Twelve surprises for 2019
“I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” — Warren Buffett
“The only function of economic forecasting is to make astrology look respectable.” — John Kenneth Galbraith
“Every year I talk to the executives of a thousand companies, and I can’t avoid hearing from the various gold bugs, interest rate disciples, Federal Reserve watchers, and fiscal mystics quoted in the newspapers. Thousands of experts study overbought indicators, oversold indicators, head and shoulder patters, put-call ratios, the Fed’s policy on money supply, foreign investment, movement of all the constellations through the heavens, and the moss on the oak trees and they can’t predict markets with any useful consistency any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.” — Peter Lynch
The quotes above do a great job of explaining the futility of forecasting. I’ve said this in all my prior surprise columns and I’ll say it again; static forecasting is junk. Situations in financial markets are fluid, thus all prognostications are almost instantly stale.
Trying to guess what the market will do next is like trying to nail Jell-O to a tree. No one can truly claim with certainty that they know what tomorrow will bring and if you meet someone who does, you should put your hands in your pockets to check for your wallet and slowly back away.
Voltaire sums it up best: “Doubt is not a pleasant condition, but certainty is absurd.” Besides, successful investing involves following the right principals and prescriptions — not the right predictions. Spending inordinate amounts of time trying to predict things you can’t forecast or worrying about imagined outcomes is rarely, if ever, a productive use of mental capacity and time.
So why do we listen or pay attention to forecasts in the first place? Why are people drawn to them and especially dire ones? Morgan Housel probably wrote the best summarised theory on this:
“The correlation between high stakes and people’s willingness to believe quackery is high. And it’s pretty rational.
“A low-probability, high-stakes prediction should always be taken seriously. And if your world is so confusing that you can’t determine probabilities, defaulting to assume that prediction will come true may increase your chances of survival.
“When things are calm, people believe what they tell themselves. When things are crazy they believe what other people tell them.
“That’s why we listened to bad forecasts 500 years ago. And why we listen to bad forecasts today.”
When it comes to investing, which can appear nebulous, scary and complex to many, comfort is sought in some semblance of perceived understanding. Unfortunately, as with all complex adaptive systems, you will never have certainty.
So why even bother doing forecasts? Good question. I think it’s ridiculous. Here are some reasons why I pen these each year.
I have written these in the spirit of nudging the reader (and myself) to look “outside-the-box” and consider a disparate view of things that may cause some cognitive dissonance. To second guess some “hard-held” beliefs and maybe consider alternate outcomes rather than be wedded to some concrete ideals that have been perpetrated by the current consensus view. The other reason, and maybe the truest, is for my readers’ entertainment.
To be clear, what follows is not an investment strategy or outright forecast but a list of potential surprises for 2019. Ideas that are not necessarily consensus-based, but with explanations on why they have a good chance of happening.
If you see value in these, it will be the explanations that count, not the actual prediction. One should immediately be questioning this whole process given a counter-intuitive meme: how can something be a surprise if it has an above average chance of occurring? Yet another good question. Now for your consideration and, more importantly, your entertainment …
1. Market dithers: initially, markets rebound on trade negotiation progress with China, cheap valuations and the prospect of a dovish Federal Reserve. Then Mr Market refocuses on earnings and global growth concerns — with the former in the S&P coming in closer to $160 versus the initial $178 and the latter being revised lower throughout the year. The S&P oscillates throughout 2019 and never hits average forecast estimates of over 2,900.
2. Federal Reserve blinks: despite the market looking for no rate hikes as I write this and the Federal Reserve Board dots anticipating two hikes, the Fed basically splits the difference. Possibly rising only once in 2019. The yield curve does not invert — in fact it steepens.
3. Agricultural crisis lifts some commodities: climate change wreaks havoc on the global supply chain for agriculture. Algae blooms, droughts and localised water crisis affects crop yields and agricultural commodities get a boost. A five-year slump in agricultural commodities begins to reverse. Concerns over food inflation resurface.
4. Cable makes a comeback: the substantial expansion of sports betting in the US creates a surge in sports watching and in tandem advertising revenue for cable companies with sports networks. Stagnating traditional media and network companies with sports connections outperform.
5. Australia rolls into recession: house prices continue their collapse as “price gravity” takes hold. The huge weight of accumulated debts pressures banks and the consumer. This collapse leads to Australia rolling into a recession for the first time in 27 years.
6. A split in infrastructure: with a more stable oil price, master limited partnerships shine as growth investments slow, dividends are raised, and investors return to the sector. Meanwhile utilities go dark. High valuations on a sector offering minimal growth pressures stocks. The flow of haven buying in the sector reverses in 2019.
7. The spotlight reveals: major IPOs for unicorns such as Lyft, Uber or Slack fail to impress. In fact, one or more is likely cancelled. Pricing collapses for a few as well — private market valuations become suspect and writedowns ensue. Venture capital and private-equity valuation practices are questioned.
8. UK exits but gains: despite initial failures to secure a Brexit vote and little confidence that a deal can be made in time, the UK eventually does agree on an exit. A no-deal Brexit is averted as the alternative is simply too dire. The UK, a deeply discounted market, responds to the lifting of some uncertainty and posts decent gains for the year along with the pound.
9. Netflix stumbles: with limited visibility on any path to near-term positive free cashflow, multiple new streaming competitors and rapidly escalating leverage, Netflix’s viability is questioned in 2019. The stock takes a dive and acquirers begin circling the company like sharks.
10. Bermuda staggers slightly again but ... : increasing regulation, rising taxes, and job consolidation in the reinsurance market leads to slight downshift in GDP. Tourism growth slows on slightly lower airlift and the slowing US GDP growth. The persistence of stagnant growth and acknowledgement of ever-escalating entitlement liabilities finally encourages an honest look at immigration policies and healthcare costs. Either a comprehensive immigration policy is finally tabled, and/or healthcare regulation takes steps to finally address the “real issues” driving costs.
11. Populism wins and loses: Eurosceptics and populists stage a major surge in the European Parliament elections — gaining a majority as a group. Europe’s future is questioned — the economy, excessively burdened with high taxes and ever-increasing regulation, begins a slip into a recession. “Brazil’s Trump”, Jair Bolsonaro, embarks on a series of pro-business and right-wing policy measures — Brazil outperforms.
12. Dollar drops: the market begins to focus on the growing twin deficits in the US and its hostile political environment. Despite yield differentials, monetary policy divergence narrows, and the dollar weakens overall versus major currencies.
This is likely the final year for these as I will be changing the format in 2020.
“Why we listen to bad forecasts” by Morgan Housel, March 22, 2018,
• Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd and can be contacted at firstname.lastname@example.org
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