Appreciating Property Markets And A Solution To The Euro Crisis--What We See Coming In The Year Ahead

Jan. 7, 2013, Chiang Mai, Thailand: Paul Terhorst predicts the start of a solution to the euro crisis and appreciating U.S. property and stock markets in 2013.

Dear Live and Invest Overseas Reader,

In predicting 2012 last January I said, "I've been investing for 40 years, and I've never seen a tougher call."

So naturally I went ahead and nailed nearly all my predictions.

I said the stock market would go up, and it sure did go up. We had a terrific year. In the United States, the S&P 500 climbed 13%, the NASDAQ a whopping 16%. International markets did nearly as well.

Dividends largely cover inflation these days, so those numbers amount to real returns. Since the stock-market bottom in March 2009, the NASDAQ has climbed almost 140%.

I said energy costs would rise. During the year, the oil price shot up, then fell sharply, then nearly recovered by year-end.

I predicted a tough time for Europe but that the euro would survive. I went out on a limb on this one; most observers predicted the euro would disappear or that some countries would leave the eurozone. Instead European leaders bought euro bonds without limit, avoiding a crisis.

I predicted Obama would win the election, and that Congress would remain gridlocked. In the event, the House stuck with Republicans and the Senate with Democrats.

Finally, I saw a grim economy with slow growth. The U.S. economy grew by only 2% for the year, almost costing Obama the election.

Looking forward to 2013 I find a much easier call: We should get more slow growth and a slow improvement in living standards. I'm slightly more optimistic than most. The consensus estimate for 2013 growth comes in at a weak 2% growth, same as 2012. I think we'll do better than that. I believe a better real estate market and an expanding China will propel us to better numbers. Still, we have a ways to go before returning to the 4% or 5% growth we've seen after other recessions.

Unemployment will finally fall next year, although we'll end the year well short of pre-recession levels.

With regards to the stock market, I predict a strong up-market over the next two years. I'm skipping my one-year prediction because of the presidential cycle. Presidential cycles show that in the two years after an election year--2013 and 2014 in this case--markets typically sputter. A strategy of selling on Dec. 31 of an election year and buying back two years later in October (October 2014 in this case) would "have sidestepped practically all down markets for the last 60 years." See article here by Marshall Nickles or Google similar studies.

Should you sell now and buy back in October of next year? I figure it's not worth the bother. Rather than try to time a sell and later buy back, just stick through good times and bad. If I'm right we'll be better off by the end of next year (2014), exactly where we want to be.

Meanwhile, while stocks should do well over the next two years, U.S. real estate should do even better. In late 2012, U.S. real estate started to move up again, and big players continued to buy foreclosed properties. Blackstone Group shrewdly spent some US$1.5 billion buying 10,000 foreclosed single-family homes. Chairman Steven Schwarzman says, "This is the kind of thing that happens once--every once in a while, where you see something that's a market-turning trend, and we are loading the boat."

If you're thinking of buying a home in the United States, I'd say now is the time.

Washington think tanks predict either Israel or the United States or both will attack Iran in 2013. I'm more skeptical. I doubt we'll see an Iran invasion this year.

The eurozone will continue to struggle. Its leaders will continue to kick the can down the road. The region entered into recession in late 2012 and will underperform in 2013. Europe's leaders will again fail to take the tough, forceful steps necessary to put things right.

Jim Paulsen, of Wells Capital Management, pointed out last summer that the term "crisis" no longer applies to Europe. "The ongoing European saga has become less a crisis than a chronic problem. No solution is in sight--indeed, 'time' may be its only solution--but after two-and-one-half years, its status hardly any longer qualifies as a crisis. The essence of a crisis is 'surprise' and a lack of time to either understand or vet the possible, probable, and even improbable outcomes. Now in its third year, the eurozone long ago left the crisis stage."

Paulsen goes on to compare Europe to Japan's zombie economy of the 1990s. Eurozone problems will likely flare up again next year, but the rest of the global economy should improve, with Europe unable to join the fun.

I suspect we'll finally see the outlines of a solution to the euro crisis, perhaps after the German elections in September. The euro crisis was never about Greece itself, but all about contamination. Germany and France worried that if Greece defaulted and left the eurozone, other weak countries, including Spain and Italy, Portugal and Ireland, might have real trouble selling debt. I predict that eventually Spain and other weak countries will strengthen and the problem of contamination will go away.

That will leave Greece isolated as the underperformer, beyond hope for recovery. At that point Greece will finally leave the euro, with a default and return to the drachma.

I'm looking way, way down the road here. We'll still have the contamination problem in 2013. But somewhere down the line--we're talking years, even decades--Europe will conclude that Greece can safely leave the eurozone.

In the meantime Germany will continue to pick up the tab.

Finally, I doubt gold or exchange rates will do very much in 2012. I have a small bet with a friend that gold will be lower on June 30 than it was last June 30. Gold has gone sideways for well over a year. I expect the trend to continue. Currencies, too, look to trade within a fairly small range. Over the next two years I expect the dollar to weaken, as it typically does in bull markets. But we'll likely avoid a sharp fall in the dollar.

That's the way it looks to me. Happy New Year.

Paul Terhorst

P.S. Congress last week passed a short-term, short-sighted, small-minded, temporary solution to the fiscal cliff. The deal puts off spending cuts for two months.

If Congress approves a new plan in early March, fine. If Congress fails to approve a plan, there's still plenty of time to act later in the year. Consider the fiscal cliff as more of a fiscal slope, with cutbacks and tax increases clicking in over time.

I view the debt ceiling as a larger problem. The U.S. Treasury has started using accounting gimmicks to keep paying bills. But unless Congress raises the debt ceiling by late February or early March, the government will have to stop paying some of its bills.

The last shut-down came during President Clinton's watch, and we had a close call again last summer. Keep your fingers crossed this time.Continue Reading:

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Kathleen Peddicord

Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 25 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring, and investing overseas in her free e-letter.

Her book, How To Retire Overseas—Everything You Need To Know To Live Well Abroad For Less, was recently released by Penguin Books.

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