There’s a huge difference between writing about markets and trading them. A good writer should have strong, bold opinions. A good trader should be humble and suppress them – opinions get in the way, especially political ones.
The bolder and more provocative a writer’s statements, the more people want to read them. But betting on outlandish and unlikely outcomes as a trader is a quick route to the poorhouse. You want probability in your favour.
So today I’ll try and find a balance between the outlandish and the probable – as we play the annual predictions game for 2014…
The big picture for 2014
This year we introduce a harsher marking system. We’ll score it two points for a hit, one point for a near miss, zero for a miss and minus one for what my son would call a ‘major fail’ – to cover the opportunity cost.
We start with the big picture. 2013 has seen a near-30% gain in the S&P. 30% gains are rare enough. But a 30% gain that follows a 30% gain? That’s extremely unlikely.
More probable is that 2014 is a flatter year: stock markets up a few percent, maybe even down a tad. Meanwhile, commodities and emerging markets start bottoming out. And bonds are down a little, or flat.
In short, rather than a correction in price, we see a correction over time, in the form of some consolidation. That’s my scenario A.
Scenario B is that we do see last year’s gains replicated. That would not be good for the economy at all. That is ‘crack-up boom’ territory (how economist Ludwig Von Mises described the terminal, acceleration phase of the inflationary cycle).
In crack-up boom scenario B, all the money that has been created over the past few years, be it through quantitative easing or borrowing, won’t just be flowing into a few stock markets and London property. It’ll be going into commodities, emerging markets, precious metals, art, wine – you name it.
The inflation that many have feared for so long, but which has never quite materialised, will suddenly be a serious problem. Rates will have to jump sharply to control things and the over-leveraged – just about everyone – will suffer.
I don’t see scenario B as likely, but it is possible.
Right, onto the specific predictions.
I am rather encouraged by gold’s action over the past few days. There’s a very real possibility that’s it’s made a double bottom at $1,180 an ounce, and that the last two years have been its 1975-76 moment. (Between 1971 and 1980 gold went from $35 to $850, but there was a shake-out in 1975-76 when the price halved).
But it’s too early to say this for sure. So I’ll stick with my New Year prediction and suggest that gold’s bear market continues into 2014. $1,050 is the low for the year; $1,425 the high. But 2014 is also the year that the bear ends and we finish the year higher than we started ($1,205 was the price at the opening bell).
This assumes my scenario A, of course. In scenario B, gold would be the asset to own, and 1976-80 – when it went from $100 to $850 – would be the template.
2. Oil (the WTI benchmark)
Hmmm. I’m bullish on oil. Does it stay in the same range it’s been in for the last three years? Or does it break above? I’m bullish, but not that bullish.
The current price is $93 a barrel. I’m going with $87 as the low for the year, $115 the high. I also suggest that oil above $100 will become more and more commonplace in 2014.
When stock markets are doing well, sterling tends to as well. When they sell-off, the US dollar becomes the go-to asset. So a bet against sterling is a bet against the stock market.
If sterling can get above $1.70, it could move pretty quickly to $2.00. Wouldn’t that be a surprise? But I don’t think it’ll happen this year. According to the logic of scenario A, I suggest $1.70 or just above is the high for the year, $1.53 the low.
4. The FTSE
The FTSE 100 breaks to new highs. 6,930 is the all-time high (made way back in 2000). In 2014, it’ll get above 7,000. 6,350 or so is the low.
5. The S&P
It tests 2,000 and perhaps even breaks above. The 1,715 area marks the low for the year. (Wouldn’t it be ironic, by the way, if the S&P made a major top at 1,920 – just like gold?)
6. No rate change
Despite growing pressure to raise rates with all stated targets met, the Bank of England does no such thing and rates remain unchanged. There’s an election to win after all.
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd
And now for the outliers…
So far, I’ve been very scenario A focused – so let’s make some rather bolder, albeit less likely, forecasts.
7. Surprise wealth snatch
A wealth tax is implemented somewhere in the EU without warning in the name of equality. This precipitates a crisis as capital flies about desperately seeking somewhere beyond the clutches of the bureaucrats.
8. Japan goes boom
Japan finally gets what it’s been wishing for – inflation. Only it gets much more of it than it wants. And it’s a great big surprise.
9. The eurozone panic erupts for real
Anti-EU parties make huge gains in the May parliamentary elections, upsetting the relative calm in Europe of the last 12 months. We may even see one nation, most likely Italy, take steps to drop out – but I don’t think we’re quite there yet.
10. The US long bond (30-year Treasury)
Too many people think rates are going to rise – and they’re right. But first sentiment has to change. Bonds rally in the early part of the year, befuddling the bears before the slide resumes. $136 is the high, $118 the low.
11. UK property
The government repeals the 1948 Planning Act, giving owners once again the right to build on their own land without permission. The result is that people are finally able to build houses for themselves that they want to live in. A boom is unleashed across the UK, as people make wonderful and marvellous places to live. Replacing income tax, a land tax is introduced, so that people are incentivised to either use their land or sell to someone who will.
Future generations look back at the homes we built in 2014, just as we marvel at the Victorians. Supply is able to match demand and prices finally fall to affordable levels. The younger generation is not priced out, but priced in…
Dream on! UK property? More of the same. Prices get even more stupid in London, and slightly stupid elsewhere.
12. England win the World Cup
Yes, England! Only joking. Brazil win the World Cup. I can’t decide if it’s Chelsea or Man City that win the League – but Arsenal definitely don’t.
So there you go. You now know exactly what’s going to happen over the next 12 months. What on earth is there to worry about?
• Follow @dominicfrisby on Twitter.
Our recommended articles for today
The great success stories of tomorrow are the penny shares of today, says David Thornton. You just need to know how to spot them.
The price/earnings ratio is a quick and simple way to look at a company’s valuation. But it can be seriously misleading if you don’t use it properly. Ed Bowsher explains how it works and why it can mislead.