What a Surprise?

-

Byron Wien is back with his “Surprises” for 2018. Byron Wien is Vice Chairman in the Private Wealth Solutions group at Blackstone. This is the 33rd year Byron has given his views on a number of economic, financial market and political surprises for the coming year. Byron defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening. To be brutally honest, some are not really surprises to me.

1. China finally decides that a nuclear capability in the hands of an unpredictable leader on its border is not tolerable even though North Korea is a communist buffer between itself and democratic South Korea. China cuts off all fuel and food shipments to North Korea, which agrees to suspend its nuclear development program but not give up its current weapons arsenal.

2. Populism, tribalism and anarchy spread around the world. In the United Kingdom Jeremy Corbyn becomes the next Prime Minister. In spite of repressive action by the Spanish government, Catalonia remains turbulent. Despite the adverse economic consequences of the Brexit vote, the unintended positive consequence is that it brings continental Europe closer together with more economic cooperation and faster growth.

3. The dollar finally comes to life. Real growth exceeds 3% in the United States, which, coupled with the implementation of some components of the Trump pro-business agenda, renews investor interest in owning dollar-denominated assets, and the Euro drops to 1.10 and the Yen to 120 against the dollar. Repatriation of foreign profits held abroad by US companies helps.

4. The US economy has a better year than 2017, but speculation reaches an extreme and ultimately the S&P 500 has a 10% correction. The index drops toward 2300, partly because of higher interest rates, but ends the year above 3000 since earnings continue to expand and economic growth heads toward 4%.

5. The price of West Texas Intermediate Crude moves above $80. The price rises because of continued world growth and unexpected demand from developing markets, together with disappointing hydraulic fracking production, diminished inventories, OPEC discipline and only modest production increases from Russia, Nigeria, Venezuela, Iraq and Iran.

6. Inflation becomes an issue of concern. Continued world GDP growth puts pressure on commodity prices. Tight labor markets in the industrialized countries create wage increases. In the United States, average hourly earnings gains approach 4% and the Consumer Price Index pushes above 3%.

7. With higher inflation, interest rates begin to rise. The Federal Reserve increases short-term rates four times in 2018 and the 10-year US Treasury yield moves toward 4%, but the Fed shrinks its balance sheet only modestly because of the potential impact on the financial markets. High yield spreads widen, causing concern in the equity market.

8. Both NAFTA and the Iran agreement endure in spite of Trump railing against them. Too many American jobs would be lost if NAFTA ended, and our allies universally support continuing the Iran agreement. Trump begins to think that not signing on to the Trans-Pacific Partnership was a mistake as he sees the rise of China’s influence around the world. He presses for more bilateral trade deals in Asia.

9. The Republicans lose control of both the Senate and the House of Representatives in the November election. Voters feel disappointed that many promises made during Trump’s presidential campaign were not implemented in legislation and there is a growing negative reaction to his endless Tweets. The mid-term election turns out to be a referendum on the Trump Presidency.

10. Xi Jinping, having broadened his authority at the 19th Party Congress in October, focuses on China’s credit problems and decides to limit business borrowing even if it means slowing the economy down and creating fewer jobs. Real GDP growth drops to 5.5%, with, only minor implications for world growth. Xi proclaims this move will ensure the sustainability of China’s growth over the long term.

Popular posts from this blog

There is room for bulls and bears, but pigs get slaughtered

-
Image
Doing stupid things is what most individual investors throughout history have always specialized in. They seldom learn from their mistakes. If they decide to hitch a ride on a bubble when it is on the way up thanks to the greed factor, make sure they remember to bring a parachute for when it inevitably pops. Some investors and traders who were “born” in the markets after the Great Recession in 2008 have made good money from risk assets over the years thanks to the massive money creation by the self-serving central bankers who do not eat and drink based on their official inflation numbers. So, they have no experience whatsoever with losing money in investments.   Those investors have not lived through the financial market crashes such as the dot-com crash of 2000-2002. I was there when the tech stocks crashed to earth. At the peak of the crazy party, I could still remember that anything that was vaguely related to the internet was enough to impress the pretty girls at the bar...
Read more

Bonds face biggest bear market in almost 40 years

-
Image
I was working on an article and then this interesting Bloomberg TV interview crossed my desk. Billionaire hedge-fund manager and Bridgewater Associates founder Ray Dalio said that the bond market has slipped into a bear phase and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years. Well, this is the guy who runs the biggest hedge fund in the world. If you recall, a couple of weeks ago both Bill Gross and Jeff Gundlach, two of the most famous bond fund managers, spoke of the prospect of a bond bear market coming. Bill Gross refined his call by writing how the bond bear had actually begun post-Brexit in 2016. This stuff is crucially important for financial markets, as interest rates are the well spring from which all other market trends arise. Rising interest rates trigger recessions and bear markets. So what the heck are you supposed to do now? For those who love short-term action, keep selling those bond rallies. ...
Read more

The US dollar comedy

-
Image
As I scan the news articles everywhere, I have noticed almost everyone and his dog is becoming increasingly bearish on the US dollar. The US Dollar Index was one of the major disappointments of 2017, depreciating by 9.0% and putting in its worst performance since 2003. Effectively, the dollar will get thrashed again in 2018 is the popular view.  Some of the analysts argued that all good news is already priced in the US dollar. It makes sense from the fundamental perspective. However, lots of things make sense in the investing world until Mr. Market decides to prove rationales flawed. Just ask the old timers who have seen enough in the markets. According to the latest Commitment of Traders report, released on December 29 by the Chicago Futures Trading Commission, large speculators reduced their net short positions on the US dollar. I do care about fundamentals. Over time, the macroeconomic fundamentals will reassert themselves. The key is interest rate different...
Read more