Imagine the Unimaginables

 

 

for 2019:

“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 1, 2016 and speculates what might happen in 2017 and is not yet discounted. Under the initial unimaginables list comes an update to see how they look currently with charts and links.

1. V-shaped recovery finally in Europe AND US

2. Currency wars are replaced by competitive lower taxes

3. Europe learns to sell itself perhaps convincing Britain to stay in after all

4. Oil prices approach $35!

5. Trump goes green (jobs!?!)

6. Trump pulls out of the Mid-East altogether

7. Populists on the retreat (lose European elections)

8. Europe stock markets outperform USA

9. Putin loses his job

10. China goes Isolationist

1. V-shaped recovery finally in Europe AND USA

When you look at the charts below, it looks like we have already had our V-shaped, but now we will feel it and Europe will surprise everyone (!) and factors like Industrial Production should return to pre-crisis levels. Germany’s ifo Business Confidence Index reached an all time high again in July, but fell back a bit in August (see below). In June, Merkel declared the Euro too weak–see no. 2 below! The Euro is now on a tear and this may make global tax reform a greater priority. Ironically, as US exports get more competitive, American manufacturers complain about higher input costs from abroad. It’s September 1 and US ISM for August came out much stronger than expected and there are charts in the link below showing lots of confidence in both the US and Europe. How can the FED not raise rates, perhaps relieving the ECB a bit from the very strong Euro…

Global earnings growth has been relatively synchronized. The chart below is the last 5 years and shows how dramatic earnings increases have been in Europe, Emerging Markets and Japan! Europe looks due to outpace the US supporting Unimaginable #8!

Source: Lazard Asset Management / WSJ-The Daily Shot (13OCT2017)
European production continues to positively surprise and now outpaces the USA Source: Trading Economics 13Oct2017*
*Industrial production in the Euro Area increased by 3.8 percent year-on-year in August 2017, beating market expectations of 2.5 percent and following an upwardly revised 3.6 percent gain in July. 
`*Industrial production in the United States increased by 1.5 percent year-on-year in August 2017, easing from an upwardly revised 2.4 percent growth in the previous month.

Link to Update October 4: Charts with Car Sales and PMIs = V-Shaped Growth

Link to Update (Sept. 26) – Elusive Growth in USA & Europe?

Link to Update (Sept. 3) with Charts

2. Currency wars are replaced by competitive lower taxes

(the strong USD will not hurt USA and will help the RoW, still countries will compete for direct investment through lower taxes—the British and USA will take the lead)

A bit more imaginable now than in December, but still subject to debate Courtesy of WSJ Daily Shot (26.April): Back in 2000, the America’s 40 percent corporate tax rate, which included state and local taxes, was competitive with those of our trading partners. Now it’s not. While the U.S. tax rate remains unchanged, Germany, Japan and the U.K. have all reduced their rates; in some cases, substantially. Germany took there’s down to 30 percent from 40 percent, the United Kingdom knocked theirs down to 20 percent from 30 percent and Japan slashed their corporate tax rate which was pegged at 40 percent to 23.9 percent. Merkel was talking up the Euro in May and Draghi hinting at tapering (did he mean it or not) has caused the Euro to accelerate higher and has hurt the bond market. Most central banks are counting on a return to normalcy. Still inflation and higher wages remain elusive. Falling taxes, also on the labor force should stimulate consumer demand.

Read full article Source: @taxfoundation, @jackmintz, @josephncohen

3. Europe learns to sell itself perhaps convincing Britain to stay in after all

Still quite unimaginable as Britain has submitted Article 50, called an earlier election for June 8th rather than waiting for 2020 (see below). Macron wins so now his victory will indicate whether or not it is a vote of confidence for the Euro and the EU project (the Euro strength says there is rising confidence). Will the British get second thoughts as the EU economies display robust growth? Consensus says “No!”

Well, it seems Ms. May blew it, bigly upsetting consensus expectations… It was hard to imagine that this election would turn out to be another version of the Brexit referendum, but that is what happened it seems. Those who really want to remain in the EU (the young and London) ended up voting for Labour when everyone had written them off. Ms. Merkel must really be wondering what can upset her currently unchallenged position… There is no sure thing in these times, that’s for sure!

4. Oil prices approach $35!

(this can adversely affect the US stock market indices)

OPEC tries to remain disciplined in their production ceilings and yet there is difficulty to figure where the real balance is between supply and demand. If American growth appears to be peaking, this should affect the demand side. Also Auto sales in the US appear to also be peaking, but remain steady at a high level. Oil prices get more and more volatile as US drillers keep supply robust and Chinese demand for commodities is challenged by Chinese policies curbing leverage financing. Not only is oil demand along with coal being challenged by increasing rig count, but also greater supply of energy from natural gas, sun and wind in the US!

September 26, 2017:

 Source: @WSJ; Read full article

Brent Oil prices take off and the spread between Brent and WTI widens…

Source: WSJ-The Daily Shot

…but OPEC Wildcard Producers, Nigeria and Libya Production stabilizes  Source: @IIF /WSJ-Daily Shot

June 20, 2017 link: Texas high winds and abundant sunshine even makes it difficult for natural gas producers… (Bloomberg)

The US Congress wants to strengthen the sanctions against Russia making things awkward for Europe who depends a lot on Russian oil and gas. If oil and gas prices stay relatively cheap and the US dollar weakens further, it should make it easier for Europe to import their energy needs from the USA! Another reflection of America First implemented by Congress, not Trump, oder? Go to Unimaginable no. 9…

5. Trump goes green

This link includes a timeline of developments in going green in 2017

The USA is Smashing Clean Energy Targets as of 2016

6. Trump pulls out of the Mid-East altogether

(together with falling oil prices, the Mid-East is in real trouble)

Currently American First and not Asia or anywhere else is the focus. President Trump tries to limit or restrict visits and immigration from 6 predominantly Islam countries to the USA. Now Trump’s first official foreign journey as President will be to the Mid-East. A journey for peace? Well that was his intention, but shortly after his return to the USA, Saudi Arabia, together with the Emirates isolated Qatar with a blockade making plans for peace a lot less realizable plus the King has designated his son as successor in an unprecedented way. BUT maybe this unimaginable is still less unimaginable…

7. Populists on the retreat (lose European elections)

As the year developed, this unimaginable has gotten much less unimaginable!

Source: Credit Suisse, WSJ THe Daily Shot 29/June 2017

Still we must learn to expect the unexpected. See Link here by #7 for election preview…

German Elections happened on September 24!

8. Europe stock markets outperform USA

It’s happening!

May 3:  In equities, everyone is marveling at the rally in the EuroStoxx 50 to a 20-month high—and noting that European equities are outperforming the US.

Sept. 1: Due to the Euro strength, the EuroStoxx 50 is up 17pct YTD in US$ terms outpacing the S&P500 and the Dow, but not quite NASDAQ, +19pct. Emerging Markets are the real winners except for China which seems to just start getting traction recently:

Selective Stock Markets YTD in US$:

Turkey +43%
Greece +42%
India +29%
Mexico +29%
Korea +25%
Brazil +24%
Nadaq +19%
Europe +17%
China +14%
S&P +10%
Russell +4%

From the WSJ (richard.barley@wsj.com): “Why European Stocks Can Survive a Stronger Euro / The rise of the euro is weighing on stocks, but it’s a sign of the eurozone recovery”

“The speed and size of the euro’s gains in recent weeks are undoubtedly weighing on stocks. But if a big part of the currency’s rise is down to the brightening prospects for the eurozone, then investors’ worries about the exchange rate should prove to be overdone.”

Earnings growth in Europe and Japan has been faster than in the US. In USD terms, the DJ EuroStoxx 50 is clearly outperforming the S&P5oo (right chart-14AUG2017)

 

Source: BofAML, WSJ-The Daily Shot 14AUG2017 

9. Putin loses his job

(for many scary)

Putin has gone quiet and arrested his most prominent opponent, then after his release, he gets green faced, nearly blinded… An earlier bombing on the St. Petersburg subway during a Putin visit puts everyone on alert. Demonstrations grow and are getting younger every time. The Youth may not be easily persuaded to change with any foreign ventures which has worked for Putin’s popularity in the past. The whole discussion of Russian interference in the US elections may even create a distaste in Russia, who knows?

10. China goes Isolationist

(perhaps the only way to deal with Trump’s trade initiatives)

Trump met with Xi Jinping. North Korea is causing major troubles for both and dominates the headlines…

 

Some initial responses to the original December 2016 Unimaginables:

Dec. 7, 2016: NY Times Breaking News: Donald Trump has selected Scott Pruitt, the Oklahoma attorney general and a close ally of the fossil fuel industry, to run the E.P.A.. No. 5 gets even more unimaginable…

“I will devour my hat if Europe grows faster than Trump propelled U S. Otherwise hope your predictions turn out right”

From a European Growth Fund Manager:
“1. V-shaped recovery finally in Europe AND USA – likely
2. Currency wars are replaced by competitive lower taxes – rubbish
3. Europe learns to sell itself perhaps convincing Britain to stay in after all – unlikely: lets get rid of them ASAP
4. Oil prices approach $35 – likely
5. Trump goes green – likely; brings jobs to USA
6. Trump pulls out of the Mid-East altogether – likely
7. Populists on the retreat (lose European elections) – very likely
8. Europe outperforms USA – extremely likely
9. Putin loses his job and China goes Isolationist HAHAHAHA”

“I especially like items 5 and 8. Item 9 about Putin is dangerous for the world.”

Now your comments/responses?