Economic Growth of 4% in 2013?

A few predictions for 2013

• Global economic growth of 3.5%, accelerating from 3.2% in 2012 (Source: IMF)
• US economic growth of 2.0%, accelerating to 3.0% in 2014 (Source: IMF)
• US Retail sales growth of 3.4%, with on-line sales growth between 9% to 12% (Source: NFR)

What do these predictions have in common? Like most predictions, they are likely wrong.

How can I be so sure in my "prediction?" Because I believe that price stability is the largest threat to the economy, and therefore 2013 nominal GDP has such a wide potential range that predicting its growth is no better than a game of darts. Following on from my last article, the Federal Reserve has done a masterful job so far at balancing the fundamental deflationary forces in the economy with the inflationary forces of the QE strategy. But, their path is narrowing and their control loosening, in my opinion.

Fundamental deflationary forces are coming from trends like:

1. Technology advancement
2. Excess capital in industries like retail 
3. Mis-allocated capital as banks postpone write-offs of under-performing loans
4. A leveraged consumer based on debt to income
5. Flat real income
6. Rising taxes paid on income, reducing disposable income
7. More controlled government spending, especially in Europe and wind-down of wars

QE is offsetting these deflationary forces by:

1. Raising income after interest expense through lower interest rates
2. Encouraging capital investment by lowering the cost of capital
3. Inflating both financial and tangible asset prices through direct purchases and lower financing

Why do I believe we are teetering on greater price instability, either deflationary or inflationary? There are signs of increased economic volatility based on interest rates, such as a potential "refinancing apocalypse" as rates rise, the economic distress on young workers (and thus potentially lower future consumption) as lower interest rates enabled schools to hike up tuition, signs of a growing housing bubbles in Switzerland and China (where official statistics show that 20% of GDP is made up of unfinished housing stock), Japan painting itself into a corner, and signs that liquidity is finally spreading wider in financial markets.

Hold onto your hats because I believe the markets have been lulled into a feeling of "the Fed has our backs," allowing that silent killer called risk to creep further into our economy, likely producing large price swings in my view. Let us just hope that Mr. Bernanke is as cunning and well-equipped as the Roadrunner when the silent killer of risk sneaks up on investors.