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?
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