Complex Made Simple

The anatomy of global financial markets in 2020

The elusive truth in financial markets lies not in macroeconomics or the geopolitical tantrums of the Great Powers, not in corporate balance sheets or the nuances of credit markets alone

I expect Brent crude prices to continue their impressive rise in January The bear market in 10 year US Treasury notes to continue The funding base of Senator Elizabeth Warren is evaporating, positive for risk assets as it suggests no anti-wealth, tax and spend

By Matein Khalid: Chief Investment Officer and Partner at Asas Capital   

Forecasting the future is the ultimate mugs game yet as an asset class agnostic global investor, that is exactly what I am forced to do from sunrise in Singapore to sunset in Manhattan to sustain my net worth and my self-worth. The financial markets are the ultimate three-dimensional chess game for me – they have given me a lifelong quest for knowledge and insight, occasional fabulous windfalls but also moments of trauma and terror, a peek into the secret history of the world in real time, the mathematical poetry of quantitative risk management.

I have often thought that what Sigmund Freud said about death wishes, what Xi Jinping or Vladimir Putin ruminated about humiliation and vengeance and imperial rebirth, was so much more important for the fate of the global markets than what Jay Powell or Mark Carney said about interest rates and economic growth.

As an investor, I take the pulse of the global economy by searching for patterns in a tsunami of data, a neurological affliction of the human brain. The elusive truth lies not in macroeconomics or the geopolitical tantrums of the Great Powers, not in corporate balance sheets or the nuances of credit markets alone. Truth in financial markets lies far deeper, in the very netherworld of the universe and our specie’s evolutionary past, hard wired into our consciousness, in quantum physics and philosophy. So Heisenberg said that the act of observation changes the nature of the object being observed (yes, learnt that on the beaches of Mykonos and Ayia Napa as a teenager, if not in Jumeirah zoo as a kid) and Nietzsche warned us not to gaze to closely at the abyss, lest the abyss gaze back, as it did in the death rattle of Lehman Brothers on 15 September 2008.

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So 2020 is finally here. Will it be an annus horribilis or annus mirabilis for the world, the Age of Aquarius or the Age of Terror? Karl Marx wrote that history is both tragedy (Syria) and farce (Donald J. Trump) but what will 2020 bring, a Shakespearean farce (“life is a tale told by an idiot, full of sound and fury…”) or a Sophoclean tragedy, hubris and then nemesis? I wish I knew – it is hard enough trying to figure out if ViacomCBS will hit its Bollinger band at 45 or whether the Powell Fed’s “don’t worry, be happy” attitude to US wage inflation means gold is headed to my $1650 an ounce target in 2020 for me to postulate any new general theory of the universe. So the only philosophy of life that ever made any sense to me was the great Rastafarian Bob Marley’s verdict. We’re jammin’ till the jammin’s through. To paraphrase Voltaire, if there was no NYSE, it would be necessary to invent it.

So Zeus on Mount Olympus in 2019 was named Tim al-Tabbakh, Jeff Bezos and Satya Nadella on the NYSE. As a friend messaged me on LinkedIn, what are your conviction calls for 2020? At this point in time, ceteris paribus, caveats galore… here goes.

One, I expect Brent crude prices, which I forecasted would “fly” in a 30 November 2019 column, to continue their impressive rise in January. The S&P 500 Oil Explorer and Producer tracker has soared 25% since just before the last OPEC conclave in Vienna. This tells me two things, One, we just witnessed the mother of all short covering rallies in US oil drillers/wildcatters/Permian Basin shale oil cowboys. Two, Trump is not attacking OPEC despite the Saudi-Russian 1.7 MBD output cut deal because millions of oil and gas roughnecks will vote Republican in ’20. This means energy, the worst performing sector of 2019 and the past decade, is finally a buy.

Two, if it takes two to tango, I expect Auric (the yellow metal) and Dr. Copper (the red metal) to rock in 2020, the reason I went gaga on Freeport McMoran at 12 and the gold tracker GLD at 132. Industrial metals? Iron ore (Rio Tinto ADR at 54) since two third of seaborne supplies are consumed by the Middle Kingdom/Celestial Dragon Empire (aka the PRC).

Three, I expect the bear market in 10 year US Treasury notes to continue as the US economic supertanker (70% of GDP is consumer driven) accelerated in the Christmas break, as the 7% rally in Amazon shares attests. A steeper Uncle Sam IOU yield curve takes the yield on the 10 year US Treasury note to 2.40% next spring and bonds worldwide boogie no more.

Four, unlike the professional cheerleaders in the banks and private developers, I had forecasted a 15% fall in Dubai home prices in 2018 and another 10 – 12% in 2019. This call proved on the money. A bottom in 2020? This complex subject is far too important to so many of my close friends and blood relatives to be flippant about in a para. I will outline my latest take on Dubai’s property market sometime in January.

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Five, the Relative Strength Index (RSI) on the S&P 500 is 78 as I write. This means the US stock index is grossly overbought and I expect a 3 – 5% technical correction in January. Time to hedge profits with cheap index puts while you can, not when you must.

The S&P 500 index was 15.6 times forward earnings exactly a year ago. Thanks to the Powell Fed’s monetary policy U-turn and three FOMC rate cuts in 2019, the S&P valuation has surged to 18.5X as I write. A geopolitical, inflation, earnings or interest rate shock at these stratospheric levels means only that El Torro gets gored by El Grizzly. The point of maximum danger is the early US Presidential primary season.

Six, the funding base of Senator Elizabeth Warren is evaporating. This is hugely positive for risk assets as it suggests no anti-wealth, tax and spend. In fact, Wall Street prices tells me the market has joined the Committee to Re-elect the President (CREEP). If Wall Street is right, Trump will win a second term.

Seven, the S&P 500 index trades at 20 times operating earnings even though EPS growth was 1% in 2019. If US Treasury yields rise and a phase two China trade deal is not concluded, the valuation multiple of the S&P 500 index could compress in 2020.

Eight, I agree with Alan Greenspan that the reckless growth in US Federal debt ($22 trillion) makes an inflation surprise a catalyst for a bloodbath in the bond/stock markets and another global liquidity ice age. Note that the US Treasury budget deficit doubles to $1 trillion at a time when the jobless rate is at 50-year lows. So can we have intercontinental contagion from Wall Street in 2020, a ghastly replay of 2008’s global credit Armageddon? Sadly, yes. There is a time for greed and a time for fear – this is not the time for greed. So risk is a four letter word but then alas, so is ruin.

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It is now time to bid adieu to 2019 with the Widow Clicquot and the immortal poetry of Robbie Burns. “Should old acquaintance be forgot and never be brought to mind? / Should old acquaintance be forgot and days of auld lang syne?” Happy New Year, tout le monde!