Analysts’ forecasts aren’t worth the paper they’re printed on. But some are more useful than others.
It’s the time of year for forecasts. Most analysts aren’t worth listening to – price targets for the FTSE 100 aren’t worth the paper they’re printed on and aren’t much use anyway (see page 5). But it can be worth reading “out-of-consensus” predictions – potential “surprise” outcomes that banks or analysts believe the market is underpricing. Even if many of these “surprises” are nothing of the sort, it’s useful to know what analysts believe represents radical thinking.
For example, Blackstone analyst Byron Wien issues a list of ten surprises each year – events that he thinks have a better than 50% chance of happening, but that the average investor only thinks has a one in three chance of happening.
The problem with Wien’s list this year is that he doesn’t say anything remotely surprising – it’s just the sort of Pollyanna-ish view you’d expect. The Federal Reserve will stop raising interest rates, yet inflation will remain subdued and the ten-year US Treasury yield will stay below 3.5%, which in turn will see the S&P 500 rise by 15%, while gold will fall below $1,000 an ounce, even as the US dollar remains flat. It’s not so much an outside view as wishful thinking.
The mismatch between wealth and growth
More fun is Saxo Bank’s annual list of ten “outrageous” predictions. The Danish trading platform aims to produce a list of “unlikely – but not impossible – events”, and it’s fair to say that unlike Wien’s list, most are genuinely fringe ideas, while remaining just within the bounds of possibility. One highlight is the idea that the European Union could announce a debt jubilee.
That sounds far-fetched at first, but as Saxo’s Christopher Dembik points out, the interwar period saw big chunks of French, Italian and even British debt explicitly or effectively written off. Dembik argues that a crisis in Italy could spread to France, and end with the European Central Bank being authorised to monetise debt above 50% of GDP (in other words, buy it with printed money and then write it off). Yes it’s far-fetched (the idea that Germany would agree to debt monetisation seems a serious stretch), but it’s not impossible, and a eurozone crisis of some sort certainly isn’t out of the question.
Other not entirely outlandish ideas include the suggestion that Apple could spend some of its vast cash pile to buy electric-vehicle pioneer Tesla. Following its recent warning on sales figures, Apple is certainly under pressure to innovate beyond smartphones and with cars increasingly becoming “smart devices” themselves, it could be a good opportunity for the company to extend the reach of its ecosystem into a similarly upmarket, design-conscious brand. And of course, Tesla needs the cash.
Niels Jensen of Absolute Return Partners lists six “potential pitfalls” for 2019. Most are predictable – the UK leaving the EU without a deal; the US-China trade war escalating; populists causing a major upset. But he makes a more interesting point about asset valuation.
Household wealth-to-GDP, he notes, tends to revert to the mean over time. In the US, the average ratio since 1951 has been 380%. But it’s now sitting at more than 500%, even higher than during the dotcom or housing bubbles. So either GDP has to grow faster than wealth for an extended period or – as Jensen considers more likely – 25%-30% of all US household wealth is destroyed.
An inflationary sonic boom
Of course, the ratio could adjust via a period of asset prices falling and wages rising (as the balance of power shifts from capital to labour). Household wealth might fall but incomes would rise and political anger might dissipate. On that point, the most interesting, and we think most likely, “outside” forecast of all comes from Nomura in its list of nine “grey swans” (its term for unlikely but foreseeable events). The investment bank notes that if US government spending continues at current rates along with the recovery, then “conditions may become ripe for an inflation sonic boom to hit later in 2019”.
Wage growth shows no sign of stopping (the latest unemployment report showed annual pay rises at 3.2%, the highest since 2009), while a measure of underlying inflationary pressure used by the New York Fed is near levels not seen since 2010. A surge in inflation this year would certainly rattle markets, which are currently still far more worried about recession and deflation.
Of course, all of these could pale into insignificance if one of Saxo Bank’s other outrageous predictions materialises. A huge solar storm could cause as much as $2trn of damage globally, says the group’s John Hardy, by disrupting satellites and “unleashing untold chaos on GPS-reliant air and surface travel/logistics and electric power infrastructure”. Hopefully it won’t happen – but just in case, it’s another good reason to own some gold.