The potential for disruption in 2015 is enormous, and not just for markets. While I won’t even think about doing my own forecast, just collect views from the best of my reading on the web, lets start with what a Feng Shui master writes about 2015, the year of the wooden goat
Regarding the economy, fire element is often the driving force behind the stock market. The five elements are also affecting people’s mood. In general fire is joy, water is fear, Earth is meditation, metal is sadness, and wood is anger. As such, fire year often generates optimism and drive up the stock market, such as 2006 and 2007. But in 2008 the water arrived and obviously people began to have fear about worsening of the USA sub-prime problem and recession. So the financial tsunami occurred in autumn of 2008 leading to a few years of instability in the world economy. The years subsequent to 2008 were missing the fire element, so the crisis and instability particularly in USA and Europe prevailed until 2013, when the US economy showed strong recovery with the fire Snake year. In 2014 horse year the fire element continued to fuel the economy and it is obvious that USA and Europe are out of the bearish years. In 2015, the momentum of fire driven optimism will continue so this could be a year that the economic activities and stock market will continue to be very active particularly in spring and summer. The strong fire and absence of water this year is still positive for the economy and the optimism continue to bring confidence to buy. This positive fire energy will continue into 2015 and 2016 which are also wood and fire showing up in the Heavenly stems.
He does forecast earthquakes, fires and peace treaties… and if sufficient people believe in his forecast then it does have a chance of success, but lets get back to economics and the forecasts of those “famously accurate” forecasters the economists*…
Let’s start with a general list of topics.
The United States seems to be doing relatively well. Unemployment continues to reduce at around 2% per annum, more or less; GDP growth is more stable although still low at around 2-2.5%; and interest rates are likely to be low for some time. The US equity markets are shrugging off anything negative. You can make a very reasonable case that this climate will continue for another year, so you have to start asking yourself, “What could go wrong?”
Well, a potentially sharp reduction in capital expenditures in the oil extraction industry (as I have mentioned previously) could dampen the US economy and there have been a significant increase in oil based employment that could turn around. Subsequently US exports could be hit by the rising dollar, which will also hurt corporate profits of large internationals reporting in rising US$, which will then impact stock market valuations – developments that have historically signalled the potential for a drop in investor confidence. And we really need to think through the potential impact of deflation, as energy prices will lower inflation . So the reduced price of oil could produce mixed results for the US, real positives for the domestic economy through lower oil prices and lower cost of imports balanced by Energy company poor performance and lower international profits.
On the global level, there is the real possibility of a significant US dollar appreciation will lead to the repatriation of US-dollar-funded overseas investments . The policy divergence among the major worlds central banks is on the verge of being very pronounced- US considering increasing interest rates while Japan, Europe will consider further reducing interest rates. This will have a big impact on global markets more than most understand. As fall out, such a divergence in interest policy has not been good for emerging markets.
We have to pay significant attention to Japan. The rapid fall of the yen has been significant. Certain forecasters (John Mauldin) forecast the Yen to move toward Y200 to US$1 ( currently Y200/$1); but this recent drop could be seen as too far, too fast. And the drop in Yen, while boosting demand for Japanese exports could draw a response from Taiwan, Korea or China, creating an export currency battle in north-east Asia.
Europe is working its way into an outright deflationary recession. Finance Chief Draghi keeps talking but never seems to do anything but talk. Will he be able to gather enough support to override German objections to acting and reducing interest rates? Another threat is the political vaccuum in Greece potentially threatening either leaving the Euro or defaulting on their borrowings again this year? Can Europe continue to muddle through for another year, or will the crisis they have been avoiding addressing finally force them to deal with the real problems?
China is clearly slowing down, but by how much? How will slower growth impact its trade partners, especially those who have been providing basic commodities, like Mongolia and Australia? China is also clearly over borrowed by governments, banks and firms. Will they be able to manage the transition from selling goods on the world market to persuading chinese consumers to buying these goods, reducing their savings rate to invest more?
Emerging markets are now 50% of world GDP. They too have become over borrowed and also dependent upon cforeign investment in their bonds and loans. The average emerging-market currency is back down to a level (against the US dollar) last seen in 2002, with many of them showing signs of even greater weakness. Malaysia is down 15% against the US$ for one example.
Energy prices are down, and that’s good for the energy consumers of the world; but low prices are going to create problems for various countries, including Russia and Iran. How will they react?
The widening policy divergence among major central banks, noted above, is going to have a major impact on currencies and create the real potential for a currency war. Also, will the US Fed actually raise rates this year as currently advertised, and if so, at what pace?
But all of the above are negative tail risks. Typically is easier to find the problem children than it is to find potential opportunities. So with the aim of assisting you by trying to avoid hazards, I’ve described what I think are the worst on the horizon.
* I have read recently that the best economics forecasters had a success rate of 45% (worse than flipping a coin!)