LONG TERM VIEWS FOR 2015-2016 BASED ON GAME THEORY AND JUST FOR FUN
The BULL case scenario for 2015... NOT ALL OF THESE HAPPEN TOGETHER. THESE ARE BULL SCENARIOS FOR EACH REGION AND ARE EXCLUSIVE BUT COULD BE INCLUSIVE.
USA:
Oil stabilizes in the $50-60 US a bbl range limiting the downside of employment cuts and stabilizing domestic production at an elevated level of approximately 7.5MM-8.5MM bbls/d. The high decline rate in ND keeps activity moving but only in the highly explored areas with decent infrastructure and pipelines. The dollar remains strong further improving the trade deficit, bringing it down to the $30MM/m range. The strong dollar and weakness in industrial metal prices persuades congress to institute an infrastructure building program to repair roads, bridges and upgrade the electrical grid. This will be passed under a Republican Congress and Senate, with a Democratic President, allowing for cover from the accusations of socialism. Although this bill passes, Congress and the Senate remain in gridlock and cannot make headway on Obamacare, Keystone, climate change, ISIS and tax reform. Essentially nothing moves forward. This helps the budget deficit to continue to shrink. It will be Hillary vs. Jeb, with Hillary winning in a landslide. The FED successfully raises rates in Q3/15 first in 25bps increments and suggests further strength in employment may require 50bps increments (the infrastructure program reverses the participation rate in the short term). In this scenario the stock markets perform very well, the DOW rises above 20,000, and the S&P finishes the year at 2300. Gold falters after a rally to the mid 1200s and finishes the year testing $1000/oz.
Investment ideas:
-low gas prices increase US domestic travel leading to increases in REVPAR and occupancy rates at mid level hotels making the hotel sector a good bet
-infrastructure investment program stems the decline in the participation rate, improving government revenues leading to a shortage of short dated treasury bills and pushes the front end of the curve down, making the yield curve very steep. This benefits banks and job placement companies.
-low energy prices and strong growth in employment and stabilization of energy prices incentivizes Americans to replace their aging automobiles. The sub $2 gas revives the American love of SUVs and muscle cars. GM, Cummins, Ford and Chrysler all have great years.
EUROPE:
In early 2015 the EU CB announced the initiation of a QE bond buying program. The EUR gets weaker until it approaches parity with the USD. Germans move their money to the US stock market and the rest of Europe moves their money to the German stock market. Despite the German pessimism, the program works sending long dated German bonds into negative real interest rates and periphery rates rats return to manageable levels. This causes EU exports (German cars, Italian wine, French champagne) to soar as well as boosts tourism. The Europeans put up with more Canadian and American tourists and the stock markets begin to soar. The key to this working is that periphery markets need to outperform German markets. With inflation staying low, but deflation fears subsiding the demographic and debt problems in Europe are delayed for another year. The successful policy coordination encourages further EU integration and a common bond market. It’s not a Grexit that happens but a Brexit. As things improve the far right anti-immigration parties begin to lose appeal.
Investment ideas:
-gold denominated in Euros
-EU stock markets rally in unison, with peripheral markets leading the charge higher
-EU luxury brands outperform all other sectors listed in Europe, followed by hotels and tourist related entities.
ASIA
CHINA:
China GDP growth decelerates to 6.5% as it transitions to a consumer society. The saving rate declines and spending spikes, increasing imports and eliminating the trade surplus, or decreases it to low levels. The new coal taxation laws shifts the energy input mix and leads to a boom in domestic natural gas exploration, as China’s large shale deposits are attempted to be exploited. The Western oil majors who are seeing weaker growth in the developed non-OPEC nations give China very favorable deals for long term access. China’s weakening growth allows the turmoil in the South Sea to subside for a year. China and Japan even meet for bilateral maritime territorial discussions, The Chinese bull market in stocks continues from late 2014 well into 2016. The liberalization of the Chinese markets continues, forcing emerging market funds and banks to hold more Chinese stocks and renminbi. This leads to more mature money flowing towards China. The renminbi holds steady, or maybe declines slightly versus the USD.
Investment Ideas:
-Gold priced in renminbi
-Chinese Market ETFs
INDIA:
Reforms work! Modi applies the Gujarat model and India grows at 6%+. This stabilizes the commodity markets, but at a lower level than 2013. The increase in Indian GDP re-establishes India on the global scale. India pushes for a seat on the UN Security Council and to gain it opens dialogue with Pakistan. India faces increased terror attacks from a new branch of ISIS operating out of Pakistan and Afghanistan. However, a newly confident India takes it in stride and pushes India close to the West, especially after source of uranium are secured from Canada. The use of British common law and the language and the plethora of Indian computer scientists in Silicon Valley further entrenches the growing desire to trade with the growing nation and further gives America reasons to collaborate in containing Islamists.
Investment Ideas:
-Indian Stock Markets
JAPAN:
Abe is successful in breaking years of deflating consumer prices and breaks the Yen in the process, with it beginning its move to 300 to 1 USD. This ignites Japanese stock markets, think the Dylan Grice thesis. Japan has still yet to deal with the demographic issue but this is kicked down the road, why worry when the party just starts? The successes of this policy endangers future hyperinflation, but once again, why worry after decades of deflation or disinflation? Japans weakened fiscal state leads it to attempt to negotiate with China over the Senakus. Long term China wins this battle, but in the short term it benefits none. In the background Japan begins to change its constitution and rearm to become aggressive. However, this is a 2020 issue, not a 2015 one.
Investment Ideas:
-Japanese bonds
-Japanese stocks
AFRICA:
It’s a mixed bag. Just like when going through your trick or treat loot, Africa is very much like the chocolate bar followed by the pear, as you pull out your loot. Terrorism flares up in the Sahel and Northern Arab states. Nigeria enters a civil war, or the beginning phase of it, as it may not be determined to be a civil war until hindsight is clear. Lesser viewed African nations, i.e. smaller commodity producers continue the road to democracy. Botswana, Gabon, Ghana etc...All improve in levels of governance but still suffer economic setbacks due to concentrated export economies still based on resources. South Africa further deteriorates.
Investment Ideas:
None
The Bear Case: NOT ALL OF THESE HAPPEN TOGETHER. THESE ARE BEAR SCENARIOS FOR EACH REGION AND ARE EXCLUSIVE BUT COULD BE INCLUSIVE.
USA:
QE in the EU causes a rush into treasures pushing the 10yr rate down to 0.5-0.8% and pushes the DXY index to 120. The higher dollar reduces the trade deficit but chokes off US exports and stalls re-shoring. Although the inflation rate drops well below the 2% target the FED maintains, the FED scared of back tracking boosts interest rates 0.25% in September, inverting the US interest rate curve by year end. By year end the economy has obviously slowed and the FED goes to cut rates back to the zero bound. The FED is now caught in a trap as they have very little room to move rates down and cannot operate conventional monetary policy. Regardless of this the USD stays relatively strong vs. the major trading partners and this pushes a wave of deflation upon the US economy freaking out the FED. The response is negative interest rates and making the yield curve almost flat at 0%. Money goes into hiding and stores of value such as art and metals. This sets up the final peak in the bond bull market and pushes US stock markets to bubble territory. As valuations become unbearable for even the bulls, gold starts to attract attention and begins to rally with the USD. Rand Paul loses to Elizabeth Warren and Wall Street moves to London.
Investment Ideas:
-US Market ETFS
-gold
-Canadian gold miners with projects in non US dollar regions
EUROPE:
QE does not have the effect that was desired. As the EUR rapidly declines money is moved from EU stock markets in to the CHF, gold, and US stock markets (US bonds initially but that creates the final peak). The QE policy drives the EUR down and bifurcates the EUZ markets. The peripheral countries debt charge becomes cheaper yet exports only pick up in luxury goods. Further, angered Germans refuse to support peripheral tourist markets out of spite. Inflation picks up in German and France but not in the peripheral markets as the unemployed have no money. Shortages arise, but regionally and import costs rise and export costs stagnate. Hungary, Romania and Bulgaria inch closer to Russia and Putin plays games with energy exports to reward and punish. This game of energy brinksmanship revives the German nuclear sector and France doubles down on nuclear. Some non-EUZ nations, like Poland push forward with shale gas exploration. Regardless, the bifurcation of the EUZ countries bolsters the prospects of far right parties and threatens war in Europe and the EUZ in general.
Investment Ideas:
-European luxury goods companies
-10 year German bonds – strip bonds if available
-10 yr German/Portugal spreads
-Gold in Euros
ASIA
CHINA:
The property bubble collapses and shadow bank credit dries up and disappears. The world finds out China has created a ponzi scheme of industrial metals and a huge out flow of Cu, Ni, Zn metals hits world markets with massive ripples. Africa and South America is hit hard on this and rethinks their relationship with China. Some move to the extreme of becoming anti-Sino. This affects China’s reputation and attempt to divest the USD system. China is now forced to buy huge sums of US treasuries and the old game has returned. The renminbi plunges vs. the USD and growth registers south of 4% in 2015-16. Purges happen and corruption is cracked down on. Money then flows to HK, Vancouver, SF and NY further creating bubble like conditions in those nations housing markets, further turning opinion negative vs. China.
Investment Ideas:
-real estate in locations Chinese flee to
-Gold in renminbi
INDIA:
The much discussed reforms in India are derailed by a terror attack or just competing visions of India and Modi responds like a dictator, similarly how he did in Gujarat, with the Muslim mass killings. India launches a retaliation attack against Pakistan and world braces for nuclear war. The war is short lived, and not necessarily nuclear. India’s growth drops to around 2% and to reboot India starts a massive armament campaign and take notice of who their allies are, and in their paranoid state they determine, very few are. Sri Lanka is threatened due to Chinese investment and world awaits China’s response, as their economy is weak too. Both nations suffer a condition of too many young men, due to sex selection process at birth and the rest of the world braces for the outcome.
Investment Ideas:
Nothing good comes from this so guns, bullets and cash
JAPAN:
Hyperinflation with no improvement in the domestic economy wipes out the elder generation. Exports improve at first but the cost of importing machinery and material destroys any sort of a profit margin. Firms go bankrupt on mass. There is only one policy left to divert the masses attention and that is war with China. Japan pushes to control the disputed islands and Taiwan, which was once a Japanese island (albeit well before anyone cared). The balance in SE Asia is affected and Japan attempts to re-establish war time operations. Nothing good comes out of this.
Investment Ideas:
-Hedged Nikkei positions
-hedged JGBs