It's that time of year again, when I score my predictions from last year and look forward to what I see happening in the coming 12 months.

This last year was a tough one in the prediction department; there's no good way to spin it.  But from a trading perspective it wasn't bad at all, mostly because I had a few scores that were huge and zoomed in on the lens, looking for opportunities in individual places rather than trying to look at the market as a whole.

So let's go through last year's performance and then take a look forward:

• We're going down -- and this time it's not "buy the dip." 

Clean miss.  The first trading day opened at 1258 on the SPX.  We're above it.

• Between forced State austerity and semi-forced Federal austerity the rug will get pulled of the master "credit card spending" support chart up above.

Miss again.  I never would have believed The Fed could actually buy up nearly a trillion dollars worth of various instruments and hit the middle and lower classes to the degree they had and get away with it.  They have -- thus far.

• Fed Index price paid/received divergences along with inventory build say we're going to double-dip in the general economy.  I believe it.

Not yet.  Despite the fed indices recovering and then dropping back again in the middle of the year into the end, I'm off on this one.

• Margin compression will become realized. 

Yes.  But -- it didn't show up in the stock market, although there sure was a dip in the middle.  Half-point; look at stocks like Intel for examples.

• The inventory build we've experienced will prove to have been unwise.

Again, it appears to have hit the regional indices pretty solidly as I expected but did not translate into stock prices.  Half-point.

• The fissures -- if not outright failure -- in the Euro Zone become realized.

Yes, but the exit I thought might happen didn't.  Nonetheless I gave this until 2013 to play in terms of an actual exit, so it counts.

• A viable third-party candidate emerges and runs for President in 2012. 

Nope.  The Libertarians nominated Johnson who was a jackass and a statist, and he got 1% of the vote.  Clean miss and in no small part responsible for my formal disavowal of the Libertarian party.

• Serious changes -- and charges -- will come out of the MF Global disaster.

Robbery, assault and battery (Genesis) -- of us.  We got it in all holes on that deal and Corzine thus far has skated.  Worse, we the people allowed it.  No, the couple of prosecutions over LIBOR (which are just starting) do not count.

• The Dollar will be flat to materially stronger.

Yep.  Right around 80.  No collapse, despite everyone looking for it.

• Housing will not recover.

It hasn't.  But -- there are some people who think it has in certain markets.   And XHB certainly looks damned impressive over the last 12 months.  I'll give myself a half-point on this one.  The government "hold prices" game I predicted has played out (and likely will continue to.)

• There will be severe issues with subgroups who don't get their "cheese."

Not yet.  Another miss.

• Lots of noise will be made about deficits and debt but real, effective moves toward addressing the problem will not be made.

Bingo.

• A real shooting conflict breaks out in the Middle East.

Does Syria count?  I don't know; I'd like to say yes but it's questionable.  Half point.

• The Fed will back off and rates will rise.

Miss -- period.

• The squeeze in state and local funding will get materially worse.

Yes.  Especially in California, but this is spreading to Illinois too. 

5-1/2.  That's a solid "F" in any school I've attended.

Hmmm....

So what went wrong?

A few things, most of them in the area of confidence and timing.  Simply put we live in a world where the government has figured out that it can bribe the people with money that doesn't exist, and they're not going to stop until the arithmetic forces them to do so.  Unfortunately that means two things -- we have no statesmen left and worse, we have nobody in the international arena willing to pull the cord either.

We're in far worse shape than we were a year ago.  Food stamp usage is up another 3% in persons and about the same in dollar amount over a year prior.  The deficit run-rate is approximately equal to last year's (final numbers won't be in for a bit yet) which was roughly $1.2 trillion.  October and November added more than $300 billion to the national credit card alone, or about $5 billion per day. 

To put this in perspective there are about 330 million Americans; about $15/day per person is added to the national debt.  This doesn't sound like much but when the average hourly wage is around $23.63 and there are 144 million workers in the nation the view through the lens gets rather dark.

If you attribute this only to working people (since they're the ones paying taxes, by and large) then the ugliness becomes rather clear -- about an hour and a quarter of the "average hourly working man's" day is handed back to monetary debasement every single workday!

That's roughly 17% folks for the "average" hourly earner and for the person making $10/hour about 35% of your earnings are being stolen pre-tax by the government's policy of currency debasement, or approaching $4 out of every $10 -- and that's before taxes!

How we've managed to get away with this is worthy of a PhD thesis; the amount of raw lying and theft necessary boggles the mind.  And yet we "muddle along" while people ignore the elephant in the room -- not to mention the health care premium hikes that have now started to show up for next year and in many cases are exceeding 20%.

Retail sales, however, according to actual check stand data, sucked over the holidays, up only 0.7%.  This is an especially-important figure because it includes online and belies any claim that overall sales were "good", "strong" or anything of the sort.  In fact they were negative on an inflation-adjusted basis.

The consumer is at the end of his rope.

Don't believe for a second that this is all about Sandy, or even about the Newtown shootings.  It's not.  It's about the squeeze that has been put on people for the last several years sequentially, as outlined above.  And remember -- that number up there is annual -- eventually you simply run out of the ability to shove it off into next year, or suck some more on the government tit; nothing more comes out no matter how much vacuum you develop.

As expected the Washington politicians continue to lie; the Democrats with their incessant screams of "tax the rich!" and the Republicans with their (false) claims of "cut spending!"  Both know they're lying; the Democrats know the rich don't make enough to matter (even if they taxed it all) and the Republicans know damn well they won't take on where the growth in spending is coming from -- that is, medical costs.

All the politicians know that this little game with exponents always blows up eventually -- all compound growth claims without a termination date are always, every single time, frauds.  They are all Ponzi schemes. 

Every one of them, without exception.

And yet absolutely nobody will talk about this in a political context.

Not Republican.

Not Democrat.

Not Libertarian.

Not Tea Partier.

Not "Progressive."

Nobody.

Guess what?  Math doesn't care about politics.  It's an absolute -- utterly unable to be changed.

Oh this doesn't mean that people can't attempt to evade what arithmetic says is to come.  They can.  They will.  But in doing so they only make the outcome worse because it is impossible to make it better through avoidance; this is the mathematical nature of exponential growth!

So let's back this up and ask a very-important question:

IF you could organize your neighbors, friends, and the rest of the nation now -- if there was to be a mass-awakening -- could we stop a catastrophic outcome that appears otherwise inevitable?

The answer to the question is Yes.

First, let's bound the problem.  The Federal Government currently spends about $850 billion a year on medical care.  This is more than half the deficit.  It is also accelerating at about 9% a year and has been for a very long time -- back into the 1980s.  In 1980, long after Medicare and Medicaid were created, Federal medical spending was $53 billion.

So let's just project this forward -- just this one segment.

This year we will start with our "prototypical" 50 year old.  He will live to be about 85. In 35 years the Federal Government will attempt to spend over $15 trillion in medical care alone.

Do you think we'll get there?

If not, where will we get?  Where's the wall, in your opinion?

If it's 5 years out the federal government will spend $1.2 trillion on medical care when "it" happens.  If 10 years, $1.85 trillion.  If 20 years, $4.4 trillion.

And if you're crazy enough to believe that your 20 year old son or daughter will make it to 65 first, you are stating that you believe the government will be able to spend $38 trillion annually.

Really?

If you want to address the Federal Government's budget problem you have to cut this off.  Right here, right now.  Today.  No ifs, ands or buts.  And the tax changes that were put through that make it worse, most-specifically the payroll tax abatement, must be immediately rescinded.

So how do you "cut it off?"

It's not by cutting Medicare and Medicaid.

There is only one way, because the problem isn't Medicare and Medicaid, it's the medical industry in general.

You have to neuter its monopoly protection racket.  All of it.  And you must do it now.

That's the beginning and end of it folks.  There are other problems we have and many of them are serious -- even critical when it comes to civil liberties and other concerns -- but none will kill our government and economy utterly dead without fail and without fear, favor or ability to mitigate it if we don't deal with them.

This one will.

That's not opinion, it's arithmetic.

So what happens if we do stand, surround DC and demand this change -- right here and now -- and we get it?  The following:

• A deep recession.  20% of GDP evaporates temporarily as medical spend collapses by 80%.  Literally.  Ramping short-term unemployment comes with it.  This is unavoidable.  The rest of the world gets to pay somewhat more for their medical devices, drugs and similar.  We pay a lot less.  The economy realigns but it doesn't happen instantly and the short-term impact will suck.
  
  
• Recovery.  We lead the way out as those jobs are lost in the medical industry and resources shift.  First in, first out.  We win big within 2-3 years.  The big suck is replaced by the big shout.  America's competitiveness improves dramatically as the imbalances everyone else exploited are removed.
  
  
• Acceptance must come.  That means personal acceptance, mostly.  Some things you "can have" now you won't be able to have, mostly extremely-advanced treatment modalities you can't afford on your own.  But with the cost of most things in the medical realm collapsing in price, that list will be a lot shorter than you think. 

In short it's not pain-free but it's the right thing to do, and we can do it.  We can do it now.  We must do it now.  We have no choice.

What if we don't?

Then we're screwed; the cut-off will be forced on us, and it will come with social unrest and economic malaise that slowly consumes the nation from the bottom of the income ladder upward.  It's already happening and has been for years, but is and will continue to accelerate.  Continued debasement of purchasing power and ever-larger amounts of consumption of GDP by the State as it tries desperately to "keep the promises" and pander to the masses will eventually fold back on itself. 

The exact point that the foldback happens cannot be known in advance, as it is a confidence problem that will come long before the arithmetic wall is hit but that it will occur is a mathematical certainty.

And don't start the ever-incessant crap from the right that "Obama wants it this way and if you had just elected Romney it would have been ok"; if you do that it'll be your last post on my forum -- ever. 

It is a fact that all spending bills must originate in The House and The Republicans have had the absolute ability to cut this crap off for the last two+ years, including in August of 2011. 

They have refused serially and intentionally as have the Democrats for the last 30 years. 

Both parties are equally complicit and actively responsible -- period.

Notice how exactly zero of the so-called "fiscal cliff" discussions have focused on this area of the problem.  A literal none of the debate is aimed here.  Yet it's essentially the entire fiscal issue when you get down to it and analyze it.  Yes, defense spending is bloated and needs to be cut, but defense spending as a percentage of both government spending and GDP has been larger than it is now on more than one occasion; it rises and falls with geopolitical events.  Medical spend, on the other hand, has been a one-way runaway train.

Not only is this ignored by both mainstream political parties none of the third party candidates addressed it in the last cycle and none of the third parties are addressing it now, even those parties that claim to be for "free markets."  They're all blatant and outrageous frauds.

There is no "free market" in medicine and hasn't been for more than 30 years.  Between monopoly acts in the market directly, EMTALA and related laws along with the FDA, which is one of the enabling agencies in the government for all the game-playing this segment of the economy has managed to lard up prices to the point that "care" costs 5x what it should and even then you often get substandard "care" with doctors billing you for sticking their head in the door!

Now let's look at markets generally -- pulling back the zoom on the lens, if you will.

When you look at the economy and markets from 2009 to today you find one glaring and ugly fact -- The Fed has removed duration as a signal from the market, which is insanely dangerous, since it is differences in duration pricing that signals risk -- and thus causes people to adjust behavior.  ZIRP has also taken roughly three whole percent out of the term cost of borrowing at the longer end for mortgages.  This sounds good but it is in fact bad.  The short-term impact of this refinancing "boom" has put another $200-300 monthly into the average mortgage-carrying household's pocket but the purchasing power destruction that has come with it took that money back out of the common man's pocket and handed it over to the grocer and gas station!

Then the true insult comes -- another $200+ a month or more is added to your health insurance costs and you become severely net-negative in purchasing power.  Worse, your house's "value" has been pinned at the top of the possible range by these suppressed rates, and when rates rise you will be instantly screwed as the imputed value loss of just a 2% rise in 30 year money would whack 21% off your home's price overnight should you need -- or want -- to sell.

Reality is that when government organs intentionally put distortions like this in place it never ends well because those distortions are also subject to the inexorable reality of exponents.  The longer "extraordinary measures" are continued the worse the adjustment is when it comes back out, and it always must eventually come back out.

For those of you who believe I'm indefatigable I assure you that I am not Superman in mind, spirit or body.  There will come a day when like Mother on the Nostromo I will declare "The option to cancel self-destruct has expired."  Those who think I don't spend neural energy on this are wrong; I in fact contemplate whether I believe we have reached that point on a literal daily basis.

When that day comes there will no longer be a point in writing Tickers, there will no longer be a point in trying to explain to readers the mathematical analysis of the budget, where we've come from (e.g. via Leverage which you can order on Amazon) and where we're headed.

On that day I will shut down this site and replace it with a $100/year place-holder account somewhere that simply has one image displayed as its top-level (and only) page.  You can probably guess what that image will be.

I may be early and I may be late in my determination of that day; I'm imperfect, you see, like everyone else.  But unlike the political class in DC I admit this freely -- I do not know where the over-center point is where we are no longer able to claw back up over the ledge. I simply know that the day will come on the path we are on, and that nobody in the political class today, irrespective of party, whether Democrat, Republican, Libertarian or otherwise will address the above.  At some point I will give up, because in my estimation the time remaining to do something about what's coming will have expired.

And without taking those steps the rest does not matter. It's literally a side show.

So with that cheery backdrop, let's do the next year's predictions for 2013:

• You will see the highs in the first half of the year.  Recession isn't just in the cards, it's inevitable.  The leading indicators that I prefer and which have an excellent track record say it's baked in the cake.  You may be looking at the highs for the year now in the market, but I won't go that far -- the tricksters have more rabbits than I have hats.  But profit margins are ultimately all that matters and they're under assault.  This will bleed into results because it must.  In addition with taxes going up no matter what we do on the fiscal cliff the impact of each new dollar of gross revenue is lower, and that means we have to shift expectations lower.  Nobody has thus far.  Yeah, I know, I thought we were done last year and yet we had a gain over 10%.  I simply retort that the math always wins.
  
  
• Europe is out of time, and now Japan is headed for a blowup.  The race down the bowl is a powerful one.  The elections in Japan have put a truly frightening dynamic in place -- a government and central bank that are willing to publicly debase the currency.  With Japan's demographics this is a suicide pact; you can't do that into an aging population after sucking up huge percentages of private savings (which could have otherwise sustained those people) and get away with it.  But they're going to try and the move in the Nikkei market over the last month or so has been utterly insane in "anticipation."  There is no minimum safe distance on this one.  If the Japanese bond market comes apart it will make Greece look like a sideshow and the cascade effects will blow Europe sky-high.  We'll be right behind them.
  
  
• Obamacare's bite comes home and the fallout is severe.  I'll consider this one a "hit" if we start to see multiple 20%+ health premium increases across the private sector.  Given that the really ugly hits next year and the USSC decision is now in, this would be the year it happens.  Grab your ankles and find a stick for your teeth as this one is going to hurt -- a lot.
  
  
• You're going to see a massive shift in the employment picture, all negative, as the Obamacare and economic realities bite into margins.  Companies are very lean right now and have little fat -- they're going to be cutting muscle and bone this time, and not really by choice.  There's no more room on a productivity basis to absorb the costs, and Bernanke's tampering is making this much worse by destroying purchasing power.  Watch the internals in the employment reports, most-specifically hours worked, hourly wage, and the population participant ratio that I track every month.  If we get lucky the latter will remain mostly-flat.  Hide under the desk if it breaks the lows in the coming year.
  
  
• The gun-grabbers will fail.  They'll try; that much is a certainty.  I think they lose, analytically.  I hope they lose, and yes, I know hope is not a strategy.  But they better lose, because if they don't then Mother is almost-certain to speak.  If anything like what that traitorous piece of crap Feinstein has proposed passes then the United States as a nation is finished; your number in the gas-filled shower is all you're negotiating from that point forward; her proposal would permanently ban essentially all semi-automatic firearms and force national registration of everything.  This is the one prediction you don't want me to miss on; the rest are good for ridicule and poking at me as just another pundit with a list that went nowhere.
  
  
• 2013 is the year of the State and city-level blowup initiation.  California and Illinois, specifically.  We may get through the year without a general-level default but there will be more San Bernardino's.  At its core this is about pensions and public employee unions and there has been no meaningful attempt to address either.  We haven't been begun to hear the screaming from these people yet but 2013 should mark a year where the elephant starts smashing the china.
  
  
• There will remain next year, as there was this year, specific individual investing opportunities that will outperform and generate not only risk-adjusted return but absolute alpha -- that is, positive absolute return.   These special circumstances will be on both the long and short side, and in order to be successful next year you will have to be nimble.  Simply buying the index worked last year (although I didn't think it would) but this coming year that will be a disaster.  In short you will have to work for a positive alpha in 2013 and you will have to also be willing to be short things that are overblown and bloated.
  
  
• This will be the year in which the high-P/E and so-called "Internet II" stocks blow up.  That's a bold call but I believe in it and will be playing it.  Tax regimes are shifting and will continue to in an unfavorable way.  In addition the cracks are already showing up in some of the "Internet" stories.  Everyone loves a good story right up until the negative earnings start to pile up.  Get away from these names and stay away.
  
  
• The Fed runs out of bullets.  Yes, they've said they'll monetize ~$85 billion a month in Treasuries this coming year.  And they will -- right up until the squeeze comes, and it's coming.  This year.  It's all confidence and this is a bad policy as it's directly responsible for about 6.5% of the economy's "spend", which in turn means that purchasing power is being destroyed at the same rate.  This hurts the lower and middle classes the most; the irony is that so many people believe the Democrats are "the party of the little guy."  That's simply wrong.  The fact of the matter is that the bigger the deficit the more often the lower and middle classes get knifed in the alley.  The people will eventually figure it out and I believe 2013 is the year it happens.
  
  
• House Bubble II is forming a visible pustule; the risk of a big "pop" is now evident (again.)  This is most-evident in places like Phoenix, although it is not specifically limited to there.  My best estimate is that this isn't a 2013 blowup (I think it's 2014 or 15) but I'll stick it in here because the evidence of overheating is present now.  One of the most-amusing numbers I'm seeing is the annualized rent against alleged "values"; in some areas they are reaching and even exceeding 30 years again.  This is into stratospheric territory; a rental house's annual rent should cover the imputed capital cost in seven to ten years on the outside and five years is better.  If it's longer you are not running a business that cash-flows on an operating basis, you're betting on your leverage making the deal work predicated on "improving" price of the asset.  That is a Ponzi scheme and someone is going to be without a chair with the music stops. Much of this insane move is due to intentionally-restricted capacity due to homes that should have been foreclosed years ago but haven't been because people are living in them even without making payments -- in some cases for two or even three years or more.  What's worse is that as states and municipalities get squeezed operating costs are going higher (property taxes) which makes the equation even worse -- especially in ****holes like Chicago.  A couple of years ago I took a serious run at a few distressed opportunities but came up empty; now the entire market looks unattractive again -- like it did in 2006!  And all this is happening with the government being 90+% of the market for mortgages -- yikes.
  
  
• Geopolitical considerations become very bad news.  Syria is the obvious target here, but not the only one.  I am becoming increasingly concerned about general middle-eastern geopolitics, including Egypt and of course Iran, although the latter has been off the news scene now for a few months.  Then there's North Korea, which just launched "something" into low-earth orbit.  Once you achieve that you can hit any location on the planet should you choose to do so; that risk just went from hypothetical to realized.  Obama gets blamed a lot here for being inept but the fact of the matter is that both sides of the aisle get "credit" for 30+ years of foolish decisions empowering tin-pot dictators of various sorts that ultimately backfire.  We've added to this dramatically in the last few years by trying to play "push-button war" from hundreds or thousands of miles away.  History says that never works and yet we refuse to either commit and do the job right or shut up and leave.  You'd think after Korea, Vietnam and watching the USSR get spanked in Afghanistan we'd know better, but you'd be wrong.  Eventually someone is going to cook off some canned sunshine and at that point it's too late to fold up the tent and go home.  Let's hope this coming year isn't the year it happens.
  
  
• The market begins to return to an actual market, not a simple gauge of fed liquidity.  This is very bad for prices at existing levels.  It's also a process and is unlikely to be an immediate "right now" sort of thing (at least you hope it isn't, because if it is we're going to lose 5,000 DOW points in about an hour.)  Nonetheless the correlations will being to break in 2013.  Getting the timing right is going to be hard -- perhaps the most-difficult thing you can do in 2013 as a trader.
  
  
• There will be some sort of attack on deferred retirement accounts.  I have no idea what form it will come in but that it's coming is a virtual certainty.  401ks and similar are at particular risk as they do not generally permit rapid changes in asset allocation.  I am also concerned about a potential revocation of the ROTH tax-free appreciation status.  I don't expect either to actually come to fruition in 2013 but I do expect the beginning of the attack to come this year and thus if there is such an attempt I will count this one as a "hit."

So that's it.  Fewer this time around than last and a couple that are literal lines in the sand -- unfortunately.

As usual I reserve the right to amend and revise until the 1st of January.