Six years ago I found myself on my first TV network panel, wishing I was somewhere else.
The panelists seemed so clever, so witty, and so eager to spring forth with transient conclusions. I was the oddball - the miscast crank of sorts admonishing the panel on why we should spend more time on ensuring a margin of safety against the unknown rather than trying to predict it.
The steady stream of pontificating on the investment implications of 2010’s hot topics including sovereign debt, QE2, and the passage of the Affordable Care Act is about as constructive as being lost in a dark room and knowing there’s a light switch but not knowing where it is.
Yet, for the sixth-consecutive year I find myself crafting my prediction for what lies ahead in 2016. Truly, I have found that writing or televising my views is the best way to educate myself about it, and when I browse through my past predictions I reminisce how much they taught me, if nobody else. My past proclamations have taught me that I didn’t know very much. But they also reminded me that the vast majority of us don’t know much either.
On October 19,2010 I was on camera arguing against one of my undergraduate finance professors - a very well-known “go-to-guy” – who thought my expectation of U.S. 10-year yields going to sub 1.5% (they were 2.5% at the time) was “foolhardy”, or on July 12, 2011 when I was head-on with a large investment bank CIO who patronizingly rolled his eyes at my conviction to be short the euro/U.S. dollar at the then-present trading price of 1.42.
My stubborn bullishness on the U.S. stock market was scorned by some of the industry’s “best and brightest” and so ridiculed was my short conviction on gold on from November 14, 2013. Yet even when I was dead-right about direction – especially when having the pleasure of exposing these charlatans for the shams they are selling; I found something deeply misguided and painfully wrong within me and my correctness. It forever changed how I view market prediction.
First, it’s astonishing how large my faith is in my personal ability to perceive and interpret the future. Whether this can be chalked up to human conditioning or personality doesn’t matter as we all - on some level - are afflicted by this and this propensity can be lethal.
Second, I exhaust more energy in predicting unknowable macro-market risks at the expense of continually preparing ways to protect capital in the face of such unavoidable certainties. Attempting to guess the next big event is good sport but all for naught if your timing is off – even a tiny bit as it’s a game of horseshoes not hand grenades.
Third, and most importantly, predicting events – i.e. earnings, macro, and economic data – always comes in at a distant second compared to understanding the value of an asset.
My 2015 predictions ended up a mixed bag. I called for a flat-ish S&P 500 year-end target of 2050-2075 (actual 2043.94). I favored hedged positions in both European and Japanese equity indexes (+3.9% & 9.1% respectively), a gold price in the $1075.00/$1100.00 area ($1060.20), and oil in the mid-$40’s ($37.04). I predicted two 25b basis point Fed Fund rate hikes in June & September (actual one 25bps in December) with a year-end U.S. 10-year yield target of 2.75% (actual 2.27%). My euro bearish continued from 2010 as I called for a year-end target of 1.12 (actual 1.0856). I was dead wrong with my bullish convictions in cattle, copper, and coffee.
Looking Ahead in 2016
For the first time I find my 2016 forecast to have strayed from consensus.
This year, I left the coziness of the crowd - the false sanctuary of doing what everyone else is doing. On the other hand, although it’s cool to be contrary, I’m not generally a contrarian for the sake of being a contrarian. Rather, consensus this year could be dead right; I just believe at this time the odds are in my favor – whether they are right or not.
My 2016 forecast is based on two key themes which include the imagined control of central bank policymakers and the ease with which we fool ourselves. These themes have been bubbling below the surface for years and have pushed price valuations to a level where the odds are in my favor – even if I’m absolutely wrong with my conviction. Remember consensus does not always have to be wrong.
My thesis is wholly based on the idea that unlike 99% of the published opinions, I am of the 1% who believes the U.S. dollar will not appreciate much further than it did in 2015. It could stagnate for months on end, but I think we are close to a U.S. dollar top versus the major currencies. I believe 2016 will bring consumer-type inflation (don’t believe those who say we don’t have inflation – they just don’t know where to look) placing a hard roof over the dollar’s head. Additionally, we could see U.S. dollar stagnation – or even a retracement – given a narrowing of a perceived tightening/loosening of monetary policies between the U.S. and Europe.
Perhaps the FOMC won’t raise Fed Fund rates anywhere near the 1.375% average FOMC target or the European Central Bank won’t need to continually “do whatever it takes” by slicing rates. It could wind up “both/and” or “either/or”. Whatever the case, the markets are pricing in a scenario that’s much different. An environment of global disinflation, higher rates in the U.S. and lower rates in Europe.
I believe the U.S. equity markets will wind up 5% higher on the year based on earnings growth and stability in the dollar and commodities markets. Like 2015, I still favor European and Japanese stocks; the twist in 2016 would be to buy these equities without hedging the currency risk. In the U.S. I remain long both financials (especially local banks) and consumer discretionary. In Europe I still favor real estate and cyclicals whereas Japan I believe financials are the best bet. Russian and Chinese equities have become cheap – let someone else take the risk for now.
Stable demand and stable dollar will increase oil to near $50 a barrel by year’s end. Gold’s recent personality disorder (is it a currency or commodity?) will be settled in 2016, lifting the price to $1100 an ounce. Price action in copper, iron ore and steel will be muted as producers spent 2015 focusing on cost reduction compared to curtailing supply.
The U.S. dollar will remain frustrating stable (against the majors) in 2016 while U.S. 10-year yields will punch through 2.60% after the third FOMC rate hike in the fourth quarter.