Let’s see if we can beat 2017’s illustrious track record.
My thesis this year is quite simple, central banks have been and will continue to be overly accommodative, geopolitical risks are low and falling which will continue to provide a wide and clear runway for the ongoing and very underappreciated technological revolution to accelerate and spread. All of this is very bullish for risk assets, particularly ones that are levered plays on a continued global expansion that investors remain highly skeptical of.
World leaders have realized that the path to world domination (and prosperity) is through technology. Maybe this ends badly ala a Terminator style judgement day, but the space race of the 50’s and 60’s led to some pretty wonderful advancements in technology along the way.
But for as much as technological innovation is being under appreciated, ongoing geopolitical developments are being completely misread by investors who are either farming out their all too important geopolitical analysis to the MSM or are too preoccupied with latest Trump tweet (which by the way was purposefully designed to distract you) to muster any semblance of a coherent analysis.
The “Trump is dumb and reckless” narrative is an important distraction from the ongoing positive geopolitical developments, such as progress on North Korea…
And other major geopolitical realignments.
These developments fly in the face of fears that Trump will either launch a major trade war with China, launch a kinetic war with North Korea or be impeached (current oddsmakers have him at an over 50% chance in the next three years). To be clear, this is a massive gap. Massive and with no chance of being resolved anytime soon. So despite bullish positioning, euphoric sentiment and the US economic expansion entering its 9th year, I am and remain bullish on both economic growth and risk assets globally.
Momentum is highly in the bulls favor.
Perhaps nothing says “risk on” more so than the Nikkei surging +3% in one day to 27 year highs.
For the past 9 years the world’s central banks have been overly accommodative and by all accounts will continue to be so. Sure the Fed is slowly reducing its balance sheet and the ECB and BOJ will very likely tighten policy this year as well but it’s important to recognize that relative to future global economic performance, central banks will remain overly accommodative for the foreseeable future, else they risk popping their own systemic bubble.
“Investors really do understand now that we will be there to prevent serious losses… Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road.” ~ Incoming Fed Chairman Powell in 2012
Do you think Trump would pick this man to come back and pop the stock market bubble he has anointed as his report card?
If you think he’s as dumb as his twitter account suggests then that answer is probably yes.
Maybe, Powell does pop the bubble. Certainly things have gotten away from central bankers in the past. Actually every time the US 10 year interest rate has been at the top range of this channel, something rather explosive has happened.
Worth noting that five year yields are also near the supposed danger zone.
It’s also been a few years since central banks commitment to financial stability has been tested, and the markets have a habit of testing new Fed Chairs. From Ned Davis Research:
“The median correction in US stocks in the first six months of a new Fed chair (starting Feb 1) is 10%. Yellen’s 3.8% pullback, when she took over from Bernanke in 2014, was the smallest to date as the market expected a smooth transition.”
Anyways, I’ve rambled on long enough. Sorry (not sorry) for discussing politics. You get the point, I’m very bullish but I have one eye on the bond market. Let’s get to what you guys really came for, my 0% prediction accuracy:
1. What is dead may never die. Investors remain woefully under positioned for a continued global expansion. 2018 may not be as good as 2017 but it’s still going to be good enough to pull some left for dead assets back to life. (Shipping, uranium, oil service co’s, high SI shale etc.)
2. US growth positive surprise. The weaker USD combined with tax cuts and millennial might will give the US its best economic growth in the post GFC era.
3. Republicans handily win the 2018 elections. Trump has consolidated his power in the DOJ and FBI and will go after his political enemies sending the Democrats and DNC into disarray and the strong economy won’t hurt either.
4. USD trades sideways. Speculators arrived way too late to take advantage of the first down wave in the USD. They will have to contend with a year of chop much like 2015 before the dollar makes its next move lower. Domestic political turbulence and a hawkish ECB should keep any USD rallies in check.
5. Gold goes up, but under performs virtually every other major commodity. Sorry bugs, but you are my sworn enemy.
6. Cryptocurrencies go wild. The combined market cap of cryptocurrencies hits $3 Trillion sparking a temporary spike in energy prices and a sell off in developed market bonds as speculators rush to participate the world’s most obvious example of monetary policy run amok.
7. In regards to future events, I know nothing. This was my most accurate prediction last year, and I wager it will be no different this year.
Super Bowl Prediction: The Battle For Pennsylvania – The Philadelphia Eagles soar over The Poopsburgh Steelers.
DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!