Investing in 2018 – the trend is your friend

Topic: Macro research is all but useless for predicting the future. However just as with weather forecasts it can provide a gauge of the current state as well as current trends. Rather than predicting turning points, be content with an accurate measure of things as they are now and invest with the expectation of the continuation of said trends.

Conclusion: Stock prices will rise, gold will stay flat or rise modestly, Bitcoin and other cryptos will soar, the oil price will keep rising, the dollar index will be flat but volatile, central bankers will stay deranged crooks (they will also raise policy rates very slowly, always talking a little tough but hiking more slowly than they communicate they will)


Use macro data carefully – don’t make the mistake of believing you can predict the future

Macro what is it good for? I wrote at length about that some time ago (here).

Here is a short version: Identify the 5-10 most important variables regarding the general big picture for the economy and assets.

Those are in a nutshell policy rates, bond prices, the spread between the two, as well as various spreads between corporate bonds, junk bonds and so on; the dollar index, the gold price, the oil price, GDP growth rates, job market data (e.g., unemployment rates), various inflation gauges (CPI, PPI), debt data (economy wide, debt growth, NYSE margin debt); and finally the stock market valuation (I prefer sales valuation measures like P/S and Hussman’s (non-fin MC/GVA).

Are the variables trending? Extrapolate the trends and draw the appropriate conclusions.

Are some correlations breaking down, e.g., if higher rates are accompanied by a weaker USD instead of a stronger USD, you might want to tread a bit more carefully.

If everlasting surpluses turn to deficits, or the other way around, is also a reason to worry. By the way, isn’t it weird with falling US tax receipts, at the peak of this everything bubble, vs. previous falls that occurred at economic troughs like in 1991, 2002 and 2009? Does that mean the economy has that much further to rise, or are asset prices and the economy a house of cards waiting to catch down to what tax receipt trends are signaling?


My outlook and strategy for 2018

In short, the fiat money game is unsustainable.

Central bankers aren’t at all ignorant of that fact. Contrary to appearances they aren’t stupid. They might be scared, conniving and evil, and slightly confused by certain “conundrums”, but they are not stupid. Right now central bankers are scheming and jostling for position ahead of the end game, the big re-set, the fourth turning, perhaps a debt jubilee, the end of the eurodollar, the end of the USD hegemony and perhaps eventually the end of cash money.

There simply is no way out of welfare promises, given current levels of public debt, tax deficits etc, with less than a productivity explosion fueled by Singularity technologies like strong AI, nanotech and ubiquitous automation. Consequently, authorities will push the current trends as far as possible, hoping to avoid a breakdown on their watch. The ones who know they will be responsible when the shit hits the fan do what they can to position their private wealth as safely as possible, while amassing as much relative bargaining power for their respective countries ahead of the carnage as possible.

Bankers always keep dancing (musical chairs) until the very end, well aware that the bigger they are and the more in the wrong they are, the more systemically important they are, and thus  guaranteed a rescue with tax payer money. Creating as much private bonuses as possible in the meantime doesn’t hurt either.

Actually the more certain the coming crash becomes, the stronger the reason for bankers to push the pedal to the floor. Why go slowly now, and not even get a rescue later, when they can maximize bonuses and importance now and guarantee a rescue later?

Investors like Warren Buffett, Soros, Gundlach and Klarman are hoarding record amounts of cash (but what is a 100bn USD among friends?) – apparently even negative rates are more palatable to a very select group of finance geniuses than equities at this point.


No turning in sight

The above all but guarantees current trends will continue. My best guess therefore is that we will see higher stock prices, oil, gold and Bitcoin in 2018 than 2017, despite record high valuations, climate change, an eroding eurodollar system and an oil market in flux ahead of the Aramco IPO.

Remember that inevitable (as the coming crash is) does not mean imminent. No matter how certain the future crash is, that doesn’t mean it has to happen right away. Sometimes, it’s quite the opposite.

Without an expanding eurodollar system (listen to MacroVoices’ 5-part podcast series from December 2017), central bankers will have to print ever larger amounts of money to compensate. Even if that leads to financialization and speculation, on both the corporate and consumer sides of the aisle, rather than real investments; 5x the money together with 20% lower real profits still mean 4x the nominal profits. Even if valuations would halve in the meantime, stocks still double from here in that scenario.

However, please note that if the 5x money scenario plays out over five to ten years, I expect massive interim volatility and buying opportunities of a lifetime in both real estate and stocks.

I think stocks will reach an index of 50 (from the current 100) before gong to 200. Some real estate prices could follow the same trajectory. Probably Bitcoin too, but while exhibiting even larger swings. Gold is a different story, since it has already had its halving, and I fully expect the gold price to rise by 5-10x or more from its recent nadir around 1000 USD.

So, stocks will be better than money over the coming 5-10 years, but gold will be so much better. I include platinum and silver, and possibly uranium as well, in my gold price forecast, even if they are four almost completely different assets.

Oil is a tougher nut, but given the promises of the shale industry and the rise of solar power and some tentative signs of a nuclear renaissance, I wouldn’t want to buy oil assets above 45 USD/barrel.

Regarding trends breaking down… For the last 75 years or so fiat money has ruled over gold; and oil prices (cheap energy) and the eurodollar (cheap money) have ruled the world. Now there are signs of gold becoming an important pawn (potential queen) in the chess end game, while both the eurodollar system and petrodollar system are breaking down. Come to think of it, the fourth horseman of the apocalypse is the US Treasury 10 year bond price. It’s still under control, but if fiat money and energy markets are re-set, then the price of money (interest rates) will be maybe the most important gauge of the collapse gaining momentum.

As brilliantly covered in the MacroVoices USD Hegemony series, the dollar is about to lose its special status. In the interim that means that the eurodollar system loses its liquidity and malleability, meaning there is a sort of technical short squeeze of dollars when eurodollar players are finding it increasingly difficult to roll their overnight dollar shortages. The question now is if this has already happened and the dollar is on a one way street downward, or if there is a final surge left before the dollar’s slow demise resumes.


Be careful what you wish for – all is not gold that (not) glitters

What do you want?

We want gold!

How do you want it?

In physical!

If you hold ETFs like GLD or other kinds of paper gold, i.e., promises by a third party to settle your claims on gold in cash then, if the price suddenly accelerates upward, or fixes at a much higher level, that third party either can’t or won’t make good of their promises. Rather, they’ll refer to the fine print saying they have the right to liquidate the position if the market becomes disorderly.

There is 100x as much paper gold as real gold, so there is no way paper gold holders will get even a fraction of the benefit of a gold price fix significantly higher than today’s 1315 USD per oz. All they’ll get is a cash settlement at perhaps 10-25% up, even if the price fixes at 10 000 USD.

You should also be wary of the very real risks of government gold confiscation or draconian windfall taxes on gold


Final words – the start and end end points are almost irrelevant for investors in macro matters, the path is paramount

Given all of the above I think 2018 will resemble 2017. The current trends will continue (until they break, but who knows when that will happen?), and I think the correlations and gyrations between asset classes in that break will surprise everybody. I think the real re-set is 10 years out, so I would look to buy an intermediate correction, just as everybody has done the last 5-10 years.

The optimistic view is a soft fiat/eurodollar/reserve currency reset in 2018-2019. The pessimistic view is a 4th Turning style total solution in ten years… In the end I think gold will outshine stocks, but stocks will still have a good run vs. money – in particular if you save your large share purchases for the coming correction.

Ten year view:

  • Gold price 10x (but flattish through 2018)
  • Uranium price 3x
  • Stocks 2x (but interim crash of -50%)
  • 10 year bond market rates 5%
  • Real estate prices 2x (with interim large correction)
  • Oil price (today’s dollar): 40 USD

…and here is what I wrote about my portfolio and macro views 6 months ago

 

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16 Comments

  1. Do you think there’s a chance of a “flight-to-quality” leading to strong outperformance in U.S. Treasury bonds in the short- to medium-term, around the same time stocks take a -65% loss and gold starts to break out towards $10k per oz.? I imagine a lot of foreign countries will be chasing the “safe haven” of the dollar in that environment. Of course, in the long-term, U.S. Treasury bonds will have to reflect the reality of inflation…

  2. Rudiger, that is my belief. Every crisis *so far* (at least the non US ones) has resulted in the dollar gaining on other currencies. Mike seems to almost agree with this when he notes that investors would rather have negative interest rates than a more speculative asset.

    I agree with this article, except for the prediction of USD losing dominance in only 10 years. For that to happen, something must take it’s place. The euro, yen and pound are in worse shape. The swiss franc and others are too small. Even China may have a worse debt bubble. Plus, exporting countries like China want a weaker currency, not a stronger one. Despite their conflicting political goals.

    I believe we will have an 18 month warning to sell dollars and get into protective assets. The scenario goes like this. Suppose some EU countries decide to default on their debt and start over with a clean slate. That would make the euro a safe haven for the medium term future. Having a better safe haven, investors could leave the dollar. However, I do not believe this can happen in under 30 years. Even small countries like Greece are not allowed to default with a clean slate. They are saddled with crippling debt to keep up the appearance of a healthy system.

    • We are in agreement. It will probably take several decades for the USD to actually lose dominance.

    • The euro is in great shape.
      Look at its balance sheet. Then price gold at 10k euros.
      The ECB’S rules allow it to launch QE into physical gold too, I don’t rule that out.
      The dollar will be toast by 2032.
      The yuan oil contract with physical gold settlement will displace the dollar within 13 years, and the return of a physical gold market will put the euro in number one position.
      Overall though, I’m expecting a similar path these next 10 years. I do expect physical gold will increase by at least 20x.
      The soft reset you mention is likely in 2020/21. New monetary system once the USD collapses in 2032.

      My business offers bullion services to European clients, so if you need allocated bars in London, Zurich or Singapore, let me know. No online nonsense, just real bars.

  3. Weather is notoriously hard to predict, and it’s generally accepted that no accuracy at all is possible beyond thirty days (except in the general sense of seasonal differences). No one counts on a weather forecast to be accurate even 72 hours in advance.

    On the other hand, weather is easier to predict than economics for two reasons: First, weather is not influenced at all by human expectations and prognostications – the chance of rain tomorrow doesn’t increase because you schedule an outing, no matter how it seems. Second, weather is subject to physical laws which are known, exact, and permanent. It is not subject to paradigm shifts, new technologies, or the tampering of governments.

    • I agree with this 100% too.

      However, there are quite predictable economic cycles such as investments, and industrial production. GDP growth rates, e.g., typically stay in a +4/-4 per cent range for a developed country and moves between these end points in a pretty stable pattern — except when it doesn’t

  4. Excellent piece, Mikael. I can add that I think grains and agricultural commodities are going to break out in the next year or so. That is going to bring back inflation and create a lot of trouble. I also think that Uranium could go higher than 3x but we’ll see.

    • Both I and my girlfriend Anna are with you on this one. She’s actually working on an algorithmical soft commodities/stocks allocation strategy right now.

      the money-climate-fixed capital investments-SOFTS prices-wages-inflation Complex is…. well, complex, but I definitely think there will be inflation sooner or later (it will probably surprise a lot of people when it arrives, but I’m betting it will arrive later rather than sooner). I also think central banks will stay behind the curve as well as manipulate inflation measures downward even more than they already do. That’s why I expect real estate, even leverage financed investments in real estate will be excellent – even taking into consideration an interimistisk correction.

      The 3x uranium “forecast” is mainly there to show I expect more from uranium than stocks, but less than gold.

  5. Mikael – “Investors like Warren Buffett, Soros, Gundlach and Klarman are hoarding record amounts of cash (but what is a 100bn USD among friends?) – apparently even negative rates are more palatable to a very select group of finance geniuses than equities at this point.”
    Not sure about the others, but this statement is not at all an accurate description of Buffett’s attitude toward equities. Just this morning he made comments on CNBC that support what he has been saying for some time now – that he considers equities to be far superior to fixed income securities at this point in time. As he also often points out, Berkshire Hathaway ALWAYS has significant amounts of cash in the form of short-term Treasuries on hand due to business necessities and to the large stream of cash that constantly fills its coffers.
    Not to take anything away from your excellent article, but I think it is important for facts to be as accurate as possible.

    • That was exactly what I was thinking. While it is true that BH has unusually much cash holdings atm, they are still some 70% in equities so it is not accurate to say that they are predicting a crash or anything like that.

      • WB always says that. You need to analyze the nuances. It’s a fact that BH has unusual amounts of cash now, just like it had in 2008. WB said the same things before that crash, and he had similar proportions of cash then.

  6. Happy New Year.

    My idea this year (and I started already) is to speculate with crypto currency and in case of profit, use this profit to buy physical gold.

    Of course I will use the part of my money that I use for risky investments.

    Thank you for your article.

  7. How do you spot the buying opportunities (in real estate and stocks) when they come? I’d love to see a follow-up post on your methodology for spotting opportunities, because when the correction happens, it’s won’t be easy to “pull the trigger.”

  8. Gold went almost 10x between 1999 and 2012 while stocks went nowhere. Now it’s time for the opposite

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