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Byron Wien’s 10 Surprises For 2020: Iran Shuts Hormuz, Boeing Fixes 737, Bond Bubble Bursts

Courtesy of ZeroHedge View original post here.

Blackstone Vice Chairman Byron Wien has issued his traiditional list of Ten Surprises for 2020 (together with Joe Zidle, Chief Investment Strategist in the Private Wealth Solutions group at Blackstone).

This is the 35th year Byron has given his views on a number of economic, financial market and political surprises for the coming year. Byron defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening.

Byron and Joe’s Ten Surprises for 2020 are as follows:

1. The economy disappoints the consensus forecast, but a recession is avoided. Federal Reserve Chair Powell lowers the Fed funds rate to 1%. Without a comprehensive trade deal in hand, President Trump exercises every executive authority he has to stimulate growth and ward off recession. He cuts payroll taxes to put more money in the hands of consumers.

2. Concepts of inequality and climate change become important election themes, but centrist ideas prevail. The House of Representatives sends articles of impeachment to the Senate, but Donald Trump is not convicted or removed from office. Enough information is revealed in the proceedings to cause some of his supporters, as well as many independents, to throw their support to liberal candidates in 2020 state races. The Democrats take the Senate in November.

3. There is no comprehensive Phase Two trade deal that limits China’s ability to acquire intellectual property. National interests result in the balkanization of technology. The development of separate standards for 5G and other tech hardware proves to be bad news for the future of world economies. The move toward “decoupling” gains traction in negotiations with China. US economic co-dependence with China erodes. Both China and the US keep their hands off Hong Kong and let the protest settle down by itself.

4. The prospect of a self-driving car is pushed further into the future. A series of accidents with experimental vehicles causes a major manufacturer or technology company to issue a statement that they’re no longer developing self-driving technology.

5. Emboldened by the pain of economic sanctions, Iran capitalizes on a lack of American leadership abroad by stepping up acts of hostility against Israel and Saudi Arabia. The straits of Hormuz are closed and the price of oil (West Texas Intermediate) soars to over $70/barrel.

6. Even though some observers believe valuations are stretched, a surge in investor enthusiasm pushes the Standard and Poor’s 500 above 3500 at some point during the year. Earnings only increase 5%, and S&P 500 multiples remain elevated because monetary policy is easy and investors become more comfortable that intermediate interest rates will rise slowly. Volatility increases and there are several market corrections greater than 5% throughout the year.

7. Big tech companies face growing political scrutiny and social blowback. Once the market leaders, certain FAANG stocks underperform and the equal-weighted S&P 500 outperforms. There are popular plans proposed to break up the largest social media platforms and increase regulation and government oversight. This has greater success than prior government efforts against Apple, Microsoft and IBM, because it has widespread support from the American people. A millennial in New York City puts their phone down and makes eye contact with another human and finds it non-threatening and refreshing.

8. Having secured a workable Brexit deal, the United Kingdom turns out to be the winner in its divorce from the European Union. The equity market rises and the pound rallies. The U.K. benefits from a long transition period and growth exceeds 2% as foreign direct investment resumes now that the outlook is clarified. The EU economy remains soft, and European markets other than the UK underperform the US and Asia.

9. The bond bubble starts to leak, but negative rates continue abroad. Even though the U.S. economy is slowing, the 10-year Treasury yield approaches 2.5% and the yield curve steepens. Japan and China pull away from the Treasury auctions. Rather than economic fundamentals or inflation, supply and demand drive yields higher.

10. The problems with Boeing’s 737 Max are fixed and deliveries begin. The plane becomes a fixture around the world, enabling airlines to operate more efficiently and increase profits. The stocks become market leaders.

“Also Rans”

Every year there are always a few Surprises that do not make the Ten, because we either do not think they are as relevant as those on the basic list or we are not comfortable with the idea that they are “probable.”

11. Fears of an economic crisis in India ameliorate. The emerging markets continue to have uneven performance but India recovers from decelerating growth. The Modi government continues business friendly growth reforms, the economy grows at 6% and the market rises 20%.

12. Artificial intelligence begins to be viewed as a paper tiger. The AI jobs apocalypse fails to materialize, much like the Y2K bug failed to undermine the US economy 20 years earlier. Manufacturing jobs have already been automated and it proves harder to eliminate service jobs by using computer-based applications.

13. Economic problems in Russia intensify even though the price of oil rises. As a result, social unrest begins to spread. Putin’s cozy relationship with his circle of oligarchs becomes an issue and his influence as a world leader diminishes. He becomes closer to China to maintain his stature on the world stage. In spite of serious differences, China and Russia appear prepared to face off against Europe and the United States.

14. Populism and inward-thinking continue to spread globally, particularly in emerging markets. Anarchy and disharmony spread throughout the world, creating turbulence in financial markets everywhere. Investors turn away from emerging market local currency debt, forcing spreads higher.

15. North Korea agrees to suspend its nuclear development program after another meeting with President Trump, but does not give up its existing stockpile. Kim Jong-un halts work on a long-range missile capable of reaching the United States. North Korea continues to be a threat, but not an imminent danger.

*  *  *

How did Wien do last year?

  1. The weakening world economy encourages the Federal Reserve to stop raising the federal funds rate during the year. Inflation remains subdued and the 10-year Treasury yield stays below 3.5%. The yield curve remains positive. – TRUE

  2. Partly because of no further rate increases by the Federal Reserve and more attractive valuations as a result of the market decline at the end of 2018, the S&P 500 gains 15% for the year. Rallies and corrections occur but improved earnings enable equities to move higher in a reasonably benign interest rate environment. – TRUE

  3. Traditional drivers of GDP growth, capital spending and housing, make only modest gains in 2019. The expansion continues, however, because of consumer and government spending. A recession before 2021 seems unlikely. – TRUE

  4. The better tone in the financial markets discourages precious metal investors. Gold drops to $1,000 as the equity markets in the United States and elsewhere improve. – FALSE

  5. The profit outlook for emerging markets brightens and investor interest intensifies because the price earnings ratio is attractive compared to developed markets and historical levels. Continuous expansion of the middle class in the emerging markets provides the consumer buying thrust for earnings growth. China leads and the Shanghai composite rises 25%. The Brazil equity market also comes to life under the country’s new conservative leadership. – TRUE

  6. March 29 comes and goes and there is no Brexit deal. Parliament fails to approve one and Theresa May, arguing that a change in leadership won’t help the situation, remains in office. A second referendum is held and the U.K. votes to remain. – TRUE

  7. The dollar stabilizes at year-end 2018 levels and stays there throughout the year. Because of concern about the economy, the Federal Reserve stops shrinking its balance sheet, which is interpreted negatively by currency traders. The flow of foreign capital into United States assets slows because of a softer monetary policy and a lack of need for new capital for business expansion. – TRUE

  8. The Mueller investigation results in indictments against members of the Trump Organization closest to the president but the evidence doesn’t support any direct action against Trump himself. Nevertheless, an exodus of Trump’s most trusted advisors results in a crisis in confidence that the administration has the people and the process to accomplish important goals. – FALSE

  9. Congress, however, with a Democratic majority, gets more done than expected, particularly on trade policy. Progress is made in preserving important parts of the Affordable Care Act and immigration policy. A federal infrastructure program to be implemented in 2020 is announced. – FALSE

  10. Growth stocks continue to provide leadership in the U.S. equity market. Technology and biotech do well as a result of continued strong earnings. Value stocks other than energy-related businesses disappoint because of the slowing economy. – TRUE

7 out of 10 true is not a bad batting average.

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