By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
It is impossible to gaze into a macro crystal ball without being forced to swallow crushed glass at the best of times. This is definitely not the best of times but I will take the risk of choking on shattered glass anyway and take you into the netherworld of my nervous system.
One, the US economic supertanker finally stalls as the Chicago PMI and consumer confidence rolls over on epidemic fears. The Powell Fed panics when the yield on US Treasury bond plunges to 1.4% and slashes the Fed Funds rate at the March FOMC by 50 basis points to 0.75%. US money center bank and insurer shares decline 25% in 2020.
Two, China’s economy and society is devastated by the Wuhan coronavirus epidemic. Commodities markets, from Dr. Copper to soybeans to aluminum, go into free fall, as do emerging markets dependent on commodities exports to the Dragon Empire. South Korea, Taiwan and Japan stock markets are hardest hit by the loss of exports to China. Chinese GDP growth falls to 4% in 2020. The Wuhan coronavirus is an unmitigated disaster for crude oil markets since China is the world’s second largest importer of petroleum. A surge in US inventories adds to the global oil glut and OPEC is unable to increase its output cut pact from 1.7 MBD to 2.5 MBD. Despite US sanctions on Venezuela and Iran, oil prices go into a free fall as global distillates demand crumbles. In 2002-3, black gold fell 30% when the SARS virus hit Hong Kong and China. Brent crude falls to $35 by autumn 2020 as Saudi Arabia’s role as OPEC swing producer is negated by the surge in US shale oil output to 14 MBD.
Three, Bernie Sanders defeats Joe Biden to win the nomination of the Democratic Party as young Gen Z voters embrace his anti-plutocrat, pro-climate change and anti-income inequality message. Despite a desperate payroll tax cut by Trump in summer 2020, he defeats the Republican nominee to become the 46th President of the United States in November 2020. The Republican Senate’s failure to allow witnesses at Trump’s impeachment trial is the biggest cover up in American history since Watergate – and this cost the GOP the 2020 Presidential election.
Four, the S&P 500 index began 2020 at an inflated 20 times earnings. The Chinese coronavirus and Bernie Sanders’s surprise win in the Iowa primary triggers a 15% correction in the SP 500 index in February and March. The Volatility Index rises to 35-40, levels last seen during the Greece/Cyprus sovereign debt crisis. As US polls indicate Sanders ahead of Trump in the general election, Wall Street panics. The SP 500 index plunges to 2400 and triggers a global bear market in risk assets.
Five, Germany’s capital goods exports to China plummet and the German economy moves into recession. ECB President Christine Legarde then slashes the policy rate even further to negative 0.8%. As the US dollar becomes the global safe haven currency, the Euro falls below parity in June and the Japanese yen rises to 85 against the US dollar, a post Lehman high.
Six, George Soros said that “the big money is made when things go from Godawful to just plain awful.” So, IBM become hot on Wall Street after Ginny Rometty finally resigned. At 10 times earnings, a 5% dividend yield, Big Blue is a turnaround Old Tech colossus that allowed an online retailer and a search engine to steal its public cloud franchises. CEO Arvind Krishna, a technologist who never ran anything in his career, an IBM lifer, cedes power to Red Hat CEO and now IBM President Jim Whitehurst. IBM slashes 100,000 of its 350,000 global payroll, accelerates its asset sales program, reduces its $36 billion net debt and boosts public cloud revenues to $20 billion. IBM shares rise from 140 to 200 in 2020-21. Krishna is hailed in Silicon Valley as a “Mini-me Nadella.”
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Seven, President Xi Jinping and Donald Trump sign a Phase Two trade deal. China, desperate as the Wuhan coronavirus hits growth, succumbs to US demands on intellectual property, 5G network standards and technology transfers. The deal is ignored by Wall Street and does not prevent a Trump defeat in the November US election. President for Life Xi remains President for Life and considers crowning himself Emperor, like Napoleon and the cannibal-dictator Bokassa before him. The Politburo orders three divisions of the PLA to crush the Hong Kong protests, just as Deng ordered the PLA Manchurian Regiment tanks to crush the student protests in Beijing’s Gate of Heavenly Peace – Tiananmen Square.
Eight, Tesla’s stratospheric rise to $600 triggers investor interest in Uber below $30, finally projected to turn cash flow positive in 2021 as Google prepares for a $100 billion IPO of white hot Waymo. Uber shares bottom at $25 and then double as excitement builds about a global E-mobility duopoly. The young generation abandons car ownership en masse and auto showrooms become as extinct as shopping malls and brontosaurus worldwide. Self-driving cars become ubiquitous by 2030 and the world’s biggest auto companies/auto dealers file for Chapter 11.
Nine, Pakistan becomes one of the world’s hottest startup markets as this nation of 217 million people finally enters the Digital Age. Easy Paisa, Daraz and Airlift command billion dollar IPO valuations on NASDAQ. A fintech and E-commerce firm in Karachi earns 50X for their early stage backers in Dubai. Both companies were founded by Silicon Valley returned “Wapistanis!”
Ten, President Sanders orders antitrust action to break up Apple, Amazon, Google and Facebook with the full support of the American people. Global technology shares plunge and FANG/tech is the worst performing sector of the SP 500 index as thousands of lawyers from the Justice Department turn the Googleplex and its peers into “shark tanks!”
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Eleven, the UK leaves the EU on January 31. Sterling surges to 1.45 as PMI data, housing prices, FTSE 100 shares and FDI surge in the sceptered isle. British equities are the best performing stock market in the developed world.
Twelve, emerging markets are devastated by the slump in crude oil, metals and commodities markets, the decline in world trade, recession in the US, Germany and Japan, the economic distress in China. Anti-regime protests break out in dozens of countries worldwide. Emerging market debt spreads spike as flight capital flees to the safety of King of Kings Dollar. The multi trillion dollar sovereign and corporate debt Ponzi schemes spawned by a decade of reckless borrowing due to QE leads to a tsunami of bankruptcies, currency collapses and the failure of entire banking systems. Turkey, Argentina, Lebanon, India, Pakistan, Ecuador and Lebanon are only the tip of the iceberg in history’s greatest cross asset EM spasm of contagion. In 2021, a near bankrupt IMF announces a moratorium in sovereign debt restructurings. By 2024, a hundred EM economies are listed by the World Bank as bankrupt victims of the post Lehman easy money decade. Yet the most obscene debt party in financial history is now over and humankind must pay its bitter price in blood, sweat and tears.