2014 : The Weight Of Expectations

2013 has been a big fat hairy year. Record highs in stock markets and rising real estate prices have made folks feel content this Christmas and not too worried about what lies ahead in their comfort zone.

I spent my past weeks struggling in personal conflict, seeking that inspiration to write something for 2014 like I managed to do with some ease (and error) last year. I confess that the effort has been mentally draining with little fruition for I am unable to find the conviction in anything much. It is highly distressing, particularly for a trader where the golden rule is to have a view at all times, as I was told many moons ago that it was better to have a wrong view than no view. 17 years later, I find myself in a novitiate position as far as 2014 is concerned.

What has 2013 been for me ?

Moral Compass

We have come a long way this year and learnt important lessons.

“Affluenza” has demonstrated that there are men and boys above the law after a 16 year old was pardoned for mowing down and killing 4 people, injuring 9 other and paralysing one of his passengers in the process.

Accordingly, prominent enough members of the financial industry have also proven that trend, Stephen Cohen and  Jamie Dimon, both escaping the clutches of the law.

Inequality Rules

Mass protests and social insurrections abound globally counted mainly for naught for life goes on and higher stock valuations make rich men richer. Billionaires net wealth growth is surpassing the average person’s from US to China and loopholes continue to ensure their wealth preservation.

The mockery continues as the media converges on the topic of the deep rooted inequality in the system, from corporations to citizens and empirical evidence of the limited social mobility in the US, a country for the free.

Fear Factor

The NSA global spying allegations, banning of social chatrooms in banks, reporters getting shut out China, reporters evicted for heckling politicians, and the list goes on.

Yes, we make a lot of noise about it. Wikileaks goes on rampage and Snowden sends his Christmas greetings from Russia. But nothing has changed or will change and we will learn to live with it as a new normal.

No Room For Failure

We have gradually adapted to the idea that nothing shall fail after Lehman and have been proven right.

Yet for all this, only less than 10% of the adults in the world really care about what happens to the markets in 2014.

global wealth pyramid

The rest with assets less than USD 100,000, I assume, do not really care where the markets are headed and will not be spending any time reading about their situations because if they found out that income growth has not been evenly spread in the US with the top percentile seeing 12% wage growth against a 6% increase for the bottom percentile which is evident in luxury car sales increasing 12% against 6% for the small cars.

My Bad, My Bad

I did not have a fantastic year. Had a few good calls and a handful of bad ones. Got the USD, bonds, tech stocks etc right, and dead wrong on gold, commodities and CNH.

Let’s Not Lie About 2014

All the outlooks for 2014 are almost identical to a point of repetition. Yet you can sense the thickly and thinly veiled doubts of the writers, all compelled to produce an outlook, almost disbelieving themselves as they write that we should be putting our money into Europe, tech stocks, the USD, short term corporate bonds while selling Gold and long bonds.

We have a few contrarians, still clinging to their China foul story and sinking European banks but none daring to slam EM too much for obvious fear of a self fulfilling prophecy and rocking a scandal ridden sinking boat. They are mostly found congregating in the Zerohedge website now. http://www.zerohedge.com/news/2013-12-13/faber-rogers-dent-maloney-stockman-%E2%80%93-what-do-they-say-coming-2014

If there is one resonating theme behind the economic reports, it will be the plaintive voice of the economist writing for the sake of his livelihood. Painting rosy pictures filled with optimism for reader, egging them to continue to put on trades to give more business to the banks and security houses. You really cannot tell people to stay put if you want to keep your job.

It is not possible to tell the truth that I am right now. That I do not really know what to expect past the first month of 2014. There is so little to work on coming from the peak in the S&P, Nikkei and the rest.

Weight of Expectations

This is what I see is the major risk. The weight of expectations for 2014. There is too much to live up to and too much to deliver.

The record pace of stock buy backs, cost cuts and accounting rule changes to include R&D into GDP this year (a move that would affect the EU next year when they include knowledge economy into their GDPs) has seen a record high in the S&P and the Nasdaq. We will need more of such little miracles next year even as Caterpillar is seeing dismal sales and luxury brands are not feeling too excited about their prospects.

2013 saw the highest rate of CEO changes for corporates. Extending to governments, we have also been seeing high turnover in leadership. To me, it signifies a certain lack of stability, yet the markets see it as breathing space and reason to cheer as more dirt gets swept under the rug leaving the governments of the future to tackle the skeletons in the closet.

The World Economic Forum produced their top 10 trends for 2014. Only one sounded remotely positive while the rest loom as economically unquantifiable risks which pose no threat to short term stock bulls.

1. Rising societal tensions in the Middle East and North Africa

2. Widening income disparities

3. Persistent structural unemployment

4. Intensifying cyber threats

5. Inaction on climate change

6. Diminishing confidence in economic policies

7. A lack of values in leadership

8. The expanding middle class in Asia

9. The growing importance of megacities

10. The rapid spread of misinformation online

What will I do in 2014 ?

It is hard to look ahead in the haze of so many transitions. Consumers are not spending, companies are not spending and countries are not spending.

The S&P profit margins at record highs are accompanied by miniscule revenue growths.

I cannot envisage another raging bull year and I cannot see peace and tranquility in the markets. My instincts tell me that we are in for a big bout of volatility led by policy uncertainty and political theatrics leaving investors largely paralysed and brewing heavy social resentment.

Clear Trends In DM Equities

1. Solar and LNG – alt energy
2. Healthcare
3. Online shopping
4. 3D printing, driverless cars, cloud computing and storage etc.

But at the current valuations ?

Forex is all about positionings and right now, the world is skewed to extremes. Gold is subject of a massive media propaganda campaign for devaluation. The real estate game has now become the ball park for sovereign wealth funds and hedge funds. China is on an acquisition campaign for hard assets, commodity and food producers and will not be stopped. Japan, which looks so sure on her reflation trend that is almost too good to be true.

Bonds do not look likely to be heading for an imminent crash with a well diversified pool of holders. The problem lies in the refinancings ahead and issuer risks. I suspect banks will continue to orchestrate stability in the markets with central banks support until a black swan bites in the form of obvious fraud and mismanagement which is more likely to erupt in the high yield segment that is not as closely policed as investment grades.

I personally would not touch any sector that runs into potential risk of regulatory changes. Banks are first on the list, as the rulebooks keep changing. Real estate are also a high risk popularity moot point such as the UK’s possible capital gains tax on foreign buyers. Saving mortgages in Scandinavia will hit banks and the list goes on.

EM risks will still run high. Like last year’s resolution, I will not be looking at countries that I am not willing to live in and whose inhabitants mostly wish they could migrate out of.

And the overhanging weight of expectations for the good times to keep rolling ?

It looks like the overweight of expectations may be just the little tourniquet that suggests that 2014 should be taken in little doses, for me at least.