Ciudad Juarez, not far from El Paso, saw more than 3,000 murders in 2011, making it the murder capital of the world. A BBC News report notes that "Five years after President Felipe Calderon launched his crackdown on the gangs, there have been some 50,000 drug-related killings" in Mexico. (The report suggests there were only about 1,700 organized crime-related murders in Ciudad Juarez.) The Washington Post's study of murder statistics for 2010 gave Honduras the dubious top position: "Honduras had the highest per-capita murder rate in 2010 as Mexican drug cartels expanded smuggling networks into Central America. U.S. officials say the north coast of Honduras is the beginning of a drug pipeline to the United States."
With an Obama Department of Justice whose brightest ideas include getting our own agents killed with American guns through the criminally negligent "Fast and Furious" scheme, the U.S. will remain mostly dependent on Mexico's anti-cartel efforts which are led by men who range from committed to utterly corrupt. The violence that drug gangs are willing to commit to defend their profits will continue to spur a discussion over marijuana legalization, though high unemployment and the strength of Republicans who will not want to appear soft on drugs -- even if their insistence on prohibition causes more death and destruction than the use of marijuana does -- makes progress on this front unlikely in 2012, at least at the federal level.
SOME OF THE BIGGEST RISKS to international stability in 2012 flow from European financial weakness, both at the government level as well as within highly leveraged banks with major exposure to the sovereign debt of countries like Greece, Italy, Spain, Portugal, and Ireland.
The 2011 awakening of Europeans to the fact that their socialist, Keynesian spending habits and the mountains of debt those habits were accumulating are unsustainable was just the beginning of years of austerity (cutting of government spending) and deleveraging (governments, companies, and individuals attempting to pay down debt) which will crimp economic growth in the Eurozone.
It is to a certain extent a vicious cycle, with weak growth making it more difficult to pay down the debt load that is causing the weak growth. There are two very dangerous aspects to Europe's fiscal woes. One is that the failure, or even the fear of failure, of a major European bank will cause ripples throughout the West's financial system and markets -- including in the U.S. where our direct exposure to Greek debt, for example, is minimal, but our indirect exposure through ownership of debt and equity in major European banks is quite large. In 2012, Europe stands at least a 50/50 chance of a Lehman Brothers-like event, causing some period of time of freezing-up of debt markets accompanied by a brief but sharp panic in stock markets. The U.S. will be less exposed than Europe but we are not immune to the disease.
The other possible contagion from European economic weakness stems from the fact that Europe is the second-largest export market for American goods (after Canada), and the largest export market for Chinese goods. Sluggish European demand will translate into fewer exports and therefore fewer jobs and less tax revenue in the U.S. and in China. And fewer jobs and less wealth in China, even if Donald Trump might cheer it, will have large negative ripples around the world as that nation's burgeoning middle class becomes less able to buy Western products.
The fact that the U.S.'s debt situation is no better than that of most European countries makes it impossible for the U.S. to be of substantial direct aid to the Europeans, even if there were political will to go down that path. However, Americans should be wary of International Monetary Fund involvement in any European bailout. American politicians who are willing to risk our taxpayers' money to help profligate European governments but don't want it to appear they are doing so will call for increased IMF participation. Although deals can be structured in which nations' participation varies from their IMF "quota" -- the U.S. stake in the IMF is about 17 percent -- it is hard to imagine such modifications doing anything but increasing the risk to American taxpayers. According to a Wall Street Journal analysis of the IMF's involvement in bailing out Greece, "the U.S., Japan and big European countries are…financ[ing] a larger percentage of IMF funding than their quota would suggest."
FOR AMERICANS, IT IS LIKELY that European financial ills will be the most significant international story of the year even as many of us sit comfortably around our fireplaces, looking back on the incredible rollercoaster of 2011.
Financially, 2011 was indeed a remarkable year. That the S&P 500 index ended the year a small fraction of a point away from where it began the year masked one of the most volatile trading seasons in my more than 20 years of trading. From late July to mid-August, the market plunged about 18 percent, then went through two months of mind-numbing volatility, before staging a 15 percent rally during the historically terrible month of October. Late November and early December saw a sickeningly rapid 8 percent fall in a matter of days, followed by a just as rapid recovery, leading into a relatively tame last few weeks of the year.
Given the risks from Europe as well as Iranian sword-rattling regarding blocking the Straits of Hormuz, through which 20 percent of the world's entire oil supply is transported, continued market volatility appears likely. Adding in the fact that the outcome of the 2012 U.S. elections appear far from certain, investors should not be lulled into complacency by periods of stock market quiet.
While most "retail" investors don't spend as much time thinking about bonds as about stocks, the bond market is far larger than the equity market, and its performance in 2011 was truly remarkable: the interest rate on the federal government's 10-year note dropped from an already hard-to-believe level of about 3.75 percent to end the year at less than half that level, roughly 1.87 percent, offering fantastic mortgage refinancing opportunities to those few Americans who can still convince a lender to give them a loan and whose home isn't worth less than the mortgage amount.
The bond market's message is (at least) two-fold: First, excess capacity in our economy (in terms of factory capacity utilization and current unemployment levels) are leaving investors with no fear of inflation despite near-zero short-term interest rates and the nose-bleed heights of the Federal Reserve's balance sheet. Second, investors are afraid of many other investments, something also seen in the 10 percent rise in the price of gold in 2011 -- although it ended the year far off its highs somewhat mirroring gains in the U.S. dollar as the Euro weakened.
If, and it's a big if, Europe seems on a path in 2012 to find a graceful way to deal with its long-term issues, the fact that the U.S. economy is performing modestly well means that bond investors are taking tremendous, almost dot-com-bubble-like risks loaning money for ten years at under two percent. Little stands in the way of a major bond market sell-off, especially since doubling current interest rates would still leave them quite low by historical standards. Such a sell-off would do great damage not only to the stock market but also to the financial situation of the U.S. government, which has to "roll over" debt on a regular basis. If interest rates rise substantially, forecasts for U.S. deficits and debt will explode along with them, causing both political and financial turmoil.
AND LAST BUT CERTAINLY NOT LEAST, 2012 promises to bring the most important election in recent American history. President Barack Obama has given Americans the clearest view since FDR -- who turned a serious recession into the Great Depression with the exact same approach to business, economic liberty, and financial markets that Barack Obama now holds -- into what Progressivism really means.
It means nothing more and nothing less than a tyranny of the bureaucracy, with the piling on of elected officials who think that Americans are too stupid to make their own decisions, that the constitutionality of a law is not "a serious question," and that it's just fine to pass perhaps the most expensive law in world history so that people can then find out what's in it.
It is difficult to imagine that people (other than members of public sector unions) will look at their ballots this November, see the name Barack Obama, and say "sure, let's do that again." But difficult and impossible are not the same thing, especially with Obama and unions aiming to spend a billion dollars on his reelection.
Changes in the Republican nominating process, giving delegates proportionately in early states rather than a winner-take-all system, means that the GOP's nominee may not be known until mid-spring. This is not all bad news for Republicans. On the one hand, it is reasonable to fear the damage Republicans may do to each other, including to the eventual nominee, in a hard-fought primary season. On the other hand, having a battle-tested nominee bodes well for the sure-to-be-brutal fight against Barack Obama and his henchmen. Furthermore, a spirited Republican contest keeps Barack Obama somewhat out of the news, reinforcing the idea that he is barely competent and simply not a leader while giving compelling evidence against the left's usual talking points that the Republican Party is one of no ideas.
President Obama can't and won't run on his record. Instead, he'll have a two-pronged approach: First, he'll try to divide the nation along economic lines, the "millionaires and billionaires" or "the 1 percent" against the rest of us. Second, he'll argue "it would have been worse." But the first of these approaches is (like Obama himself) fundamentally against the nature of American thinking. And the second of these approaches cannot withstand the exact same question Ronald Reagan asked in 1980 when running against Jimmy Carter: "Are you better off than you were four years ago?"
Current betting odds (at Intrade.com) give Barack Obama about a 51 percent chance of re-election, along with a 75 percent chance that Republicans take control of the US Senate and a 68 percent chance that Republicans keep control of the House of Representatives. The surprisingly (to me) low odds on a Republican House are a reflection of Congress's abysmal approval ratings and a suspicion that the election may be as much anti-incumbent as anti-Democrat.
In the 2012 elections, unemployment and economic growth will be the key issues (unless we're in a shooting war with Iran). But Obamacare won't be far behind in people's minds even if the "mainstream" media will refuse to discuss it. Republicans should and will campaign on repealing Obamacare, including getting women (who tend to support Democrats more than men do) to fear loss of availability, affordability, and quality of health care for them and their children. Repealing Obamacare may require a filibuster-proof majority in the U.S. Senate (and will require a Republican president) unless the next president can convince the one or two so-called "moderate" Democrats who may remain after the 2012 elections to go along with the repeal.
Democrats currently hold 23 of the 33 Senate seats up for contest this November and seven of those are retiring, explaining the high betting odds on a Republican majority next year. But a majority is not the same as having 60 votes to overcome a filibuster. Even if Republicans do a good job of convincing voters to support Republicans for the Senate, repeal of Obamacare might not be possible until after the 2014 elections, by which time most of its horrendous provisions may already have been enacted. It is not out of the question, especially given the Democrats' reprehensible willingness to change or ignore rules to shove Obamacare and other legislation down the nation's throat, that Republicans will take the good-for-the-goose position and find a way to repeal Obamacare in a way that is not subject to filibuster. We can only hope, but even doing that will require a very strong Republican performance in this November's elections, including a big enough win for the Republican candidate for president that Republicans can credibly claim a mandate to eliminate the cancer that is Obamacare.
Prior to the elections -- probably in June -- the Supreme Court will issue a ruling on the constitutionality of major provisions of Obamacare. Arguably there is no good outcome for Barack Obama here: If the Court strikes down Obama's "signature" legislation, voters will remember not only that Obama, former Speaker of the House Nancy Pelosi, and Senate Majority Leader Harry Reid used one dirty trick after another and spent more than year of Congress' time to pass an unconstitutional, unpopular law which would then lie, as it should, on the ash heap of history. And if the Court refuses to strike it down, the GOP will have a powerful campaign issue arguing to elect enough Republicans to repeal the law.
In the Rasmussen Reports series of polls going back to March, 2010 asking likely voters if they favor repeal of Obamacare, only once has the number been below 50 percent, and that one data point appears to have been an error, with polls a week before and a week after both well over 50 percent. There will rarely have been as anticipated a Supreme Court decision as this one, and for good reason. Obamacare is not just about health care. It is about the nature of the relationship between American citizens and our government, about whether the United States of America remains the nation that Madison, Jefferson, Hamilton and Washington and our many other Founders pledged their "lives, fortune, and sacred honor" to create. It is about whether Americans agree with Barack Obama that our nation needs to be "fundamentally transformed."
Below the federal level, Democrat governors in big blue states including California, Illinois, and New York -- each of which has behaved dangerously similar to Greece for many years -- will have to try to deal with collapsing state finances while somehow figuring out how to pacify the union base of their political support. Public sector unions are wholly incompatible with good government and good state finances, but they remain the keystone for Democrats' elections that should leave Jerry "Moonbeam" Brown, Pat "Tax Hike" Quinn, and Andrew "I acted conservative for two months" Cuomo in quite a quandary.
In Wisconsin, Governor Scott Walker, champion of putting unions back on a leash, will face a recall election. Given the tremendous benefit to municipal finances through the changes he has implemented, I predict a landslide re-election for Walker. (For example, prior to Walker's changes, teachers' unions could force school districts to buy overpriced health insurance from insurance companies owned by the unions.) The Orwellian-named Government Accountability Board said in December that it will allow the signatures of Mickey Mouse and Adolf Hitler on the petitions to recall Walker "as long as they are properly dated and include a Wisconsin address." There's no such thing as a fair fight when unions are involved, all the more reason that supporters of good government should endeavor to kneecap public sector unions' finances and influence (if you will pardon my redundancy) across the nation in state and local elections in 2012.
An Obama victory in the 2012 elections would cause stocks to decline and economic growth to slow. And while election results in 2012 might not bring the same chaos that events in Europe or the Middle East seem likely to rain on our heads this year, they remain just as important not just for the future of America but for the entire world. A poorer, weaker America -- which Barack Obama manifestly desires -- will interact and lead differently than a rich, growing, strong nation would, even as we move wisely if glacially away from the "foreign entanglements" that George Washington warned us against in order to follow the political and economic equivalents of the Bible's exhortation "Physician, heal thyself."
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To read another article by Ross Kaminsky, click here.
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