Happy New Year everyone!
Life is good. Especially if you live in interesting times. And 2019 will be very interesting indeed. Here my outrageous predictions for the next 12 months:
1. The FED's quantitative tightening (QT) will intensify the global USD shortage. Bank shares will keep falling led by the ones with the largest USD short positions, i.e. the Europeans (Deutsche, BBVA,...)......until the FED announces the end of QT.
2. Donald Trump will keep up the pressure on FED's Chairman Jerome Powell for a more lax monetary policy. To send a clear signal of FED's independence to the markets, Jay Powell will keep QT in place for longer than the US economy fundamentals would justify and even increase interest rates by 25 bps one or two more times. The US yield curve inverts. The US enters a recession.
Donald Trump's 2020 re-election becomes a low probability event. The US institutional framework of checks and balances does work in mysterious ways.
Chairman Powell, high five!
3. Theresa May's Brexit deal is voted down in parliament. For weeks there is no majority in parliament for what Brexit-related path to follow. Newsnight (BBC 2, from Monday to Friday at 10:30pm UK time) becomes the world's greatest comedy show for quite a few weeks.
Eventually, the UK parliament calls a second referendum and the EU agrees to extend the 29th of March Brexit deadline by 1 year. The referendum is held in September. Remain wins by a surprising large margin (55% vs. 45%).
The GBP goes through the roof. London's real estate prices start to go wild again. Brexiteers are angry. Boris resumes playing cricket with other Etonians in North London.
4. In May, populists parties across Europe secure less than 15% of the overall European Parliament's seats. Even if they formed a single parliamentary group, it would be smaller than that of the two leading parties.
The EU is perceived as having saved another set point by the British press. Brexiteers are angry. Boris is still playing cricket.
5. China launches a major stimulus programme. The Chinese aggregate debt levels keep rising and surpass 260% of GDP, 5% short of Italy's total debt to GDP ratio. This combined with Xi Jinping's aggressive anti-corruption campaign and the communist party's rising interference in China's large private companies, makes Chinese entrepreneurs increasingly nervous and looking for ways to transfer some of their wealth abroad.
China has strict capital controls in place. The capital account is closed. However, no capital controls system is 100% watertight. With the yuan denominated financial assets / foreign reserves ratio currently at 12x, a 4.2% leakage of financial assets abroad will cut Chinese foreign reserves in half. And force a devaluation of the currency.
The capital flight happens. The yuan devalues 15% vs. de USD (to USD/CNY of 8.0). Trump is not happy.
6. An EU-wide recession is currently fully priced in by European stock markets. An US recession is currently priced in with a 50% probability by both European and US stock markets. In the European high-yield market, high single to mid-teen yields are available on names of strategic industrial companies benefiting from implicit core-EU government support.
2019 will be a good year to deploy capital. You just have to be patient. Contrarian. And long-term greedy.
7. Portugal will remain the European football champion in 2019. I'm 100% certain about this one.
The next European Cup will only take place in 2020.
May 2019 be a FUNtastic year!