2012 is here in full force already so it’s time to get my predictions on like I promised you yesterday!

However, please remember that at the end of the day, it really makes no difference what I think will happen…it only matters what you think. There are plenty of people much smarter than yours truly who “got” 2011 completely wrong (think John Paulson, Bill Gross, and of course Whitney Tilson…).

But hey, if they can fail so spectacularly and still hold their heads up high and maintain billions of dollars under management, surely I can throw my hat in the ring, and I am happy to gaze into my crystal ball for you and tell you what I see. (Just please remember that mine is as cloudy as everyone else’s!).

But first, I have one quick fun request for you…will you help me choose our new Kung Fu Finance logo?

I have a contest going over at 99designs and have narrowed it down to the final 8….and I would really appreciate your opinion! You can vote right here (it’s quick, easy, and fun):

Click here to vote on the new Kung Fu Finance Logo!

Thank you!!!

Now, on to 2012…what’s going to happen???

I saw the new Sherlock Holmes movie last week and wish that my powers of observation were as good as Holmes’…he was able to actually predict the future multiple moves in advance simply by using his astonishing powers of observation in the present!

While my powers of observation are sadly nowhere near the quality of Holmes’, I will do my best to fill you in on my top predictions for 2012 and how you can best protect yourself from the tumultuous times ahead.

Which leads me to my first prediction:

1. Continued Volatility

If you think 2011 was a bumpy ride, I’ve got to warn you that I foresee 2012 being even crazier. As I feared, exactly zero of our global problems have been solved and we are entering 2012 with even more U.S. debt (almost $15.2 TRILLION), a gigantic deficit ($1.3 TRILLION as of September 30, 2011), a huge problem in the Euro zone, a slow-down in China, global trade imbalances, and continued unrest in the Middle East. Good times. (Not!)

And to top it all off, it’s an election year here in the ol’ U.S. of A…who knows what that will do to the markets!

Actually, by now you know that I am somewhat of an economic history buff (as Confucius says, “Study the past, if you would divine the future…”). And it’s interesting to look back and see what election years have held for markets in the past. Luckily, there are two even crazier history buffs than yours truly, Yale and Jeffrey Hirsch from The Stock Trader’s Almanac, who have scrutinized the performance of the Dow Jones Industrial Average over 177 years of presidential cycles.

So what did they find? Well, beginning with Andrew Jackson in 1829, election years have averaged a 5.8 percent gain in stocks. And 29 out of those 44 election years have resulted in gains for the Dow. So, despite all of the global economic uncertainty, it could actually be a somewhat positive year this year for the stock market. (However, I think it’s far more likely that 2012 will be like the other 15 years…but who knows!).

Either way, what I can predict with absolute 100% certainty is continued volatility, and tomorrow I will give you my #1 strategy for dealing with said volatility (and no, it doesn’t involve burying your head under a pillow, as tempting as that may sound!).

2. Continued Corruption

This next prediction is just depressing. I am such an optimist and always like to look for and believe the best in people, but I’m sorry to say that our markets and our governments are becoming more and more corrupt each year. It’s sickening, and gives me absolutely no pleasure to write this.

But with the downfall and horrendous handling of the MF Global saga, where investors are still missing $900 million of their own money while their accounts are frozen and so-called “regulators” “search” for missing funds, it’s apparent that our markets are being corrupted by the very leaders who are supposed to uphold and regulate them.

Here’s an understatement of the century by Reuter’s: “Some traders have lost confidence in CME’s ability to regulate brokerages like MF Global and to protect customer money held in segregated accounts.”

And here is a more accurate statement from Ann Barnhart who said on November 17, 2011, “The entire system has been utterly destroyed by the MF Global collapse.

And unfortunately, MF Global is just the tip of the iceberg. I warned you a few days ago when I mentioned one of my “top” investments of 2011, EUO, of the problems of many of the leveraged ETF’s and how you need to watch them very closely, and sure enough, two of the popular “double-leverage” precious metals ETF’s, DGP (Double Long Gold) and AGQ (Double Long Silver) completely diverged from what they were supposed to do last year.

DGP is supposed to track the physical spot price of gold by 2x, so if gold is up 10% on the year (which it was), DGP should be up 20% (which it wasn’t—it was only up 10.9%). And silver finished the year down almost 10% (9.9%) so you would expect that AGQ would be down 20%…but in actuality it was down 47%!

That’s not even in the ballpark of how that fund is supposed to perform! It is funds like these that continue to destroy Wall Street’s credibility— these structured products do not do anything close to what they promise to do. Why would anyone in his or her right mind choose a “product” like this that diverges so far from what it promises? (Short answer: they wouldn’t!)

So as good ol’ Kenny Rogers famously sang in his hit The Gambler, “You gotta know when to hold ’em, know when to fold ’em, know when to walk away, know when to run…”, and I’m afraid that 2012 may be the year when it’s time to run away from some of these so-called markets, or at least to be very, very careful if you choose to engage. I’ll talk more about ways to do this and alternative investment vehicles in an upcoming post.

3. Euro…Make up or break up?

Finally, we have the Euro zone. This is a toughie. I simply cannot see how they can possibly pull it together and avoid at least a partial collapse, with at least a few countries being forced to leave the Euro, and yet, I never underestimate the power of politicians to delay, deny, and “diffuse”. They could possibly drag this out beyond the end of 2012, though it will be painful no matter what they attempt to do—theirs is a problem with no easy solution (another understatement of the year!).

If I’m pressed, however, my prediction is that the Euro zone will at least partially collapse, leading to extremely difficult and volatile times for the entire globe.

Wow, well, happy-happy-joy-joy, right?! I’m so sorry for the gloomy prognosis! But there are not a lot of optimistic signs on the horizon right now…but hey, maybe that means the “contrarian” play is to think positively and expect a huge leap up in all global stock markets, the final resolution to our global debt crisis, and world peace.

I sure hope so.

But just in case, I urge you to “prepare for bad times so you will only know good times.”

Here is the logo link one last time for your vote (thank you!!!):

Click here to vote on the new Kung Fu Finance Logo!

Thank you so much for reading and being a part of our Kung Fu Finance community!

To your financial success,

—Kung Fu Girl