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What Will Be 2012's Blind Side? China


Europe and Iran will draw most of the attention in 2012, but pay attention to news of real estate turmoil in China. It could spiral well beyond the subprime crisis in the US.


The holiday season is over and I'm heading back home. We had the traditional Swedish Christmas Eve dinner, followed by opening presents on Christmas Eve. The kids got presents to open, but between the adults, gift giving has pretty much degenerated into the passing of gift cards which seems rather pointless. Pulling out a $100 bill and just passing it around would accomplish the same thing.

I decided this year to try to break this unfortunate "new" tradition and asked my sister to buy me some books, as in actual physical paper books. After seeing Moneyball and The Blind Side as movies last year, I decided I wanted to read Michael Lewis's The Big Short and Boomerang. I started reading The Big Short Christmas Eve, and I can't remember the last time I actually enjoyed a Christmas present right after I got it.

The Big Short started me thinking about the whole subprime crisis which evolved into the European sovereign debt crisis in 2011. Nevertheless, there was nothing shocking about Europe in 2011. As a tribute to my current favorite author, nobody got "blindsided" by European events in 2011. The blind-side winner was obviously the earthquake and tsunami event in Japan which were clearly unpredictable with incredible damage both locally and to the future of nuclear power.

If Europe couldn't blindside the US in 2011, it certainly can't blindside it in 2012. However, if there is a Richter Scale 9 earthquake offshore, you can be pretty sure a tsunami is coming. That is not a blind-side moment. It is time to scramble to higher ground.

There has been talk that the US economy is decoupling from the continuing problems in Europe. What exactly does decoupling mean? It means that a tsunami is coming, but you believe that the US coastal dikes will not be overtopped by the waves. In other words, impressive waves, but no systemic damage to the US institutions or economy.

It's easy to measure the height of physical assets above mean high tide, but how do you measure the height of financial strength to weather the European tsunami? Here are the one-year charts for Bank of America (BAC), Morgan Stanley (MS), and Goldman Sachs (GS).

Click to enlarge

Click to enlarge

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Got sandbags? You believe in decoupling? The market is not voting that way in the financials.

My purpose of this article is not to try to game the evolution of the European sovereign debt crisis. There are way too many variables and policy decisions that will influence markets in 2012 and beyond. My question is what could be an ankle-breaker (my apologies to Joe Theismann) that is clearly a blind-side hit in 2012?

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No positions in stocks mentioned.

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