Lars Tvede på Facebook d. 9. januar 2016
"SOME OF MY THOUGHTS ABOUT 2016
THE WORLD ECONOMY
The world economy and asset prices had a great (if not smooth) run 1980-2008. Asset prices were boosted by:
• The IT revolution
• Falling inflation
• Credit boom
• Globalization
• Capital spending boom in emerging markets
These were interrelated. Inflation fell partly because of the IT boom and globalization; asset prices went up partly due to falling inflation and rising credit, but credit rose partly because of rising asset prices (it made sense to borrow and invest in the bull markets). However, the credit boom was also due to gvt. overspending. Now, structurally, much of this is slowing, is over or is even reversing.
The IT revolution is ongoing, but unit prices are not falling as fast as before.
Inflation is well below gvt. targets and central banks are trying (not very successfully) to raise it.
The credit boom is finished and people are struggling (again not very successfully) to reduce their debt loads. Essentially, if the private sector reduces its debt, the public tends to increase its own by the same amount to avoid recession. There is a collective debt addiction. The only way out is growth, but this is very slow because of the debt load.
Globalization has peaked. International trade is now for the first time in decades falling behind GDP, and unit labor costs in China are now only 5% lower than in the US. Companies will back-source, and this may accelerate in a coming boom in cheap mass-robotics and Deep Learning AI (see below). Energy trade will also decline, if nuclear fusion works.
Finally capital spending is lower due to virtual and sharing services that can build new business without requiring big (or any) investments. We are increasingly improving the use of existing equipment.
THE BUSINESS CYCLE
Regarding the normal business cycle, this runs in slow-motion now because the expansion is so weak. We are therefore nowhere near a situation with bottlenecks and hefty monetary contraction. If we get a recession soon, it would be because of some huge, geopolitical accident. The Middle East? OECD economies are not inherently close to recession.
POLITICS
The Middle East will continue to disintegrate. Oil prices below USD 60 cannot nearly sustain the economies (they generally need USD 100 or more), and there is no end in sights to the internal strife and terror. On the contrary; we have approx. 5 Islamic terror attacks daily plus various civil wars, and this feeds on itself. Most of the terror attacks happen within the Middle east and relate to secterian issues. This means that we have a civilization of 400 million people at Europe's doorstep in collapse or in threat of collapse. Why? The deeper reason for the collapse is partly lack of innovation. All empires and civilizations without innovation have collapsed. Check how many patents arab/persian nations file compared to, for instance, the Netherlands. Dutch people are more than a thousand times as likely to file patents than Arabs. This is a known problem in the Arab world, and some are working on it, but it is not easy to change.
So there will be increasing pressure of refugees (political and economic) to Europe, and most political parties in Europe will move towards more restrictions - or lose their voter base. If they don't do it fast enough, expect real fascism. It is already visible in Eastern Europe, but is also possible in France and elsewhere. The EU may very well break up, unless it gets control over its external borders, which it probably won't.
Argentina has shifted right and may have relatively good prospects. Brazil may also turn right later, but it has a horrible constitution that makes it partly unmanageable, like an airplane with the wing flaps stuck in the wrong position.
Venezuela - anything could happen. 2/3 of the population voted right wing and the parliament should have super-majority to call a presidential election, which would also be won by the right. However, the president refused to accept the recent election result, and his government and the military are socialists and will not cede power. This is perhaps high treason, which means no way back. It will get even uglier. Inflation is now 270 % and most smart people have left.
The UK may leave the EU (50%) and do a trade deal with NAFTA. If they do, Scotland may leave the UK. If UK leaves EU, the Danes would get itchy. Remember Danelagh? Brits are really half Danes, sort of. Just look at how thez drink beer. Same thing.
CONFLICTS
When you have internal political or economic problems, you need an external threat or enemy to keep the people behind you. Preferable a cold or frozen conflict, so it doesnt cost too much or spiral out of hand. The sunni-shia conflict or Russia -Nato, or Russia-Ukraine can do the trick. As long as commodity prices - and especially energy prices - are weak, we will see a lot of that.
TAXES
Due to aging, zero productivity growth in public services and increasing cultural welfare dependence, the pressure to raise even more taxes will continue many places.
However, people have become far more mobile than before, and entrepreneurs and successful businessmen will increasingly flock to places with reasonable taxes, whether these taxes are for all or only for non-doms. For instance, there are attractive European non-dom offers in UK, Spain, Cyprus, Switzerland, Malta, Denmark, Sweden and Portugal (currently one of the best), etc.
Otherwise people can - and increasingly do - escape to Luxembourg, Hong Kong, Cayman, Singapore, Jersey, Panama, Bahrain, Bermuda, Guernsey, Dubai , Canada, Mauritius, British Virgin Islands, Macao, Marshall Islands, South Korea, Russia, Barbados, Seychelles, Liechtenstein, Isle of Man, Bahamas, Israel, Netherlands, Belgium, Cyprus, Dominican, Vanuatu, Costa Rica, Ireland, New Zealand, Gibraltar, Norway, Guatemala, Belize, Latvia, Aruba, Curacao, US Virgin Islands, Botswana, Anguilla, St Vincent and the Grenadines, Turks & Caicos Islands, Malta, St Lucia, Antigua and Barbuda, San Marino, Grenada, Hungary, Brunei, Andorra, Monaco, Samoa, Delaware, Dominica, Cook Islands, Maldives, St Kitts and Nevis, Nauru, Montserrat, Montenegro and approx. 20 others, which have low taxes, non-dom agreements or no tax at all. High tax nations are essentially pricing themselves out of the global market for talent and investments. This can course downward economic spirals, where they think they need to raise taxes even more to solve rising social issues. There is an important network effect in how you treat talent and entrepreneurship.
TOP 30 HOT TECHNOLOGIES
The 30 hottest technologies over the next few years are probably:
Artificial intelligence/deep learning (software that can learn to do some things as if they had human intelligence)
Big data (the mining and use of very large online data resources)
Blockchain (Originally made for Bitcoin, a distributed consensus system, where no one person controls all the data. It can be used for anything requiring signatures or authentication, and it can eliminate use for many middlemen, from notaries to brokers.
Brain Organoids. A method for growing and inserting brain cells to replace those lost or damaged.
Cancer immunotherapy. Cure cancer by mobilizing the body's immune system for the task.
Car-to-Car communication. Cars send warnings to each other and automatically avoid collisions.
Crispr-Cas9 gene editing. Cheap and precise technique to change gene errors. Can also be used for other genetic engineering.
Crowdsourcing. Techniques and software for mobilizing large scale cooperation between people who don't know each other.
Drone/vehicle hybrids. Half car, half helicopter, but unmanned and with autopilot. Could be from tiny to a truck.
Drone-facilitated close air support. Ground soldiers work closely and in real time with a fleet of circling armed drones.
Fintech. A range of technologies that automate financial processes. A typical approach is to offer an online service for free against some information about the user. That information is used for offering premium services that are cheaper than normal because of low transaction costs.
Hybrid and smart cars. Tiny engines combined with batteries give great fuel economy with sports car acceleration. Smart means semi-automated driving.
Information of Everything. Software that combine and give meaning to vast amounts of online data from sensors and other sources. Merges with Internet of Things, see point 15.
Internet of DNA. Online access to vast knowledge about genes.
Internet of things (sensors and platforms). Things that communicated over Wifi or the web.
Laser weapons. You can't shoot down a laser beam, but a laser beam can hit anything, such as an incoming missile, a terrorist or an aircraft carrier.
Lithium-ion batteries. They just get better and better...
Medical home diagnoses. Smart kits that can detect signs of health problems early and cheaply. Will include liquid biopsy, where you sample none intrusively for chemical signs of tumours and other problems. The smartphone will interface with online sources and do the local computing.
Mega scale desalination. Very cheap production of fresh water from salt water.
New nuclear. A range of safe and compact nuclear technologies, including travelling wave, thorium and fusion. If fusion works, we don't need fossil or windmills anymore.
Sense-and-avoid drones. Drones that avoid colliding with anything, including each other.
Solar powered stratospheric airships for telecommunication and aerial surveillance.
Supercharged Photosynthesis: genetically modified plants that grow much faster.
Versatile robotics. Robots that can be used for anything and upgraded with software apps and spare parts.
Whole-cell simulation. A tool for simulating what happens to cells with different nutrition, medicines, etc.
Wireless payment. Someone steals money without using their hands from you as you walk past them. Can also be used for voluntary payments, though.
Smartphone magic wand. You smartphone becomes a remote key, a remote control for your devices, etc.
The Sharing Economy. OK, we already have that, but there will be much more.
Omni marketing tools. Software/online tools to integrate marketing over multiple channels.
Smart homes. Why can't you lock your come with a click on your smart phone and set the temperature control with one click, etc.?
Of all these things, a few stand out.
AI is not just smart computers. If you offer access to deep learning computers on clouds, it's a massive new all-purpose technology that can spawn thousands (if not millions) of new applications. It's really huge.
Cancer immunotherapy may cure cancer painlessly. That's big.
And if nuclear fusion works, we will have enough clean energy for several times longer than the universe has existed. Imagine what that would change.
ENVIRONMENT
Environment is horrible, horrible in China. But in OECD nations, the trend turned ages ago. Air, water getting cleaner, forests growing rapidly, etc. Global land-based green biomass is up 14 % since 1980. Global warming is real, but since the panic started ca. 1980, the run-rate has been 1 degree per 100 years. Either the models are wrong, or they are right, but man-made warming is counteracting a very powerful cooling process. Weirdest joke would be if we are inadvertently preventing a natural ice age.
RESOURCES
Real commodity prices have decline steadily and dramatically the last 200 years and will probably fall even faster the next 100 years. Farmland hasn't grown since 1980 and will soon start to decline. Population growth in percentage terms peaked in 1963 and in absolute numbers in 1989. Within the next approx. 10 years, the world goes below replacement fertility. And the resources technologies are largely evolving exponentially. If you tell stupid people that we are running out of resources, they will think you are a caring and thoughtful person and love you for it. Don't tell it to smart people, though.
GOVERNMENT BOND MARKETS
The value is generally very poor, and gvt. bond prices are boosted by central bank purchases in Japan end Europa. German gvt. bonds have negative yields 6 years out. However, due to low interest rates, no OECD gvt. is in danger of default in this environment, and gvt. issuing in own currency (US, Japan, UK, DK, CH, etc.) need technically never default, as they can just inflate instead. However, we are not near that situation either. Donàt say that the US will default in front of smart people.
CHINA (OMG!)
As outsourcing peaks, China must learn to grow from more than property construction and cheap labor-based exports. It will, and the government has lots of firepower in rates and borrowing potential. They could also devalue heavily, which, however, would create some global turmoil (followed by a buying opportunity). More likely is that they devalue a bit only. But pls. bear in mind that Taiwan is 3-4 times as rich per capita as China. Long term, why shouldn't China become as rich as Taiwan is today? They is no why. They will. So long term, China still looks very good.
EQUITIES
US equity markets seem risky since valuations relative to earnings are a bit on the high side and earnings relative to just about everything are exceptionally high. The US market is essentially where one could expect (at least hope) that Europe to be 2-3 years from now. There is a risk of a weak development in earnings, and there is also risk of a mid-cycle correction with economic slowdown (but not recession). Not very appealing now. But on a deeper correction, yes. Perhaps this spring?
Europa has better valuation and better earnings prospects. The most interesting European markets are probably Spain and Italy, with Spain as the preferable of the two. Spanish real estate is down 40% from the top and seems to find buyers here. The most likely development is that property prices start rising within the next few years, which would create great tailwind for the economy. Spanish real estate stocks could have good long term value. They are 75% down.
Japan falls in the middle between US end Europe. However, Japanese companies sit on mountains of cash. It was approx. 25% of GDP in 1990, 38% in 2000 and 55% in 2010. It is now almost 70%. So while the government has built up enormous debt, the corporate sector has built up enormous savings (although the debt build-up is biggest). The obvious strategy is for the central bank to continue to buy up the government debt and for the government to implement tax incentives for distribution of retained earnings. Both things are happening. On a side note, the central bank could in principle convert its holdings of gvt. bonds to zero coupon perpetuals, which would in reality annul most of the government debt without involving default to any of the remaining private investors. That would be hillarous, and the great time to do it would be approx. 2 years from now.
For the very long term, Chinese H-shares look good. But not right now. Soon, though.
Other emerging markets (EM) still look very troubled. As mentioned above, outsourcing/globalization has peaked. Going forward, EM will be up against robotics and Deep/learning/AI (item 24 and 1 on the list above), which will substitute cheap blue collar factory workers (as in China) and cheap white collar service workers (as in India).
Overall, the best equity strategy for 2016 can be to trade the volatility (buy heavy oversold; sell heavy overbought). The worst would be to panic late in corrections.
COMMODITIES
Gold couldn't boom while US had close to zero rates and massive QE. Just think about that. Now it has neither, so gold should continue to fall. However 1.000 USD/ounce offers huge technical support. It will surely bounce at that, but if crashes under 1.000 at some point, it could go to 800, where many mines would stop producing and there would be some value. In 2006 it closed at USD 635 and in 2001 it was 276. Even with a bit inflation, 1.000 doesn't sound cheap to me. Perhaps 800 not even. 276 was cheap. What we have is still one of 3 gold bubbles since 1940 that is bursting. If gold hits 800 (still a big if), I would look at Philadelphia gold and silver.
Oil could become interesting in 2916, though. We have record inventories and 1.5 m barrels daily overproduction (where the heck do they store it?). If it makes it dip below USD 30/barrel (Goldman says 20 is target), then that might become interesting buy. Markets will likely balance towards year end. perhaps even Q3, and after that, prices could rise to where US fracking kicks in, which is approx. 50-60. Buying at, say, 25 and selling at, say 55, would be a joy. Hoping, hoping. A good proxy for forex traders would be to buy CAD. If we reach 1.60 in USDCAD, sell, sell sell.
METAL
Should be weaker than oil in 2016. The problem isn't only that China growth is slowing, but that it might have passed peak metal. Korea and japan passed their peak metal at roughly similar stages in their development. Chinas industrial capacity runs on 50% capacity utilization versus 80/85% in Europe and the US, so it is way overbuild. Longer term, shifting growth towards services require less metals than building up industrial capacity and massive housing. Of course, there is India coming up, but metals are probably not yet about to turn".
http://www.irishtimes.com/.../william-reville-nuclear-fusion-...
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