Conventional Outlooks For The New Year Will Likely Be Incorrect

The New Year is usually a time for ebullience and high expectations. Human beings tend toward optimism. And why not? For most of us, our lives have been better than our parents as theirs were also. Along the way everyone experiences bumps in the road, occasional setbacks. These are usually overcome. That we can pick ourselves up from such events reinforces the belief that the future will be better than the present or the past.

But what if this kind of thinking no longer holds?  Suppose that extrapolations of the past were no longer relevant. After all, there is no guarantee that things get better. They have in the US as a result of institutions and technological advances. These were nurtured by a relatively benign government, at least for much of our history. Other countries have not had the institutions and government conducive to progress and improvement in living standards. If our institutions and government have become less favorable toward enterprise and commerce, why should we be any different than third-world countries, at least in the longer term?

Changes in institutions and government are not typically taken into account by economists and their mathematical models. The underlying basis for most forecasts is extrapolation. That is why economists almost never catch turning points in the economy. It is also a problem for pundits in financial markets. Neither of these two learned groups saw the economic crisis coming.

Things have changed in the economy. These changes have affected institutions. Government has been hostile to business and shows no signs of recognizing the damage it has done. Under such conditions, it is inappropriate to extrapolate past performance forward at some normal rate. Ditto for financial markets. All mathematical models failed to spot the crisis coming and cannot properly estimate the behavioral changes that have been imposed via government. Forecasting, always dangerous, becomes especially so under such conditions.

Will 2012 be a good year for the economy and financial markets or not? Here are two opinions that say no!

Bob Chapman expects a dire new year:

2012 is going to be quite a year with falling economies in the UK, Europe, the US, China, Japan and the remainder of Asia. Latin America, and Mexico by comparison should fare fairly well overall. England is in a death spiral. Europe is next, the US is not far behind and China and Japan will soon join the disjoined group. We are about to witness the end of the period that developed since the end of WWII. That is economically, financially, socially and politically. The transition into the future is going to be borne out of chaos. If you have any doubt just look at the recent legislation passed in the US allowing the president to pick up and incarcerate, torture or murder dissidents. Americans will be labeled terrorists for any reason government decides.

Mish is not quite as gloomy, but he is not at all optimistic. He sees the sovereign debt crisis escalating and believes:

Hiding places will be few and far between for much of 2012.

Both of these views are different from the typical CNBC hype and the political propaganda. Both are worth reading, if for no other reason than to widen your perspective on what could happen.