Plunger's 2005 forecast
[Plunger is a poster on my board on the FOOL - this entire post except for my comment here in brackets is from Plunger. Here goes:]
I think it's now quite clear how the year's going to pan out. The Dec FOMC minutes showed the Fed upset by two things
1. Excess US consumption fuelling the trade imbalance.
2. Property and junk bond bubbles sustaining the consumption boom and possibly leading to financial instability if allowed to develop further.
The Fed have said they want to ensure the bubbles are contained. They are therefore on a course to hike until either
(a) they are more comfortable - leverage/borrowing decreases without exciting side effects except a gentle decline in overconsumption,
or
(b) the finacial markets do something dangerous that forces/scares the Fed away from their hiking path.
However the global system has too much savings looking for a return. As the Fed hikes, marginal investment opportunities turn uneconomic. Activity declines. This is what they want, but earnings and wages will be very soft, and higher rates are out of sync with economic realities of low yields on assets. Thus they are playing with fire and given how brittle high leverage makes the system, they will surely break something.
Clearly with massive leverage and not much real capital supporting the elevated transaction prices in the US financial system, item (b) above will actually be the result. This will cause, at some point quite soon, a stockmarket fiasco and the Fed will need to reverse course. But the damage will be done just as the Fed did in 1937(?) and because of global excess savings, no other country will take up the slack and a global depression will ensue. By the end of the year this depression will be in full swing. Owing to US asset deflation and economic softness, the US consumer will no longer be able to bail out the world's excess savings washing about.
Investment implications
1. Stocks. Gradual decline until the waterfall down. Then when the Fed eases, stocks will stabilise but only creep up timidly and in line with some modest inflation that the Fed is forced to accommodate.
2. Treasuries. Broadly stable until the stock crash when there is a rush for safety. Led by the long end treasuries then sell off as the Fed eases and modest inflation is accommodated.
3. Eurodollars (2005/06). Broadly stable until the stock crash then a rapid move up where they remain until maturity.
4. Oil/copper/steel. Falls throughout the year.
5. Real Estate. Falls from here. Will revert to a bull market once the Fed eases but because of weak wages and financial instability, the Fed might impose margin rules on home loans so the market is unable to get too exuberant for quite a while.
6. Gold/Silver. Bearish until the stock collapse, then a steady bull market resumes and new highs are reached later this year. Tough to play - dangerous now though a sure winner in the end as the US cannot ulimately preserve the real value of the USD owing to incapacity for debt service with a strong currency.
7. Foreign Currencies. The USD may be strong while markets see how far the Fed goes. When global stocks collapse, probably the USD will be allowed to weaken. Euro should touch 1.50 at some stage though this may be due to inflation in the US and so purchasing power parities may not be so volatile. CAD should outperform all majors again after the stock crash when gold/silver resume their bull run.
8. China. Capex bust, when it's clear the US can not accept an ever increasing stream of imports, is a severe shock and very soon. Severely exacerbates the global depression by creating a massive business-cycle recession on the world, especially Japan.
9. Japan. Horrendous depression as the rest of the world can no longer deal with their excess production, which has been running at 15% of GDP for a decade and more. Massive reduction in employment, high Yen, much strife. The US may decide to leave Okinawa and other bases to let Japan build its defence forces to offset the unemployment and the US trade deficits, at the margin.
10. Europe. Continues to eat good food, breather reasonably clean air, take long vacations in both the summer sun and the winter snow and generally enjoys life.
Trade implications.
Now. Short stocks, buy puts if you see things crumbling. Long Eurodollars and treasuries.
At the stock crash. Redeploy capital from short stocks into gold/silver. Hold Eurodollars unless they go mad on the upside, and shorten treasury durations but add leverage. Get back into the carry trade as Fed Funds will have to stay negative real in the end. Buy property/REITS if bombed out.
Good luck to all.
Plunger. |
