I tend to believe that we will still give investors false hopes until mid 2012 before the real capitulation occurs. Perhaps the doomsday forecast of the end of the world which coincides with the end of the Mayan Calendar could come true! Most OECD countries could still count on QE because inflation rates are still low, at around 2 - 3%. In the UK, it is already at 4%. But when hyperinflation sets in by mid to end 2012, even monetary policy is out. Money printing always benefit only a small group of people. The investors, the entrepreneurs. Most employees will suffer as wages cannot keep up.
From 2H 2012, stocks will rely on the economic data. I believe austerity measures will continue to bite in the EU. They may be in worse shape than they are now. Just think. All this money printing will only devalue USD and EU against Asian currencies. The EU and US will need to import all sorts of goods, from raw materials to manufactured goods. Rising cost of imports will hit the Europeans and Americans. Wages, which comprise 60% of their inflation indices, will fall, but other parts of the indices will rise at a faster rate than the drop in wages. It will push inflation up to around 4 - 6%.
I don't have a good feel about China's economy. It may land harder than in 2008 because this time, the scope for credit expansion on government investment may not be as great. There will be more reliance on private investments this time and it probably cannot cover the gap left by the government. By mid to end 2012, the US' unemployment rate may have dropped to below 8%. Obama may survive the second term by the skin of his teeth. It may be Newt Gringrich of the Republicans if the US economy continues to fall. But sometime around Nov 2012 and beyond, we could see another dip that will take stock markets down to 900. That will be the 3rd wave that Prechter talked about. It could dip below 900 to 800 even.
Don't forget that the demographics of OECD is not favourable. They will have hundreds of millions of baby boomers retiring in the decade of 2010 - 2020. Pension funds will sell stocks desperately and become insolvent. Governments will step in to fund the shortfall. They will print more money until money becomes worthless. But to fund the pension, they will have to cut social welfare, infrastructure and education. This will cause the young, unemployed to riot. If they cut pensions, the old will protest, although they will be less violent because they are weak! It will be such a dreadful decade for the western world.
Growth is only found in emerging Asia. The stock markets could bottom out in 2013, starting with emerging markets equities. My advice is to stay very safe, very diversified. I think Singapore residential property may not even recover until 2014. We may see it fall 20 - 30%. Frightening thought. I haven't even talked about my worst case scenario, which relates to the end of the Mayan Calendar!
