With less than nine trading days left in the year, it's that time of the year again when market participants of all kinds and levels of expertise begin making long-term predictions for what's to come next year.
Friday, we looked at some of the more positive predictions that painted investor-friendly scenarios in 2012. At a time of daily stock-market seizures, weekly bank and sovereign debt downgrades and monthly central bank interventions, most people are seeing the glass half empty, and have forecasted bearish -- if not downright abysmal -- market conditions for next year.
Below, some of the more salient of those predictions:
1. U.S. Banks Will Experience Contagion of the Crisis in Europe
As the financial crisis in Europe has intensified in the past quarter, leading to a sharp correction in global equities, multiple head-of-state summits and coordinated central bank intervention, some experts have publicly worried the same issues being faced by European banks could affect their American counterparts. The idea is that, as a result of the opaque interconnectedness that binds the world's financial institutions, a contagion of the crisis could occur.
A failure in the euro-zone area, a malfunctioning of the euro, would have negative repercussions for the U.S. not just in terms of a slowdown in U.S. exports to Europe, but also because of linkage between American financial institutions and European institutions, Henry Kaufman, a noted Wall Street economist, was quoted by Reuters on a Sunday interview, summarizing the case for contagion.
We don't know the full depth of these links, he added.
Individual economists are not the only ones expressing the dreary forecast. A poll of chartered financial analysts worldwide conducted by the institute that assigns that certification, and released Thursday, shows about half think contagion is likely, according to the Dow Jones Newswires.
Bank economists are talking about it, too. TD Bank Chief Economist Craig Alexander, for example, recently explained how one particular item might put the contagion phenomenon in relief.
If Greece were to default tomorrow, it could prove a massive shock to the global financial system if it is not handled in an orderly way Alexander said in a statement.
Emerging markets had already seen contagion effects as a result of both investor's increased risk-awareness and the volatility of capital, which affects the shallower emerging capital markets more severely.
But is the crisis coming to America?
2. Europe Will Devolve Into War
As morbid and depressing as it might seem to suggest armed conflict as part of a market forecast, strategists for various major banks have not been shy about playing out scenarios of political violence that, they believe, could develop in the near future.
Perhaps the most persistent in its assessment has been the global economics team at Swiss bank UBS, which has estimated the statistical likelihood of what it labels the authoritarian government / military coup / civil war outcome is at least 65 percent if a country secedes from the Eurozone.
In September, Stephane Deo and Larry Hatheway wrote a report that suggested the political cost of any euro break-up will include civil war, and even provided a historical aside to emphasize the fact no modern monetary union has even broken up without falling into dictatorship or conflict.
The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs, Deo and Hatheway wrote, later adding it is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.
The economics team team then doubled down on its prediction early December, quipping in an update that assets worth buying to hedge against a euro break-up could include precious metals, as well as tinned goods and small caliber weapons.
And they're not alone in predicting a call to arms.
In a chart-driven analysis revealed last week by Citigroup's FX Technical team compared the current period in U.S. equities to periods ending in 1907 and 1939, time frames that the report helpfully notes both preceded / led into World Wars 1 and 2 respectively.
3. A Major French Bank Will Fail Or...
When the world's central banks announced a coordinated effort to inject liquidity into the world economy on the last trading day of last month, rumors flew that the action had been designed not as a general stimulus, but to avert a very specific catastrophe: the failure of a major French bank.
Since then, two of the world's top credit rating agency - Moody's and Paris-based Fitch Ratings - have downgraded the credit rating of all three major French banking institutions: BNP Paribas, Société Générale and Crédit Agricole. The third rating agency, Standard and Poor's, is weighing a wider downgrade of the French banking industry.
French banks are relatively more dependent on dollar funding than their Continental peers, a fact that has squeezed the liquidity in their balance sheets considerably since the financial crisis intensified in August, sending dollar lending rates sky high. And as their sources of funding run out the door, who knows how the banks will fare?
4. ...A Medium-Sized U.S. Investment Bank Will Fail
Following the collapse of broker-dealer MF Global, analysts began frantically searching for the next one, the financial institution most likely to suddenly, and spectacularly, collapse. A lot of the accusing stares fell on medium-sized U.S. investment banks. Firms like Jefferies Group (NYSE:JEF) were quickly identified precisely due to their size, as market participants figured these firms would suffer disproportionately high losses from the carnage in Europe, but were unlikely to be backstopped by the federal government if they faced insolvency.
Jefferies Group was hit hard and often. Wall Street research and credit rating firm Egan Jones issued a report November 2 suggesting the bank's exposure to sovereign debt holdings was problematic. While this particular worry seems to have been overstated - other analysts later questioned Egan Jones' findings - the overall outlook for investment banking, which is not good, will seal the fate of these firms. Already there is talk of mass layoffs.
Jefferies, which has underperformed its larger rivals and seen its shares drop nearly 56 percent in value since the first day of the year, reports its latest quarterly results tomorrow.
5. AAA Germany Will Be Downgraded
The German economy, widely considered the strongest in Europe, is at the heart of any solution to the Continent's troubles. Whether the crisis is addressed through some kind of integration mechanism that allows deficit transfers in exchange for tighter fiscal discipline, the monetization of current debt, or issuance of new German-backed debt, Germany is seen at the cornerstone in which any plan will have to rest.
Which is why many are worried Standard and Poor's will go ahead with actions it has implied in recent days and downgrade the sovereign credit rating of that nation.
No one knows for sure what will happen if such a downgrade occurs: ever since Standard and Poor's downgraded U.S. sovereign debt, demand for U.S. Treasury securities has only intensified.
Not that the Germans are curious to see if that case will repeat itself with their country.
6. Military Intervention in Iran Will Send Oil Futures Soaring
In late November, PIMCO, the investment firm best known for operating the world's largest mutual fund, put out some research that reminded the world bad things were happening in places not named 'Europe.
Specifically, PIMCO put out a collection of oil price scenarios the firm foresaw in case of a military attack on Iran. The predictions ranged from $140 if an attack ended up being only mildly disruptive to an Armaggedon scenario involving worldwide oil disruptions.
The view that geopolitical rumblings in the Middle East could soon cause a major oil shock has only seemed more and more prescient since the PIMCO report, as Iran has been conducting naval exercises along a key maritime strait and has begun floating the idea of a blockade if it is threatened.
7. The Chinese Trade Deficit Will Arrive
For more than a generation, Chinese economic policy has seemingly only gone one way, with Beijing artificially keeping the currency weak and promoting a massive trade surplus.
In the last few weeks, something curious has happened, as trading in the partially-open foreign exchange market for Chinese currency has seen the renminbi touch the lower levels at which the government promised to keep the float, putting authorities in the awkward position of artificially keeping the currency strong.
As if to complete the topsy-turvy transition in economic policy, the Chinese might see their first trade deficit in decades next year. The turnaround in trade positions is not a negative, per se. However, no one knows exactly how Chinese authorities, who still play a substantial role in central planning of the economy, will react to the development.
8. The S&P 500 will go to between 700 and 900
The rosiest of forecasts for American stocks -- discounting contagion in U.S. equities, predicting a relatively healthy price-to-earnings ratio and assuming GDP growth over 2 percent-- see the benchmark U.S. stock market index up by more than 17 percent sometime next year.
The flip side of that coin comes courtesy of David Kostin, chief economist at Goldman Sachs. Kostin, who is considerably more bearish on U.S. equities than his large bank peers, believes the price-to-earnings ratio for U.S. equities will contract to the single digits (most other chief economists see that ratio hovering between 11 and 14). Combined with less than forecast U.S. growth, and a drop in corporate earnings, Kostin has put together a downside scenario that sees the S&P 500 trading somewhere between 700 and 900 points next year, a drop of at least 25 percent from current levels.
And Kostin is not the only bear putting out those figures. Nomura's Bob Janjuah recently went on Bloomberg TV to reaffirm his target, using similar numbers as Kostin's, of 810 for the S&P 500, a drop of over 30 percent.
9. Inflation will Skyrocket
Ever since the world's central banks began to inject massive amounts of liquidity from 2008 on, expanding the monetary base of their respective currencies, a certain group has been warning of the impending hyperinflation that unprecedented printing of fiat currency will bring.
Because of what economists now widely understand as a liquidity trap that has offset inflationary pressures, those making the high inflation forecasts have been proven consistently wrong. As any conspiracy theorist will tell you, however, just because you're paranoid doesn't mean they're not out to get you. And just because spiraling inflation hasn't happened yet, doesn't mean it won't.
The seemingly unabated rise in commodity prices, which had held up until recent days, for example, points to the fact that, at least compared to certain assets, the currency is devalued. So does the increases in food and energy costs, which have far outpaced 'sticker' recession number in recent years.
As German economists have recently found themselves seemingly isolated in their worry expansive monetary policy could lead to Depression-Era hyperinflation and presidential candidate Ron Paul - who subscribes to the view expansionary monetary policy is dangerous - has risen in polls, the inflation doom-sayers have seem themselves as least slightly as part of the mainstream dialogue, and predictions have abounded.
10. The U.S. Will Fall Into a New Financial Recession
While most economists see moderate GDP growth of about 2 percent next year, a small but growing group of experts see the real possibility the U.S. could fall into the long-feared second wing of the double-dip recession, and actually see an economic contraction.
Spearheaded intellectually by Richard Koo, an economist for Tokyo's Nomura Securities, an increasing number of people are now talking about a balance sheet recession to come as households deleverage assets and pay down debt.
And that recession, if not aggressively attacked, could lead to years of stagnation.
Happy New Year!
Editor's note: This article has been updated to reflect a correction in #4 that removes mention of Lazard Ltd. as an example of a medium-sized investment bank with significant exposure to the European financial crisis.