Food for Thought…
“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 and is not yet priced in. Keep in mind, some of these ideas are rather controversial and some may say absurd. I like to call it ‘Food for Thought!’
Many will describe 2017 as the Year of the Bubbles: Bitcoin, Leonardo da Vinci, Jean-Michel Basquiat, Stocks, etc. Who would have thought!?!
Source: @HayekAndKeynes, @convoyinvestments, @josephncohen WSJ-The Daily Shot 9 November2017
Let’s review the Unimaginables for 2017, originally published on December 1, 2016:
Unimaginable no. 1: V-shaped recovery finally in Europe AND US – in December 2016, growth expectations were low and rather bearish as the cycle appeared to be in its end phase. Europe esp. has surprised in 2017, although not in a V-shape, still much stronger than the market could ever imagine.
US Industrial Production (lt. blue) vs. US GDP Growth yoy – a slight ‘V’
Euro Area Industrial Production vs. Euro Area GDP Growth yoy, steady
Unimaginable no. 2: Currency wars are replaced by competitive lower taxes – 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 their 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. Falling taxes, also on the labor force should stimulate consumer demand.
Read full article Source: @taxfoundation, @jackmintz, @josephncohen (WSJ-The Daily Shot)
Unimaginable no. 3: Europe learns to sell itself perhaps convincing Britain to stay in after all – well not quite! Stubborn negotiations seem to make Britain even more determined, but depending on who you ask, some still wish for the whole idea to collapse.
Unimaginable no. 4: Oil prices approach $35! – Nearly happened – $42 low! I would not be surprised if this pattern is repeated again next year, a sign of clear abundance of supply.
Unimaginable no. 5: Trump goes green (jobs!?!) – Remains unimaginable, but America will probably still lead the way in cleaning up its environment independent of the current administration!
Unimaginable no. 6: Trump pulls out of the Mid-East altogether – not yet, but remember, America comes first!
Unimaginable no. 7: Populists on the retreat (lose European elections) – this one worked, only Germany saw a stronger than expected result for the populist party, the AfD. After the breakdown of a possible ‘Jamaica’ Coalition and Chancellor Merkel facing major headwinds, will Germany get new elections in 2018? Maybe Merkel, now an underdog, wins the protest vote in a new election…
Unimaginable no. 8: Europe stock markets outperform USA – In USD, YES! As of Nov. 20:
DJII – +18.50% S&P500 – +15.32% NASDAQ – +26.15%
EuroStoxx 50 – +21% CAC40 – +22.2% DAX – +27.25% Italy – +28.75% (!)
Unimaginable no. 9: Putin loses his job – remains unimaginable, too successful at ‘hacking’ democracies… Keep in mind, this was inspired by unimaginable no. 4. If Oil had fallen to $35 and stayed weak, then the Russian economy would have been in trouble.
Unimaginable no. 10: China goes Isolationist – quite the opposite, likes assuming the global leadership role!
Keep your eyes open for ‘Imagine the Unimaginables for 2018!” It will be a challenge as we again face the prospects of the end of the cycle and a very long bull market run. Consensus is also difficult to measure when opinions like politics are so polarized. Does that mean we stay in the middle and it’s business as usual? Unimaginable? Food for Thought!