I would like to begin the 2012 Outlook by doing something a bit unconventional – fitting for a year that I believe will be unlike any in history. Let’s start the 2012 Outlook as if today is December 31st, 2012 and the year that we are looking ahead to is now in our rear view mirror. What has happened?

• Has the euro currency failed?
• Are we at war with Iran?
• Did the U.S. dollar continue down the bullish path that it was on when the year began?
• How about the Japanese Yen – did it go hyperbolic and bankrupt the Bank of Japan?
• Let’s not forget this is a Presidential election year – are we staring at a republican about to take office?
• Is the world knee deep in a recession or did we claw our way back into recovery?
• Did China slowdown their growth rate or did they tighten too much and squeeze themselves into a hard crash?

OK – enough with the 20 questions – allow me to play Monday morning quarterback on Friday. First let me mention that this 2012 forecast is completely unique compared to past years – as it happens I have been writing annual outlooks for nearly a decade, but this year I decided to do something different.

The beautiful thing I see in the futures markets is that it is a zero sum game– for every buyer of a contract there is a seller, and for every bull there is probably a bear willing to take the other side of the trade. The same tends to hold true for the analyst community and, while there is often a consensus opinion, there are almost always some contrarians taking the other side of the debate. There are few things I like better than a good ol’ fashion debate between market analysts and I thought that the 2012 forecast could bring together a few analysts that may not agree on everything but are more than happy to tell it like they see it.

My first thought is that the euro is everything this year and it will likely become nothing. I believe the fall of the euro currency has already begun and I forecasted it all the way back in 2010. The reality is the bailouts have proven that the euro is only as strong as its weakest country because the strongest countries will destroy their wealth and credibility in order to bail out the weakest ones. That, my fellow investors, is a likely recipe for disaster. For me, the question is not whether the euro will fail but rather when will it fail? Don’t get me wrong, I am not sitting next to Angela Merkel, but there comes a point where Germany could take a cue from Great Britain and diverge from the euro essentially evading the paralysis caused by the economic failures within the EU. This would simultaneously force the demise or heavy-handed reconstruction of the euro currency because the euro will lack the support system to maintain global investor confidence – something that is hanging on by a thread right now. It is a ticking time bomb and I feel that 2012 is a year that could see a currency cataclysm – an epic shift in the global composition of currencies – take place.

The U.S. dollar will likely be the primary beneficiary of this epic event and the Japanese Yen could threaten the Bank of Japan’s stability by overcoming intervention after intervention – I recall the history of currencies when George Soros claimed his fame breaking the Bank of England and the BoJ is no BoE if you know what I mean. The yen could go hyperbolic when the BoJ relents and that could cause one of the most volatile currency rallies in recent history.

China is an interesting cat. They seem dead set on hampering their GDP growth to avoid inflation and many fear their efforts to thwart that growth will lead them down a path of self destruction. One of the issues China will face is they are one of the world’s largest product exporters and they are tied to the U.S. dollar. When the dollar strengthens the ability for China to export gets a big sucker punch to the stomach, and guess what – I think the dollar can make a major breakout move this year if a euro debacle is around the corner. The U.S. dollar index used to be at 120 (it is just above 80 these days) – nearly 50% higher than current levels. And this wasn’t 50 years ago – try less than a decade ago. Imagine the potential export freeze that would take place if the U.S. dollar value suddenly and dramatically skyrocketed – the kind of move that may occur if the world panics out of the euro currency. Unfortunately this same country is sucking up our commodity resources like Takeru Kobayashi at a hotdog competition, and that is unlikely to sustain itself if their growth goes down the tubes (regardless of their increased buying power.)

I believe the world is already knee deep in a recession, so the question should really become will it be waist high come December? Unfortunately the stars seem to be aligning that way. Amid all this turmoil and exposure to war with Iran, the euro debacle, high unemployment and a potential shift in the Oval Office and Congress, the S&P500 has had one of its biggest two year rallies in history, commodity prices are closer to their 20 year highs than their 20 year lows and treasuries are paying such little interest it almost feels like you are paying them for the honor to hold these high risk instruments. To me that spells disaster.

In the global markets, things can go up, go down or stay flat. All of these fundamental events aren’t necessarily a promise of significant price moves one way or another, but I will keep my eye on them all the same.

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