The last ‘What If?’ 2020 reluctant forecast thought through some scenarios in the future.
"We are $277 trillion in global debt, near 0% in interest rate, behind a 10-year bull market, and peak madness prepared. We are in a historic time and as they say, fortune prefers the prepared mind."
If someone tells you that nobody saw the interest rate coming, you should point them to the 'What If?' thinking. Central Banker is neither the friend of stock market investors nor the friend of real estate holders when it comes to fighting the war on Inflation. Central Banker has one purpose above all, Inflation control. So saying that zero % interest rates are not forever, is commonsensical thinking not forecasting the future.
'What If?' scenarios are important to understand market surprises. Writing now on the eve of Christmas, I can say with high probability that Santa Claus causality did not work this year. Anything causality given enough time is destined to fail. Causality gives an illusion of correctness, some fun, some news, and an element of human explainability. AI seeking causality is another way to go wrong. The convenience of AI is about shifting the blame from the human to the machine.
Coming back to 2023. I was asked the forecast question. Here are my thoughts.
There is enough money in the system. A lot of cash. Under the bed, in the crypto exchange [even after the destruction], in non-allocated VC investment, and of course the printing press from the central bank, which is taking a break for now. So, when there is enough money in the system and inflation is high, it is not going to groceries and real estate. Where do you think it will go?
This is not a question for chatGPT, as it needs more thinking. I prepared a comparative table to get some quantitative data to support my forecast and 'What If?' thinking.
Figure 1 - Performance Comparative of global assets and regions
Out of the 18 Assets, I compared, China and Hong Kong were the only Equity assets that were near 50% of their max value. The rest of the assets that had fallen nearly 50% from the top were all alternatives like Brent, Silver, and Bitcoin.
India was the top-performing equity market in my group at a 100% upside from March 2020 lows.
Barring China and Gold, all the other 16 assets in my table had a minimum registered in March-April 2020.
Japan was 12000 days from its 1989 peak.
Extremities are strange beings. They always surprise you with how much extremity in sentiment is out there. There is an extreme sentiment against Bitcoin and with prices down ~ nearly 80% from the top, I wonder if Bitcoin is ever going to die, with all this die-hard sentiment wanting it to die. Wishing Bitcoin death is like wishing death to Web3. Innovation does not work without incentive and Web3 needs crypto incentives to function. This means the top 10 large-caps in cryptocurrencies would be interesting to watch considering their demise has already been written. You should watch our Exceptional & Rich [E&R] Crypto 10 Index from 1 Jan 2023 and the other E&R Indexes from Indonesia, India, U.S.A and Canada.
Similar but not crypto-like sentiment negativity hovers around China and Hong Kong. I don’t know whether I can do a ‘What If?' thinking for such large economic regions. The prices are compelling and insanely attractive. And unlike Bitcoin, China and Hong Kong are not designed to go to zero.
UK 100 fits the 'What If?' well! At barely 3% from its peak, I wonder about the future of the UK markets. 'What If?', the UK 100 is nowhere like Indonesia, which is under 5% from its peak? Some economic realities are hard to dismiss regarding emerging markets' growth rates vs. developed market challenges. Not so surprisingly, some frontier markets like Romania, which recently became Emerging continue to do well and show a lot of 'What If?' promise.
Crude and Silver were also interesting. Brent is up 260% from its April 2020 lows, but still 40% down from its all-time peak. My 'What If?' Oil $300 is still running. And I don’t know how Silver can rot in an inflationary world. Silver is 50% down from its all-time peak. Machines will eventually become the best asset allocators because they would know that causality, quantitative or qualitative is a human thing.
Figure 2 - Current Prices as % from maximum price
Another 'What If?' thinking married to common sense is connected to real estate. 50% of global wealth is invested in Real estate. And if the interest rate scenario is not fleeting and it is here for 25% of the time it took for interest rates to fall from 1980, we are talking about a high-interest rate for 10 years. How do you think Real Estate as an asset flourishes in a high-interest-rate environment?
Figure 3 - U.S. 10 Year Treasury Rates
In the end, if you are in a non-income generating asset [NA], you have a problem at your hand, because your NA has suddenly transformed into a decaying asset, losing value slowly over the next 10 years. Assuming in 10 years, we will get climate change in control, we will become vegetarians, we will bring our carbon imprint to zero, we will build impactful organizations and asset management will detoxify itself from fees and will generate alpha, the interest rate rise and the commodities rise might be a decade long affair. If not, we could add another decade to inflation into the 2040s.
The idea of 'What If?' is not to scare you. The objective is to illustrate that you can’t see the future and you are in a dynamic system that does not respect causality. The only way to survive is to diversify and understand that the future is for intelligence systems that can generate outperforming returns by adapting to changing times, without suffering from the illusion of intelligence, which is here today and gone tomorrow.
Merry Christmas
My top 10 writings of 2022.