An Outlook For 2014 - From An Austrian Economist's Perspective
When it comes to forecasts and outlooks for 2014 (or 2013, or 2012, or 2011, etc), there is no way one can't be tired of the endless Keynesian drivel which the sellside bombards its gullible client base, which can be summarized as follows: "this is the year when the central bank strategies, which have failed to boost the global economy for the past 5 years, will finally work and the economy picks up - yes, this time will be different, we promise. Oh, and 'if' we are wrong (again), well just blame it on cold weather in the winter, or warm weather in the summer and if need be, delay the 'recovery" to the following year, while blaming the lack of insufficient stimulus - because $1 trillion in balance sheet expansion per year is obviously not enough." Rinse. Repeat. One would think spinning the same yarn year after year, they would get it right purely by luck at this point. Alas, they haven't. So for everyone tired of listening to the same old broken record, here is a completely different "Austrian" perspective, one shared by Scotiabank's Guy Haselmann.
His full report is attached below, but for those curious what an alternative take on 2014's risk factors, here is the summary:
Market Factors and Risks in 2014:
- Market liquidity, especially during crisis periods, is the leading market attribute that all portfolio managers (PM’s) miscalculate.
- Central bank ‘put’ is weakened with tapering, so volatility will be higher.
- With the surge of equities (right-tail), the greater is the probability of a move down into the ‘left-tail’.
- Portfolios should increase the overall liquidity of their portfolios, as well as their ability to make tactical adjustments.
- With asset prices so elevated and distorted and with the initiation of the Fed ‘Taper’, preservation of capital must be a core investment strategy. (Long term wealth accumulation means not participating in the downside, because historically it takes approximately 10 years to return to your high-water mark.)
- Global capital markets will be more volatile due to capital flows triggered by changing central bank actions. Emerging market economies with current account deficits will have difficulty attracting foreign capital.
- Chinese growth is a key to the global economy. Chinese housing remains in a bubble. Non-performing loans are on the rise. Ecological challenges are growing. Policy pivot from export-led growth to one of domestic demand will have growing pains.
- Shale gas, leading to U.S. energy self-dependence, is a major positive for U.S. markets over the next 10 years and has positive implications for a revival of U.S. manufacturing.
- EU markets are too complacent but investors do not wish to fight the commitment of leaders who implement reactionary ad-hoc fixes to each new crisis.
- Abenomics will not yet achieve its 2% core inflation objective. There is a paradox: as inflation rises, the yield on the 10-year JGB will be unable to stay near 0.7%. (See strategy note from May 2013). Higher debt servicing will be a problem for a country that already spends 25% of revenues on debt servicing.
- Protectionism is a great potential risk to the global economy and must be monitored closely.
- Cyber-crime and cyber-terrorism are real and growing threats. Precautions must be taken where possible. A significant event that impacts markets is likely in
- Other risks include: escalation of Middle East tensions, escalation of Asian tension over disputed islands, EU disunity, civil unrest, election(s) of extreme political parties, and extreme weather or electrical grid problems.
Full 2014 Outlook report (pdf)
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