Imagine the Unimaginables for 2018

“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 is the link to what 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?

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 goes from strong to stronger!

And then there are obvious global risks: Link (WSJ): Turkey Is the Canary in the Global Risk Coal Mine . Turkey has since starting bombing Kurdish regions in Syria. This is a risk that perhaps the markets cannot afford to ignore, also possible recession in Mexico? NAFTA negotiations look precarious.

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 explanations  (link to charts/details): Look for Posts with Updates on individual Unimaginables!

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.

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

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

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.

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.)

Unimaginable #10: Women Disrupt! 2018 – The Year When Women Lead the Way!

 

Call this Food for Thought… I am eager to hear from you!