I expressed in my list last year that many of those who were expressing the most extreme levels of optimism for 2011 were the most wrong-footed three years ago and experienced not inconsequential pain in the last investment cycle.
Back in 2008-2009 and again last year (but to a far lesser degree), many investors appeared similar to victims of Plato's allegory of the cave -- a parable about the difficulty of people who exist in a world shaped by false perceptions to contemplate truths that contradict their beliefs. This is why so many investors were blindsided by the last economic downturn and, from my perch, continued to remain conditioned to wearing rose-colored glasses in 2011.
In the famous simile of the cave, Plato compares men to prisoners in a cave who are bound and can look in only one direction. They have a fire behind them and see on a wall the shadows of themselves and of objects behind them. Since they see nothing but the shadows, they regard those shadows as real and are not aware of the objects. Finally one of the prisoners escapes and comes from the cave into the light of the sun. For the first time, he sees real things and realizes that he had been deceived hitherto by the shadows. For the first time, he knows the truth and thinks only with sorrow of his long life in the darkness.Last year's surprise list achieved about a 50% success ratio. Forty percent of my 2010 surprises were achieved, while I had a 50% success rate in 2009, 60% in 2008, 50% in 2007, one-third in 2006, 20% in 2005, 45% in 2004 and one-third came to pass in the first year of my surprises in 2003. My surprise list for 2011 hit on some of the important themes that dominated the investment and economic landscape this year. Below is a list of some of my accurate surprises from last year's list.
- Markets: As discussed previously, the market was practically unchanged in 2011, and the year's range almost perfectly coincided with my No. 4 surprise. Also, group performance surprises were fulfilled -- for instance, "During the second half of the year, housing stocks crater, and the financial sector's shares erase the (sector-leading) gains made in late 2010 and early 2011." I also was correct in expecting asset managers' shares to fall lower and underperform.
- The U.S. economy: Real GDP in the U.S., as I expected, was disappointing at about half consensus growth expectations. Screwflation of the middle class was a dominant theme, and I incorporated screwflation in my surprise list and in a Barron's "Other Voices" editorial in June. Americans, I thought, would remain in a foul mood, as the jobs and housing markets failed to improve to the degree expected by most. My surprise of social unrest was also realized around the world -- over there in the Arab Spring and over here in the Occupy Wall Street movement.
- The European economy: Over there and as I suggested a year ago, "multiple country austerity programs moved Europe back into recession by year-end 2011."
- China's economy: I wrote that "China continues to tighten, but inflation remains persistent, economic growth disappoints and its stock market weakens further." All happened.
- U.S. politics: I wrote "increased hostilities between the Republicans and Democrats become a challenge to the market and to the economic recovery next year. As the 2012 election moves closer, President Obama reverses his seemingly newly minted centrist views.... The resulting bickering yields little progress on deficit reduction. Nor does the rancor allow for an advancement of much-needed and focused legislation geared toward reversing the continued weak jobs market." Trust in our leaders was indeed lost throughout 2011 -- approval ratings hit an all-time low during 2011 for Congress) and for the president -- and political gridlock and inertia adversely impacted sentiment as confidence figures plummeted by late summer.
- Republican presidential candidate: Mitt Romney, as expected, is the Republican Party's presidential frontrunner (but Ryan and Thune never were in the fray).
- Commodity prices: Throughout the year, "the rise in the price of commodities was one of the primary market themes and concerns."
- Gold: I was correct in expecting volatility in the price of gold but very wrong in the direction of the price of gold when I wrote, "The price of gold plummets by more than $250 an ounce in a four-week period in 2011 and is among the worst asset classes of the new year. The commodity experiences wild volatility in price (on five to 10 occasions, the price has a daily price change of at least $75), briefly trading under $1,050 an ounce during the year and ending the year between $1,100 and $1,200 an ounce."
- Takeovers: Though Microsoft (MSFT) has not yet made a bid, my Yahoo! (YHOO) deal surprise turned out to be materially correct. "Among the most notable takeover deals in 2011, Microsoft launches a tender offer for Yahoo!.... The private equity community joins the fray."
- Internet as the tactical nuke of the digital age: "Cybercrime likely explodes exponentially as the Web is invaded by hackers." Dead on, as serious hacking incidents are occurring with increased frequency.
- Expanding insider trading charges: It was a record year of insider trading indictments and convictions, from Raj to many other ne'er-do-wells (including research network consultants, hedge funds, corporations and even a member of the board of directors of Goldman Sachs). "The SEC's insider trading case expands dramatically, reaching much further into the canyons of some of the largest hedge funds and mutual funds and to several West Coast-based technology companies." (Some of us even learned this year for the first time that Congress is legally permitted to be in the insider trading game!)
- Though the price of gold was volatile (and did sustain quick $200-per-ounce drops), it did not fall and was among the best asset classes in 2011.
- There was no military confrontation between China and India over water rights.
- The price of oil didn't soar to over $125 a barrel.
- The yield on the 10-year U.S. note did not spike to 4.25%.
- Food and restaurant stocks were not among the worst-performing market sectors.
- Hillary Clinton and Joe Biden did not switch jobs, though Clinton is resigning her post as Secretary of State.
- While Speaker of the House John Boehner's tenure has been uneven, he was not replaced by Paul Ryan.
- A third political party did not appear (though it is never too late!).
- There was no peaceful regime change in Iran.
What Is Consensus for 2012?As we enter 2012, investors, strategists and talking heads are again grouped in a narrow consensus, but, in contrast with last year's almost universally bullish views on the economy and on the U.S. stock market, the consensus is far more downbeat, reflecting near universal acceptance of Pimco's Bill Gross's " new normal" of de-leveraging, de-globalization and re-regulation. Again, let's use Goldman Sachs' principal views of expected economic growth, corporate profits, inflation, interest rates and stock market performance as a proxy for consensus. Below are Goldman Sachs' forecasts for 2012:
- 2012 U.S. real GDP up 1.8%, and global GDP up 3.2%;
- 2012 S&P 500 operating profits of $100 a share;
- year-end 2012 S&P 500 price target at 1250;
- 2012 inflation of +1.7%; and
- 2012 closing yield on the U.S.10-year Treasury note at 2.50%.
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