“Imagine the Unimaginables” is an annual attempt to identify what the capital markets are expecting in the months to come and therefore have efficiently discounted. It is an act of trying to identify consensus and then think of trends that may defy that consensus. This was originally published on December 6, 2017 and speculates what might happen in 2018 and is not yet discounted.
The trouble this year (2017) is that like many ideas and perspectives, investors are also quite polarized in their expectations. It feels like a 50:50 Bulls vs. Bears or Continued Growth vs. Bubble Bursting world out there and so real difficulties in identifying consensus. Does this mean we get more of the same forcing those that are fighting the tape to capitulate?
Link> First let’s review the Unimaginables for 2017 published originally on December 1, 2016 , which featured the rise of populism, the positive prospects for European growth and the fall of oil prices and the consequences. The Unimagiable affected by falling oil was to put Putin in a vulnerable light, but instead it hit Venezuela. One clearly wrong unimaginable last year was China going isolationist as Trump took over the Presidency. It seems the opposite has occurred.
One of the factors driving the bears out there is illustrated in the following chart from Capital Economics and provided for by WSJ-The Daily Shot.
Here is a risk heat map for the largest economies. It’s a bit surprising that asset prices don’t come up red.
Over-indebted Sovereigns: https://www.bis.org/statistics/totcredit.htm
total credit to non-financial Sector in Italy is 267%. in Spain 277%
in the USA 250% Read full article WSJ The Daily Shot 14NOV2017
Maybe this is why Asset Prices don’t feel the heat, which is driving the Bull camp….
The synchronized global recovery has driven up corporate earnings
and Euro Strength!
Euro surges – About to Breakout! (Mid-November 2017):
The Euro broke out until the Tax Bill Reform looks likely, now testing support levels at a high level
Source: Rockefeller TreasuryServices (www.RTSforex.com)
The concentration in the US markets’ strength makes the bears weary…WSJ Link: Investors’ Growth Obsession Leads Only to Tech – Technology companies are generating strong earnings just as the stock market has become myopically focused on growth and other sectors have weakened.
and then there are obvious global risks: Link (WSJ): Turkey Is the Canary in the Global Risk Coal Mine This is a risk that perhaps the markets cannot afford to ignore, also possible recession in Mexico?
Now what can happen in 2018 that most cannot imagine:
Unimaginable #1: More of the Same – Business as Usual — Markets continue to rally including the bond market.
Unimaginable #2: Inflation remains elusive such that rates stay low and bonds continue to rally AND economies compete to lower taxes!
Unimaginable #3: European growth outpaces the USA turning negative interest rates positive, narrowing the differential keeping the EURO strong with little volatility.
Unimaginable #4: Consolidation across industries continues to drive the markets, ‘Mittelstand’ companies combine forces and get larger…
Unimaginable #5: Oil prices approach $35! (2017 repeat)
Unimaginable #6: Green Technology shares will be the big movers in 2018 (#5 and #6 may appear to contradict one another which makes the combination unimaginable)
Unimaginable #7: 2018 is an election year, will the Republicans keep their majorities? A surprise 3rd party (!?!)–USA gets a “Macron Effect!”
Unimaginable #8: Britain capitulates on Brexit…NOT. Changed my mind on this one!
Unimaginable #9: Populists on the retreat? Not in Europe’s member countries who ironically benefit the most from being EU members!
Unimaginable #10: Women Disrupt! 2018 – The Year When Women Lead the Way!
Black Swans? Tensions arise between India and China, as well as deepening between Saudi Arabia and Iran…. but America maintains the peace and eventually comes to the rescue (unimaginable?) while deliberately or not isolates China with an Indo-Pacific and Quad Alliances (Japan, Australia, India, and the U.S.)
Now with some charts/details – Every Picture tells a Story:
Unimaginable #1: More of the Same – Business as Usual — Markets continue to rally including the bond market. No bubbles get burst except may be the bitcoin one, but that is imaginable. when bond markets rally, the yield curve inverses.
Economic issues are becoming less of a concern for Americans
Source: Gallup, h/t Paul Menestrier; Read full article
The Conference Board’s US index of leading economic indicators (LEI) rose by the highest percentage since 2013 (beating expectations). According to the Conference Board, this report “suggests that solid growth in the US economy will continue through the holiday season and into the new year.” Source: WSJ-The Daily Shot 21Nov2017
France catches up, gains momentum, next Italy and Spain?
French economic output and Employment indices from Markit (blue line)
Source: @Markiteconomics; Read full article
The Eurozone GDP-per-capita growth lags other economies (see the potential for Italy and Spain)?
German Ifo Business Climate Index: Up, up and Away!
Source: ifo; Read full article
This chart shows corporate debt as a percentage of the GDP since the late 1940s. Notice what happened the last two times we’ve hit this level, but the current liquidity levels are unprecedented!Read full article Source: @jessefelder -WSJ-The Daily Shot (22NOV2017)
Unimaginable #2: Inflation remains elusive as economies compete to lower taxes such that rates stay low and bonds continue to rally! Money keeps moving into ETFs that allow the continuation to short volatility–more of the same? Consensus?
Source: The Daily Shot Oct 18Yield Curve Flattens? Bloomberg Story Link: The U.S. Yield Curve Is Flattening and Here’s Why It Matters
The bond market remains a challenge? Rate hiking cycles typically push the 10yr Treasury yield higher, but that hasn’t been the case this time around (so far).
The bond yield differential between the US and other economies has diverged from the dollar.
Unimaginable #3. European growth outpaces the USA turning negative interest rates positive, narrowing the differential keeping the EURO strong with little volatility. European company earnings are thoroughly underestimated due to the misconception that Europe is stuck in an old economy, but in reality companies (often unlisted) have embedded technology and services that keep them competitive and innovative AND allows them to dominate their respective markets globally. This explains continued strength in confidence, employment and unexpected growth AND Unimaginable #4…
Unimaginable #4:. Consolidation across industries continues to drive the markets, ‘Mittelstand’ combine forces and get larger… the magic behind higher margins is scalability, distribution and lowering the cost of ownership for one’s customers. This happens with further consolidation.
Unimaginable #5: Oil prices approach $35! – Nearly happened in 2017 and will probably happen in 2018! American oil independence will allow them to dictate the price. Americans like cheap fuel.
Unimaginable #6: Green Technology shares will be the big movers in 2018
Internal combustion engines are keeping up with the hybrid technology. This will help reduce Carbon Emissions…Source: WSJ.com, h/t Paul Menestrier; Read full article
Particulate matter (PM2.5) in urban areas around the world.
Source: Lazard Asset Management
Unimaginable #7: 2018 is an election year, will the Republicans keep their majorities? A surprise 3rd party–USA gets a “Macron Effect!” The Macron effect in the USA? Unimaginable! A third party emerges from nowhere and takes both established parties by storm. Washington gets new meaning.
“Red” states continue to lag behind “blue” states in labor force participation, which may further exacerbate the nation’s political polarization. Here is the employment/population ratio.
Source: @IIF, @RobinBrooksIIF, @josephncohen; Read full article
US Jobs:Americans with higher incomes believe that there are tons of jobs available in their area. Lower-income workers are less convinced. Source
Unimaginable #8: Britain capitulates on Brexit…NOT. Changed my mind on this one! – Higher Europe growth causes Britain to wonder if she prefers higher growth and/or a weaker currency (many will argue, a weaker currency will fuel higher growth). The Brexit negotiations keep the uncertainty sky high! There is a lot of wishful thinking that Brexit fails, but at the moment it has just been postponed. Europe will get used to the idea and learn its lesson to promote its Strengths in order to convince others to stay. Looks like compromises enhance the process… Britain–the next tax haven?
Unimaginable #9: Populists on the retreat? Not in Europe’s member countries who ironically benefit the most from being EU members! Will we see more variations of Brexit or simply experience a year of “non-functioning” governments (Germany, Italy, Britain, USA, etc.)
Who is happy to live in the EU? Eastern European nations are clustered on the right side of the chart despite the phenomenal economic growth this year (a direct benefit of being part of the EU market).
Unimaginable #10: Women Disrupt! 2018 – The Year When Women Lead the Way!
This chart shows the female labor force participation for select economies.
Read full article Source: @IIF, @josephncohen, WSJ-THe Daily Shot 21.11.17
Call this Food for Thought… I am eager to hear from you!
Here’s wishing you all a joyous holiday season and a prosperous and successful 2018!
”Guten Rutsch” (Good Start/Slide) into the New Year!