It’s not often I quote physicists but this one is from Niels Bohr
Each year Saxo Bank makes outrageous predictions, in 2016 and in 2017 for the following year.
Here are the 2016 predictions about last year and my assessment of them
1. China GDP swells to 8% and the SHCOMP hits 5,000- nope 6% & 3000 to 3400.
2. Desperate Fed follows BoJ lead to fix 10-year Treasuries at 1.5% – nope
3. High-yield default rate exceeds 25% – nope
4. Brexit never happens as the UK Bremains – nope
5. Doctor copper catches a cold – exactly wrong copper soared 60%
6. Huge gains for Bitcoin as cryptocurrencies rise – OK one right, they forecast a 300% increase rather than 1000% but yes.
7. US healthcare reform triggers sector panic – nope
8. Despite Trump, Mexican peso soars especially against CAD – almost went from 16 to 13 but reversed back to 15.5
9. Italian banks are the best performing equity asset – this is hilariously wrong
10. EU stimulates growth through mutual euro bonds- also no
ok outrageous and pretty much wrong, but good about Bitcoin… so which one of Saxos predictions for 2018 will be right?
1. The Fed loses independence as the US Treasury takes charge
Both the Republicans and Democrats vie for an increased share of the populist vote as we head into 2018 mid-term elections, with budget discipline entirely absent and GOP tax cuts bringing a massive revenue shortfall which will worsen as US heads into recession. The Treasury takes on emergency powers and forces the central bank to cap US government yields to 2.5% on long bonds to prevent a bond market meltdown, a policy which was last in place in the immediate aftermath of World War II.
2. Bank of Japan forced to abandon yield curve control
The Bank of Japan’s policy of yield curve control depends on soft global interest rates and low yields, and in 2018 this centre will simply not hold. As inflation rises, yields too will spike, and the result will be a fantastical plunge in the yen. Ultimately, the central bank will need to resort to QE-style measures, but not before USDJPY hits 150, after which it rapidly devalues to 100.
3. China rolls out the Petro-Renminbi
China is by far the largest oil importer, and many producer nations are already more than happy to transact in yuan terms. With the US’ global power and reach waning, and given the success of CNY-based commodity futures in general, the Shanghai International Energy Exchange’s decision to launch a yuan-based crude oil future is a runaway success. The introduction of the petro-yuan sees CNY appreciate more than 10% versus the dollar, taking the USDCNY rate below 6.0 for the first time ever.
4. Volatility spikes after flash crash in stock markets
World markets are increasingly full of signs and wonders, and the collapse of volatility seen across asset classes in 2017 was no exception. The historic lows in the VIX and MOVE indices are matched by record highs in stocks and real estate, and the result is a powder keg that is set to blow sky-high as the S&P 500 loses 25% of its value in a rapid, spectacular, one-off move reminiscent of 1987.
5. US voters go hard left in 2018 election
Changing demographics in the US which already has the under-35 millennials in place as a larger cohort than the post-war baby boomers will have a dramatic impact on politics in 2018. The general revulsion of younger voters for Trump’s persona, the widening inequality gap aggravated even further by the Republicans’ cynical tax reform, and a new breed of Democratic candidates who are unafraid to tap into Sanders-style populism from the left sees millennials turning out in droves at the polls in November.
6. Austro-Hungarian empire threatens EU takeover
The divide between old core EU members and the more sceptical and newer members of the bloc will widen to an impassable chasm in 2018 and for the first time since 1951, Europe’s political centre of gravity will shift from the Franco-German couple to Central & Eastern Europe.
7. Bitcoin is thrown to the wolves
Bitcoin peaks in 2018 above $60,000 and with a market capitalisation of over $1 trillion as the advent of the Bitcoin futures contract in December 2017 leads to a groundswell of involvement by investors and funds that are more comfortable trading futures than tying up funds on cryptocurrency exchanges. Before long, however, the Bitcoin phenomenon finds the rug torn out from under it as Russia and China move deftly to sideline and even prohibit non-sanctioned cryptocurrencies domestically. After its spectacular peak in 2018, Bitcoin crashes and limps into 2019 close to its fundamental “production cost” of $1,000.
8. Southern African Spring sees South Africa blossom
In 2018, after a surprising turn of events, a wave of democratic transition spreads across sub-Saharan Africa. The forced resignation of Zimbabwe’s long-term president Robert Mugabe at the end of 2017 triggers a wave of political change in other African countries. South Africa’s Jacob Zuma is forced out of power and Congo’s Joseph Kabila faces unprecedented demonstrations pushing him to flee the country.
9. Tencent topples Apple as market cap king
China, still the world’s most populous country and one with a rapidly rising standard of living, is opening up its capital markets and its reform programmes are driving a rise in investor sentiment. In 2018, Tencent leaves the other giants in the dust with its shares advancing another 100% despite the company’s already enormous size , stealing the world market cap crown from Apple at well above $1 trillion.
10. It’s their time – women crash the glass ceiling
Over the last generation, women have started achieving higher education levels than men, with US universities now graduating some 50% more women than men at the bachelor’s degree level. Women also now comprise nearly half of all business graduates. And yet in 2017, only 6.4% of the CEOs in the Fortune 500 list are women – though on average they earn more than their male peers.
Change is coming – not because it is “fair”, but for the practical reason that women realising their desired potential is the last way left to grow the pie without growing the population in our low-productivity and aging developed economies.
Maybe 3,4,7,8 May occur but here are some other concerns to consider
- Turbulent Brexit negotiations taking the UK to the cliff edge. Inability to gain agreement in UK government circles plus EU pigheadedness results in a challenging year ahead.
- General elections in Italy turning the country anti-EU. Italy is already the least positive about the EU and despite there being an equal split between right, left, and populist maybe an antiEU coalition results.
- Mayhem in Saudi Arabia leading to a dramatic rise in oil prices. It’s hard to fight one war but the new rulers of Saudi Arabia are now fighting in Yemen, Syria, antagonisibg Iran and fighting at home… not a great strategy. If Saudi and Iran get into a fight expect oil at $200 a barrel.
- Synchronised GDP growth leading to rising wage inflation. Wages have started to rise and populist ideas in the US could propel this further.
- The US equity market turning into Japan of the late 1980s. Read up about the Japan boom in 1980s At the peak, the land surrounding the Imperial Palace in Tokyo was said to be worth more than all of California! The bubble was not only characterised by inflated asset prices, but also by largely uncontrolled money supply, by excessive credit expansion and by disproportionate monetary easing. And it lasted until the bubble popped and Japan languished for two lost decades.
Ok enough about the future… we need to think ahead and plan but we also need to act; what will you do?