My Brilliant 2014 Forecast is… ummmm…

I’ve been trying to compose an appropriately “Strong View Lightly Held 2014 Outlook” for a few days now.  Just not happening.  I have ideas, but not feeling much conviction.  This “meh-ness” might actually be the dominant tone for 2014 – especially the first half.  I still have a pretty clean longer term view, but the next few months seem particularly murky.  So here goes nothing.

The economy will come back stronger and (especially) longer than most expect.

  • Declining productivity and consequent hiring will put more money in the pockets of the bottom 95%.
  • The 95%’s higher propensity to spend will raise monetary velocity.
  • More money moving faster through the system will raise company revenues.
  • Revenue growth will support absolute profit levels, although profit margins will trend flat to down.
  • A whole lot of fixed goods will get replaced.
  • A wave of M&A and business investment will (finally) happen.  Corproate chieftains are as bad as anyone at bottom-ticking markets and arguably better than most at chasing trains already leaving the station.

Equity markets:  I expect a somewhat directionless total market but a whole lot of sector rotation.

  • The S&P can very supportably go to 1,900-2,000 (5%-10% gain).  16x-18x $120 earnings.
  • Stocks probably go up a whole lot more in 2015-2016 if we do get that major economic acceleration.  But that will take time to become apparent.  And even more time to be believed.   2H14 at the earliest.
  • The return of revenue growth will lead markets to favor high-operating-leverage, “growthier”  companies (companies who can show revenue growth without a 1 for 1 increase in operating costs).   This will favor tech, metal-bashers, others sectors I can never remember off the top of my head (I remain a tech guy).
  • Dividend stocks will lag in comparison.  Especially as interest rates start to creep up.  But retirees looking for income have rediscovered dividend income (my favorite kind), so they won’t crash.

Bonds will suck.  For a very long time.  At least until long-term 10-30 year interest rates are back in the 5%-7% range vs 4% today.  Remember that bonds go down when rates go up.

  • Interest rates will tick up for good reasons (higher economic growth expectations).
  • Higher monetary velocity will also lead to higher inflation expectations (also raising interest rates).  Higher inflation is a whole lot better than deflation, but we I get a feeling things will overheat a bit down the line.
  • This inflationary over-run will feel great while it lasts, but probably incubate the next crash.

2014 politics.

  • The biggest potential surprise in US politics will be if the center-right coalition that passed the budget compromise starts to get some confidence and group identity.  Hard to see in an election year, but maybe not given the country’s (and big business donors) clear disgust with 2013’s follies.  There are clearly enough votes to pass comprehensive immigration reform AND tax reform.  Both being pushed hard by traditional Republican constituencies.  The only question is whether the Republican leadership is willing to accept votes from across the aisle.
  • The biggest surprise in Asia is already ongoing.  China is going to become much more of a consumer nation than a producer nation.  It remains to be seen whether this happens smoothly, but it will happen.  Near term, it is probably smooth.  That means the rest of the world will go from competing with Chinese labor for jobs to competing with Chinese consumers for goods and services.  Better go see the Eiffel Tower before it is completely over-run.  But good for global economic growth overall.  China’s impacted control/power/influence system will eventually lurch forward somehow (probably painfully).  But not anytime soon.
  • The biggest potential surprise in European politics would be if they actually faced up to their structural social-economic problems and did something to spark real growth.  Not likely.  Not really even good for a laugh.  Things there probably do get better mostly on a dead-cat bounce.

Social trends:  More small signs of a 20-30 year pendulum swing leftwards after the last 20-30 years shift to the right.  This trend will be (mostly) masked by the right’s increasingly furious, frantic, feckless, and futile efforts to stop the clock.  Income inequality will start to narrow for the 95% – barely perceptible at first.  More significantly, the 95% will regain confidence in their own power and voice.  This growing assertiveness will be a good thing at first, but incubate the Left’s own over-reach 20-30 years down the line.

  • Hiring will increase incomes directly.
  • Hiring will also increase incomes indirectly as employed and exhausted workers regain bargaining power in a tighter labor market.  Watch for the quit rate to start ticking up.
  • The minimum wage campaign will gain traction and bear fruit.  Quite possibly faster and more broadly than most expect.  Especially as it becomes clear the economic consequences are largely benign (Wal-Mart et al are already running at minimum staffing levels anyway).

Internationally, we’ll have some major outbreaks of political risk in Asia.  But also some positive surprises.

  • The biggest ticking bomb in Asia is North Korea.  One day it will go off.  Lets hope that’s just figurative, not literal.  China and Japan’s jousting in the South China Sea is also worrying in terms of potential for miscalculation.  Unbidden trouble could come from Southeast Asia, which is looking a whole lot riskier.  Demonstrations in Thailand and Cambodia.  Transition in Myanmar.
  • The Middle East could be a positive surprise.  Not that it will get better, but it might not get worse.  And there is a sense of exhaustion creeping in on all sides that bodes well for the (very) long-term.  If nothing else, the rest of the world is learning to ignore the whole mess.  And that is a good thing.
  • Africa will continue to emerge as a real economic growth area.  And one year non-Africans will finally take notice.

Having said that, I find myself at a loss about the next few months.

  • I (still) like tech.  We could see a major re-valuation of the sector, which is trading at below-market multiples while churning out prodigious cash flow.
  • I think dividend stocks will lose their luster, but waves of retirees will need income somewhere so its hard to see a crash there.  If anything, the demand for current income will start to exercise some salutary governance restraint on company managements.
  • I think the US and developed markets will do better than emerging markets, with the exception of Africa.  But there is no way in hell I am putting my money in an Africa ETF just right now.  Although that intuition probably tells me I should.

So the above actually came out more coherently than I feared.  But it still feels a little lacking.  Lacking conviction but, more importantly, verisimilitude.    What is frustrating is that I can’t seem to ken whether I am being too optimistic or not optimistic enough.  I am not the only one.  It was easy (and profitable) to be a contrarian last year.  This year, it is hard to even know what to be contrary to

Anyway.  The best 2014 news for me is that the front house is fully permitted with all materials at hand.  So there is some hope we’ll finally have a permanent home after 3+ years of nomadism (we’ve lived in around 12 different places depending on how you count it).  And that will be a relief even if the market goes to hell.

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