The Hog’s View for 2018 [Forecasts]

Read the next semi-annual forecast for July 2018 here!

2017 was an awesome year for punters and investors alike – by all accounts. Stock prices reached new record highs, real estate prices are up and – oh yes, Bitcoin and its close cousins blessed a few with gains that go beyond good and evil. It seems the old animal spirits are back we all missed so much since 2007. Now it’s time for the market forecast 2018!

Making money hasn’t been that easy for a long time. Simply place some bets and see your money multiply out of thin air without a drop of sweat or toil. The only regret is why we didn’t place those bets earlier and why we didn’t leverage up to maximize profits today.  After all – where are the negative soothsayers today? Well, there is always next year!

As usual with the staggering complexity of international affairs, it depends on what perspective you look at it from – and who you are looking at. Below are a few predictions for 2018 from The Monthly Truffle – all of which will have significant economic and political consequences.

The Emperor and the Tsar

2017 was, according to the Guardian, a year of ‘tough-guy leadership and foolish brinkmanship’. Indeed, 2017 has been a glum year if you’re a liberal, anti-authoritarian, non-proliferation supporter, or a Republican who disapproves of Donald Trump – but how long will the malaise last?  

Not much will change in 2018 – except the two ascendant and dominant leaders on the global scene today, China’s Xi Jinping and Russia’s Vladimir Putin will assert themselves even more effectively.

For Xi’s part, the official inclusion of ‘Xi Jinping Thought’ into China’s governing philosophy marked the first time since Mao Zedong that a living Chinese leader has had their personal ideology incorporated into the country’s governing principles – a step which is precisely as significant as it sounds. Expect his cult of personality – which includes Xi Jinping comic books – to continue to grow, as well as his grip on the apparatus of the Chinese state.

Likewise, Russia’s number one macho man Vladimir Putin will gear up to face a nominal challenge to his rule in 2018 in the form of an election – but with the only meaningful challenger, Alexei Navalny, already barred, we can be all but certain that the current president will win and become Russia’s longest-ruling leader since Stalin.

The Decline of Trump – but not the fall

2018 will witness a modest fightback against America’s eccentric president in the form of a few small electoral victories for the Democrats. As events in Alabama have shown, there is a limit to the strategizing of the likes of Steve Bannon. And as poll after poll has shown, though Trump continues to receive the fervent support of around one-third of America’s electorate, his appeal does not extend much beyond that.

Add to that the calamitously leaky governance of his White House, the endless bloviating, the alliance-shattering international ineptitude, and precisely zero effort at widening his base, we can expect Trump’s support to erode somewhat over the course of the second year of his presidency.

But don’t expect too much – the President is nothing if not a slick operator when it comes to spinning his actions to the positive, and those that do support him seem likely to do so right until the bitter end.

The only possible bombshell is the Mueller inquiry – a process which highlights another one of Trump’s weaknesses: unlike Xi and Putin, America’s president has woefully inadequate control over the apparatus of his government. Expect resistance from within and without to persist.

Europe is Bleeding

With the induction of a far-right party into Austria’s governing coalition, we can expect Europe’s woes to continue. Brexit will go ahead, and, at least initially, will seem to have worked out. From the perspective of their continental cousins, the departure of the tea-sipping ones will be sad, but not the end of the world – and in any case, they will have their own issues to deal with.

From Catalonia to Poland’s hard-right government, from Jobbik’s anti-Semitism in Hungary to the ongoing refugee crisis in the Mediterranean, this will be one of Europe’s toughest years. Making things harder will be the ongoing erosion of support for France’s Little Emperor, Emmanuel Macron, whose haughtiness and uncompromising nature seem to alienate people more than it accomplishes meaningful change.

Yet for all this, expect the biggest experiment in a transnational federation in human history to weather the storm and come out the other side scarred but stable. As the year grinds on, and the sheer overwhelming quantity of work Brexit involves becomes evident – the renegotiating up to 1000 treaties, preserving Northern Ireland’s border, fending off Scottish pro-European sentiment – it will become even clearer to members of the EU that departure is simply not worth it.

Whatever the British may think, the circle of stars is going nowhere and freed of their constant drag it may move into even more successful times.

The Minnows

While the big boys duke it out over issues of colossal global interest, a series of smaller nations will be emerging from their own dark pasts and slowly but surely make their way to prosperity.

Look to Sri Lanka, Ethiopia, Uzbekistan, Nepal, and Bhutan to continue with their dramatic economic growth this year, with countries such as Ghana and Nigeria growing.

And, though by no means a minnow, India is the one to watch here. Clocking in with a staggering 7.2% growth in 2017, the subcontinent will continue to forge ahead with Modi’s heady mix of Hindu nationalism and economic liberalism.

With the opposition Congress party an utter mess, there is no chance that they’ll be booted out of power soon. As with any of these states, however, the danger lies not in economics, but in politics.

Sri Lanka’s bitter 27-year civil war still casts a pall over its contemporary governance; Ethiopia’s tensions run deep; and in India, anti-Muslim sentiment could boil over at any moment.

Islamism Thumped

2017 was actually a dreadful year for the world’s Islamist terrorists. From the fall of ISIS to the repeated failure of attacks on the West to prompt the withdrawal of troops from the Middle East (or, indeed, accomplish any of the attackers’ goals), the pressure is on for an ideology that bloomed in the aftermath of the failure of secular Arab nationalism. Look to 2018 to be a year of escalating attacks and desperation.

Keep an eye, in particular, on the atrocious situation in Pakistan, where the state is essentially beholden to increasingly radical public movements (one of which recently caused the resignation of a minister through street protests).

Indonesia is also an area of concern, with the power of non-state Islamic organizations growing dramatically in the past few years. Though in time it may prove to be one of the last years this mode of thought has a significant impact on the world, it will nevertheless be a dramatic one.

MARKET VIEWS 2018

Frankly, there are no convincing arguments why the good times shouldn’t continue into the first quarter of 2018. The number of global IPOs is at the highest since the Subprime Meltdown with more to come in 2018.  Saudi Aramco IPO’s is scheduled for the second half of 2018. If successful, it will be the world’s largest IPO ever. 

M&A activity is also at an all-time high. The FT just reported that “worldwide mergers and acquisitions activity exceeded $3tn for the fourth consecutive year” with outlook positive. Notably, Chinese companies, such as Alibaba or Tencent have been at the forefront of the acquisition drive. Coffers filled with cash, they are willing to pay top dollars. Some investment bankers are already rubbing their hands in anticipation of more ‘Golden Boni’ next year.

Furthermore, the rising popularity of index funds and ETFs (Exchange Traded Funds) continues. Both have recorded steady inflows this year with $385 billion as of October 2017, suggesting that retail investors want to be part of the capital markets bonanza.   

All this suggest a strong first quarter. But those who were caught off guard when Bitcoin dropped over 20% within hours this month got a little foretaste what’s in for a growing group of naive investors (sheep) in 2018 when some “big swinging dicks” flex their muscle or take chips off the table for no apparent reason. Let’s have a look what could spook the masses next year.

Interest Rates

Warren Buffett is never tired of emphasizing how important interest rates are for the global economy and valuations specifically. “Everything in valuation gets back to interest rates.” At the interest levels, we have today, stocks are cheap and should do considerably better than bonds. Central banks have been flooding markets with cheap money since the Subprime and Euro crisis. But what happens when interest rates rise – even for a bit? What happens when the money supply shrinks?

The Fed will most likely continue its current policy increasing rates little by little going forward. Mix to that a new Fed Chairman (Jerome Powell) who will need to prove himself and there will be many opportunities to mess up or confuse market players.

Other central banks will be forced to follow as there are obvious signs of inflation and capital markets running hot. Countries and companies around the world that have borrowed themselves up to this hilt will have a much tougher time to refinance their outstanding debt.

A prime example is Venezuela or Tesla. Tesla might have great intentions for building revolutionary trucks, super fast roadsters, and high tech plants overseas, but it can’t even mass produce a mundane sedan. A company that is already leveraged 7 to 1 will not have much leeway to operate when interest rates change for the worse.

Venezuela is already on the brink of sovereign default and only kept alive by its two comrade allies. How long the financial support lasts greatly depends on the financial situation back home! Whatever the case might be, Russia’s and China’s patience and money resources are limited.

Global Impact

The interest rate adjustments might be small, but crucial on how financial markets will have to adjust next year. 

Special attention should be given to high yield debt markets (Junk Bonds). Already back in 2015 Carl Icahn warned that BlackRock created an “extremely dangerous situation” by encouraging debt issuance. Noting that BlackRock has been fabricating an illusion of liquidity where there is none. Icahn might finally be right next year.

For stocks we predict a similar trading pattern emerge that marked the end of the Go-Go years more than four decades ago. This legendary period gave us the original Nifty Fifty that defied all gravity until they came tumbling down as well.

Lower quality stocks and funds from the second and third row will collapse first while the new batch of Nifty Fifties (FANG, AANG, FAAMG and BAT etc.) will push forward until a few big players decide that the emperor doesn’t wear clothes after all.

China, in Japan’s footsteps

We have already noted that Chinese companies have been expanding overseas at an ever faster pace. It reminds of a time when Japanese companies were conquering the world in the 80s, buying up assets such as Rockefeller Center or Pebble Beach. It all ended in 1990 when Japanese central bankers determined the party was over.

But China is not Japan. Indeed, China might be considered more capitalistic than Japan has ever been and on a global scale that dwarfs Japan’s best bubble efforts.

In October, Zhou Xiaochuan, soon to be retired governor of the People’s Bank of China, had some frank words for his fellow members of his Communist Party. Surprising to say the least in a country that blocks FaceBook and Google and that will soon rate all its a citizens on a scale of being ‘naughty and nice.’

Voicing concerns that corporate and household debt rose to unsustainable levels he stated,“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.”  Hyman Minsky is an American economist who described “how excessive growth in debt or credit risks a sudden collapse in asset prices.” 

The Global Minsky Moment

What a Minsky moment can do to people’s wallets was illustrated by the recent pullback of Bitcoin and cryptocurrencies. The sudden drop of 20% or more might be just a blip on a chart, but not for those who have leveraged themselves up 10:1 and are late to the party. Real losses have real consequences.

It’s important to realize that the question of why prices can drop so quickly is irrelevant relative to asking how other players react to it  – that’s pure Keynes!

The Hog’s Idea Pool for 2018

• Long Vola! Financial insurance hasn’t been so cheap for a long time.
• Long gold and silver – it’s shiny!
• Short second and third tier companies which profited from theme and ETF buying.
• Short Junk Bonds! They will live up to their name!
• Watch China! We have to get used to the idea that “When China sneezes, the world catches a cold.”

Since 2010 we have only been recommending long ideas – all of which played out. Granted, it wasn’t difficult if everything rises. Even companies, that committed outrageous financial and strategic blunders recovered from their temporary lows. Names such as Deutsche Bank or Glencore come to mind that experienced miracle recoveries – at least from a stock price point of view.

This will change next year – at least for us and our newsletter – The Monthly Truffle. Since October we have been recommending our first short — Tesla. Spoiler Alert! Many more short ideas will follow.

We would also like to note that buying bets on falling prices haven’t been that cheap for years. Anyone who is familiar with Nassim Taleb and his buddy Mark Spitznagel and their esoteric trading strategies should follow their lead. 2018 will be their year!

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That was the market forecast 2018 – a Happy New Year and all the luck for 2018!

Signing off – The 80/20 Investors Team