Frisby’s forecasts – what does 2021 have in store for investors?

Good morning and welcome to the new year – same as the old year, only with a different handle.

Today, as is tradition in the first Money Morning of the year, we venture into the attic, rummage around, find our crystal ball, dust it down and make ten investment predictions...

Ten sure things* for 2021 (*they’re definitely not sure things)

We make these forecasts with the usual disclaimer: predictions are a mug’s game.

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1. Covid-19: the crisis is here to stay: As you will all know from having read my magnum opus Daylight Robbery: How Tax Shaped our Past and Will Change our Future, one of the recurring themes of history is that governments extend their taxation and controls during a crisis in a way that they never could in peacetime.

Were it not for the Napoleonic and World Wars, for example, we would never have had to pay as much income tax as we do. Income tax in the US was first imposed in the Civil War, yet it never touched the lives of ordinary Americans until the Revenue Act of 1942, passed to fund the US effort in World War II.

Yet when the crisis has passed, the taxation and controls never return to the levels they were at before the crisis began. When WWII ended, income tax for everyman never went away, because now there was the rebuilding effort. The Institute of Fiscal Studies calls this “the ratchet effect”.

Having won the general election of 1841 campaigning against income tax, British prime minister Sir Robert Peel re-introduced it to the UK in 1842 as a “temporary measure” to fund a deficit emergency. Today, 178 years later, that temporary measure remains. But back then, the tax only affected higher earners. It took another crisis, World War I, to bring the tax to ordinary folk.

Quantitative easing (QE), a form of inflation (in that it inflates the money supply) was introduced as a temporary measure to address the banking crisis of 2008. Nobody voted for it. Without the Global Financial Crisis, it is doubtful whether it would ever have been allowed. Today, 12 years on, it is normal.

This is a long way of getting to my first prediction. We will never go back to the freedoms we enjoyed before Covid-19 came along. The precedent of the government being able to close down the economy has been set. This is the new normal.

Whether vaccines work or not, Covid is now part of our lives. New strains of the virus will come along, some more dangerous, some less. But control of movement, testing, tracking, tracing, quarantining, vaccination, bail-out money, furlough (all steps towards Universal Basic Income) even lockdowns – these are the new normal.

Airports never went back to what they were before the September 11th attack in 2001. Same applies.

Those who optimistically look forward to getting back to how we were are going to be disappointed.

2. Inflation: expect even more of it: I’ve noticed on social media a large number of people posting their investment returns for 2020. These returns have, largely, been excellent. We are all geniuses in a bull market. Before we run out and congratulate ourselves, it must be remembered that money printing this year has been extraordinary. The result has been extraordinary returns, and speculative bubbles a-plenty.

Tesla was up 750%. Peloton 435%. Zoom 400%. Bitcoin 300%. Amazon 75%. The Nasdaq 50%. Gold 25%. The S&P 500 18%.

Base metals had a great year. The UK housing market is at all-time highs.

Oil was down 20%, while commercial property and the high street took a battering. But funny money has softened that battering.

The US stockmarket is deemed as important to the US economy as the housing market is the UK’s. Both will be protected at all costs. Wall Street is addicted to stimulus. The UK housing market is protected by low rates. It might seem absurd that both should be more valuable than they were before the decimation of Covid. The reason is funny money.

This inflation, of course, does not show up on official measures, because official inflation only measures consumer prices, which, in a competitive market, tend to come down in price as productivity improves.

Is 2021 the year that the economy rids itself of its drug dependency? Nope. Extend and pretend continues. Asset prices go higher.

The anti-inflation narrative may get more pronounced in 2021 as more people cotton onto the racket, but the funny money is still going to push multiple asset prices higher.

A lot of people have saved a lot of money this year – they are still being paid, but they are not spending as much on travel, clothing, entertainment, eating out. That’s a lot of savings waiting to be invested. That’s going to push asset prices higher too.

3. Bitcoin: a rollercoaster ride towards $50k: One of the biggest beneficiaries of said inflation will be bitcoin. The new vogue for corporate cash to be held in bitcoin to escape cash’s annual 15% loss of purchasing power continues. Bitcoin goes north of $50,000 as a result. But 2021 also sees one of bitcoin’s triennial, monster 50%+ corrections.

4. Gold: new highs ahead: Gold breaks out to new highs, probably in the first half.

5. US stocks: new records beckon: The S&P 500 breaks above 4,000 for the first time.

6. Silver: another run at the moon – and back: Is this the year that silver has another run? Heck, why not. Silver goes back and retests its old highs at $50 an ounce. But it doesn’t get through because... manipulation.

7. UK property: house prices up, office prices not so much: The UK housing market continues its relentless grind higher. The alienation of the younger generation through unaffordable housing resurfaces as a political issue. The root cause – funny money – is not addressed. We probably get a change of housing minister, bringing the total to 19 since 1997.

The commercial property sector faces its day of reckoning in the spring, especially in the hospitality sector. Hipsters start to occupy vacant commercial properties in city centres and turn them into live-work spaces, though the older, middle-class exodus to the country continues.

8. Oil: the return of fossil fuels: Brent goes to $70.

9. A wealth tax in all but name:The chancellor raises capital gains tax. It is “only fair” to do so. Rates get closer in line with income tax.

10. Sterling: back in the game: The pound goes above $1.40 and retests $1.45 for the first time since you-know-what.

11. Your Bruce-y bonus sports prediction: Man City win the League. Fulham, West Brom and Sheffield United go down.

So there you go. That’s what 2021 has in store for us.

Now for the actual events – which always mess up the predictions.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.