This week, in our final article of the year, we make some predictions going into 2021. Hopefully I end up with a better score than the 3.5/5 for 2020. I wouldn’t bet on it, but again this is the investor in me looking at my surroundings and trying to come up with probabilities. So without much ado (not about nothing), here are five more.
Prediction 1 – The commencement of TNN (Trump News Network)
I still have some conviction in the idea that Trump’s rise to power was a case of an accidental presidency and the original intent was a marketing exercise, to build his brand, rather than a legitimate bid at the Oval Office per se. It got out of hand and the rest is history. Whether this was originally in order to launch a news network is speculation. But now that the electoral college has made it official (at the time of writing) that he is not in for a second term, we are making the call that the Tweeter-in-Chief continues “up” the greasy rungs of power, beyond the US Presidency, to media tycoon.
And yes, you did read that right. Up the greasy rungs rather than down. I, along with many others including the likes of Dr Pippa Malmgren, who served under the Bush administration as a special assistant and the daughter of the even more credentialed Herald Malmgren, believe that controlling the narrative is more powerful than temporary control of the governmental apparatus. In the words of LBJ (Lyndon Johnson), the President is only as good as the headlines he/she makes. LBJ, the ever smooth political operative, was one of only a few that recognised and emphasised a need to write the headlines as opposed to an editor. (In this respect, there might be a legitimate case to KRudd, or the Handball King as he is known, and his petition for a Murdoch royal commission).
Kevin Rudd has had a busy year:
Whatever the case may be (I may be wrong), since day one the scene Trump has been seemingly set for a post-White House role as King Maker and Murdoch 2.0. This included those rather bizarre meetings with Kanye West and Kim Kardashian as well as, more recently, Wendi Murdoch’s (Rupert’s now ex-wife and a supposed CCP spy if one is to believe the old Murdoch patriarch) meetings with Ivanka. Why does this matter?
Well, aside from being downright interesting to watch in the same way as reality television (for those so inclined), this evolution will have an immense impact upon the political space and by extension the investment environment in the years to come. If played right, scaling up rapidly may also assist in avoiding/mitigating that nasty $400m USD ($1bn by Forbes’ estimates) in loans coming due very soon. What we have effectively guaranteed is that an ex-President turned media-mogul, that has the support and viewership of a decent chunk of 75 million Americans, will continue to have a policy impact. While probably not as broadly appealing as Murdoch’s Fox News, TNN (or whatever it will be called) and Trump will be a key endorsement for any Republican’s looking to get elected over the next cycle or two. His base will be key for Republican candidates and they will bend over backwards for Trump’s endorsement.
Caveat: This is assuming we don’t see the investigation and prosecution of a former US President for an alleged laundry list of misdeeds. We would be surprised to see this at a federal level or Biden explicitly instructing it to happen (he is too much the statesman and we believe will take the “high road”) but at a state level... New York has already begun criminal investigations into Trump’s dealings.
Prediction 2 – QE will continue but with a difference
As I’ve previously mentioned, the normalisation of monetary policy is a scenario that is now downright impossible to achieve without massive repercussions across a financial system that has been effectively trained to rely on it. In the absence of CPI inflation we will likely see a continuation of an expansion of balance sheets with government issuance of debt (likely to continue well into the future now) ending on those balance sheets. We won’t have debt monetisation but we will come close enough that the more seasoned investors (who actually know how fixed income and the treasury market works in practice) won’t be able to tell the difference.
The big risk we see here though is that the treasury issuance across most of the developed world is occurring on the short-end. If you issue new government debt on the short-end of the curve, you also have to roll it over. If CPI ticks up on even a modest scale, that is an accident waiting to happen with yields sky-rocketing and deficits being increasingly difficult to manage. But this is not a scenario likely to play out in 2021, so let’s shelve this one for now.
Prediction 3 – The ASX and Asian Indices will be the better performers
There have been two prominent correlations with regards to Asian markets and more broadly emerging market indices. The first is the inverse correlation with the US dollar and the second, the risk-on/risk-off trade scenario. These two, though closely related, are a little more nuanced.
Much of the premium that comes with US valuations is arguably a result of what De Gaulle referred to as ‘the exorbitant privilege’. That is the status of the USD as the reserve currency ensures that inflation is curtailed (theoretically) seeing as if there is artificial demand for said currency as a matter of trade, then there is by extension demand for the currency and thus assets denominated in said currency, including equities. We have already started to see cracks appear in that theory given the weakness of the currency and increasing likelihood of greater fiscal stimulus (i.e. and by extension Treasury issuance) under a new administration. Beyond Covid, expect to hear murmurs about the Green New Deal and Debt Monetisation make their way from the fringes and into the mainstream.
The perceived safety of US assets and currency is already under threat. We have already seen the Shenzhen composite end the year as one of the top performers globally with new rules, including changes pertaining to MPF (Mandatory Pension Funds) managers likely to see money flooding in, along with upward pressure on the RMB. Across Asia we are still at the infancy of that ultimate economic nirvana of positive household savings, demographic changes to enable a speedy recovery with any vaccine news, not to mention that the region has handled the pandemic substantially better than most of the developed world (recent surges in Japan and the Korean peninsula notwithstanding).
The composition of the ASX will also finally see it perform in a more reasonable manner. Given that the global levels of fiscal stimulus and infrastructure spending, we should see continued support for base metals and commodities. This comes with the caveat that there are no further escalations in the currently tetchy Sino-Australian relationship.
Prediction 4 – Gold will break above 3000 USD with new resistance at 2000 USD
Given the recent price action around the shiny metal, this might seem hard to fathom. But remember that gold is not a hedge against inflation nor does it have any other purpose (for you or I) other than exchange value. As we continue to see the expansion of money supply and continued debt issuance with downward pressure on real yields, this creates real catalysts. The correlation that matters here are ‘real yields’.
Monetary policy now officially allows inflation to overshoot targets, there are massive amounts of government stimulus across most of the Western World, de-globalisation is seemingly now underway and there are increased hurdles to trade. Given this, we will not only have inflationary pressures but also downward pressure on alternatives such as the USD. My base scenario is that there will be upward pressure on the price. The thing to watch here is the correlation between the new perceived substitute, in the form of Bitcoin. I would go so far as to suggest that a decent chunk of the money that has traditionally sought gold has gone towards bitcoin, even those that don’t quite understand it (myself being one of them). A finite resource, it simply performs the aforementioned function of exchange value.
Prediction 5 - Energy Markets rebound late Q3 & Q4
Despite the price action and the market appetite to hold up the price of oil, we have seen IEA data point to a 10-year low in top-line demand and despite the Saudi’s promising production cuts this is simply jawboning the market. Simply put, they can’t afford them.
Energy will rebound but much later than what the market is currently expecting. It was rather telling to me that the price action after a build of close to 25m barrels Stateside in both crude and distillates, the market decides to push the price up on hopes of a vaccine-related recovery. Even if the recovery is speedy, with even the most optimistic scenarios positing Q2 next year, you not only have to get rid of excess inventories but also the new production up to that point. We will see it sell-off (nowhere to store it) before we see a substantial rebound in Q4 next year with the added advantage that a lot of the higher cost producers would have been choked and US supply will be dialing back.
Markets & Commentary
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