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Planning ahead

Tyranny of the calendar
January 4, 2018

This, my first column of the New Year, tackles the outlook for 2018 – a sort of GPS-readable map of upcoming events over the next 12 months.

Personally, I prefer to work with the tax year. Once accounts with HMRC are agreed, and I know exactly how much I have to play with I estimate what leeway I have, if any. Then I allocate amounts to categories depending on upcoming events and allowing for the unexpected. From there I can work out how much I can lock up for long periods, top up the kitty if needed, and put some aside for special bargains. Yes, these do come along, but you must be ready to pounce.

What gives me the right to pontificate and predict? Not a lot really. But what I can say is that too few actually question the source and reasons for the advice published. Ask yourself: who is saying what, and why?  Being spoon-fed is not the solution – it’s lazy and dangerous. Ruling politicians, their hangers-on and think-tanks, business captains and the elite are not going to tell you they’ve made a mess of things. Never!

Advice tends to arrive in two basic formats: a) we’re about to turn the corner; things can only get better or b) it’ll all end in tears; the end of the world is nigh. Beware those trying in this way to tempt you, or who want to make headlines – and hopefully a name for themselves and therefore more dosh. I have a third way for this coming year, c) more of the same grim, grind. As you can see, this doesn’t exactly sell. It’s also now fashionable to predict the unexpected, first championed by the inimitable Steen Jakobsen of Denmark’s Saxo. The trouble with this is that thinking becomes ever more outlandish, and the possibility of two or more black swans does not feature. Recently I saw a pair swimming in Regent’s Park pond. Mmm…   

Back to the here and now.  How did I get on last year and have my forecasts changed significantly? My very long-term outlook remains basically the same, if anything reinforced by market action in 2017. The world is saddled with more debt, in absolute terms and relative to GDP, than ever before. This is not good, and not necessarily bad.  Problems start, and quickly, when repayments cannot be made; this affects the borrower and his family, the business, and especially the bankers. Loans are usually serviced out of income, either wages or profits, although sometimes they can be topped up by asset sales; the latter does not improve living standards or the business outlook. Higher interest rates do not help at all. The option of shrinking debt – which Bloomberg reported recently as "inflation is starting to come back into the picture" as if it were a "good thing" is not popular with savers and those on fixed incomes – as Venezuelans know only too well.

The yield curve – the difference between short and long-dated government interest rates – is on my side. These have done nothing but flatten (shrink) throughout last year and are at their lowest levels in about a decade, meaning that bond dealers are not confident with current economic forecasts and are actively betting against it buying long-dated bonds; they are not alone. This time last year I pointed out that fund managers were banging on about fixed income yields being derisory; I suggested thinking outside the box. Retail investors did, and withdrew funds from stock pickers and piled into bonds in the highest numbers in a long time. My view remains unchanged, the UK gilt curve having flattened since 2010, and Japan where it’s been flatter than a pancake for longer than most can imagine.

The consensus view for central bank interest rates, once again, is that they should slowly increase to get back to ‘normal’ because ‘the global economy is set to retain its post-crisis footing which it found in 2017’. How many more times must I listen to this drivel?  As for revised predictions, the IMF and OECD are past masters trying to catch up with today’s reality. Quarterly polls by Thomson Reuters have all 68 specialists predicting no change in UK Bank Rate until at least 2019. Unanimous! Room for a hiccup. US primary dealers expect another Fed funds 25 basis point hike in March and again in June 2018 (maybe a third one), to match the 2 per cent inflation target. The trouble is, CPI is 1.7 per cent and their preferred Core PCE is currently 1.5 per cent. Exactly the same scenario in the European Union which has seen its strongest economic growth in a decade but inflation is only 1.4 per cent. Debt will therefore shrink at a glacial pace and there really is little need for rate hikes. Sack-loads of fairly unproductive money will slosh around next year, in turn keeping volatility – and the chance to make a quick buck – low.

Interest rate differentials are at last being questioned in terms of currency moves. The US dollar took a battering from the moment Mr Trump was inaugurated: buy the rumour, sell the fact – yet again. This we nailed saying a year ago that the dollar was too expensive; it suffered one of its worst annual performances in over a decade (off 12 per cent).  The dollar index has been hovering at pivotal support for five months, closing at its lowest since late 2014; we expect further, across the board, losses this year in the region of another 10 per cent on the index.

The stock market meme is the usual one, again as one of the few homes for a slush fund. Steady and modest gains are predicted by most, although quite a few are hedging their bets saying they are expensive, overbought and based on stretched fundamentals. I tend to agree with the latter, particularly US ones which rallied about 25 per cent for a second consecutive year, and prefer emerging market ones – south east Asia especially. I’m really not keen on many eurozone bourses, the Swiss Market index and FTSE 100 the exception. Bullish momentum is on their side and the UK index’s close just shy of 7700 – is statistically significant (unlike last year’s close) – 10 per cent higher than it settled in 1999.

 

Commodities will continue to have a very low correlation with moves in stocks, bonds and to a lesser extent currencies.  WTI crude oil is likely to meander broadly sideways again this year, probably holding between $45 and $65 most of the time.  Haggling over production cuts will be OPEC’s bane as renewable energy sources continue to make inroads and environmental policies aim to reduce carbon emissions. 

 

Precious metals could drift still lower over the first half of the year, then could rebound if they become cheap enough or the dollar weak enough.  However, those used in new technology, as well as minor metals, should remain in demand for the foreseeable future.  Exploration and developing new sources of these look to be interesting opportunities.

 

I don’t know about you but I’m starting to sense a theme here: a painfully slow recovery from the great financial crisis and, a decade on, many only too happy to latch on to small signs of recovery. I chuckle and think of the shoe as a sign in Monty Python’s Life of Brian. Against a backdrop of slow but relentless demographic change, recovery so far is small fry. It’s not a ‘new reality’, just something we haven’t seen since the Hundred or Napoleonic Wars, Spanish Influenza and Great Depression. A lousy economic outlook does not encourage risk-taking and procreation. Ergo: shrinking and ageing (thanks to strides in medicine) populations. Note that US male life expectancy has dropped for a second consecutive year, blamed on opioid abuse and the decline of blue-collar jobs. Change in supply and demand is therefore inevitable; less is now more and we should tread lightly.

 

Post-industrial life needs an educated, healthy, imaginative workforce. No wonder spending on higher education, healthcare and IT has soared. I still feel that Asian companies have a lot more to squeeze from these trends.  Developed countries must devise acceptable and affordable methods of caring for the elderly. Here we can take a leaf from the Japanese who are rebuilding smaller towns to cater better for senior citizens, leaving prime real estate to those who work. Talking of which, Shanghai city council has recently decided to cap the city’s population and constructed land to battle the ‘big city disease’. With the air, noise and visual pollution in London at unacceptable levels, I’m tempted by the Swiss village of Albinen’s (in the French speaking region of Valais) offer: pay newcomers CHF 25,000 per adult and 10,000 per child to add to their meagre 240 inhabitants. I can picture myself singing ‘the hills are alive with the sound of music’.