The Bearish Case For 2012

Market bulls seem to be advancing a case that emerging market growth and the strong profitability of U.S. multi-nationals selling to them will provide fuel for a bullish 2012.  That simplified view of the world fails to take into account a number of complicating factors that point instead to a challenging year.

  • The Base of the Pyramid: Recent coverage of Bank of America’s pullback from small business lending illuminates a severe challenge to small businesses nationwide.  Over 400 banks have failed since 2008, and more severely troubled, the cost of capital for the very companies that are responsible for net new job growth is set to increase, perhaps dramatically.
  • Unbalanced Emerging Markets: Much of the story of globalization has involved emerging market countries becoming very successful at selling raw materials and low value-add manufactured goods to developed countries (in the latter case, much to the detriment of U.S. manufacturing employment) while developed countries sell high value-add goods to emerging market countries.  Emerging market countries will only be able to sustain their gains by increasing domestic consumption; failure to do so will leave them uncomfortably dependent on the health of their developed country trading partners.
  • History is Against the Euro: An economic collapse in Europe will inevitably pull down the U.S. The tenacious support of the euro zone by European bureaucrats is notably offset by the currency union’s lack of three of the four major criteria of a successful union:

– labour Mobility: Constrained due to cultural and language barriers

– Openness: Capital may be mobile, but price and wage flexibility across the region is wanting.

– Fiscal Transfer Mechanisms: Completely lacking

– Similar Business Cycles: The different levels of economic advancement between the core and peripheral euro zone countries illuminate the cruel joke of this particular criterion.

A bearish restructuring professional is particularly vulnerable to the charge of seeing not what is there but what he hopes to be there. Nonetheless, there are considerable headwinds facing the U.S.   

About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].