Sunday 12 January 2020

Outrageous Predictions for 2020

Dear All,

here we are again: new year. Same people. Better world and life. And my outrageous predictions for the year just started:

1. Trump will be re-elected US President. God bless America.

2. The killing of General Soleimani triggered a burning desire by Iran's ruling elite to seek revanche against the US. It also exposed Iran's deep vulnerability to US military's tech supremacy, starting with the personal physical safety of its leaders. The latter effect will tame the former - there won't be any major Iran-led attacks to US interests in the West.

3. Boris Johnson. No one in living memory enjoyed being British PM so much like Boris. He will also prove to be an unexpected bold strategic thinker. Here a snapshot of his thinking: it doesn't make sense for the UK as a non-EU member to be regulatory fully aligned with the EU and in order to have full access to the single market be a contributor to the EU budget. It would mean that the UK would be in exactly the same position as non-EU member as it is currently as an EU-member. With one major difference: it would have to fully comply with EU regulations without any saying in its design. Moving from a rule (co-)maker to a rule taker isn't very smart. Neither very British.

Consistent with his thinking, Boris will seek maximum regulatory divergence from the EU (ultra-flexible labour laws, weak social protection, ultra-low corporate taxes to foreign direct investment projects) to offset the impact of EU's WTO tariffs on British exports (on average 2.8%; for car imports 10%; for dairy products rising to around 35%). And thus try to transform London into the Singapur on the Thames.

Result: there will be a Hard Brexit on 31 December 2020. God save the Queen.

4. Dominic Cummings is a crazy man. Then again, he will revolutionise UK government's decision-making process by starting to rely on big data instead of big ideas. On evidence instead of perceptions. Whitehall will start to be populated by boys and girls who actually have strong numeracy. Instead of only literacy and social skills.

It will be a beautiful combination: literacy, numeracy and social skills - what is there not to like?

5. The Greens will be solidly leading the polls in Germany by the end of 2020. Fridays for the future anyone?

6. Spain. For the first time following democratic elections in the post-Franco era, Spain has a coalition government. Podemos, the supposedly left-wing radical party, is PSOE's (the Spanish social democratic party) coalition partner.

Spanish traditional right wingers expect the worse: an irresponsible government leading to the collapse of the Spanish economy. And then of the entire country. Spanish traditional left wingers expect nothing less than the worse: the military rolling out the tanks and crushing the left-wing government. Spain moving back to the dark side. A new military dictatorship is unavoidable.

Quality institutions and being part of the EU - which acts as a top quality institutional anchor - makes life sometimes apparently too predictable and boring. Exciting narratives all too appealing. It's all very much understandable.

However, I would suggest the Spanish media to build a narrative comprising Pedro Sanchez meeting Boris Johnson on a spaceship travelling to Mars designed by Elon Musk. There they would meet with Donald Trump, play golf with Angela Merkel and be lectured on Voltaire's great contributions to mankind by Emmanuel Macron. The probability of it occurring is the same as the currently propagated narratives by traditional Spanish left and right wing media.

But the latter narrative would be more fun to follow.

On a slightly different note, worry not - the Spanish paella is as good as ever.

7. 2019 was a happy year for investors across (almost) all asset classes. Based purely on valuations 2020 should be a very difficult year across (almost) all asset classes. But valuations are just one part of the equation. The other is liquidity. On the latter, the FED made the largest liquidity injection on record in September 2019 (to shore up the US repo market when it suddenly froze up). And the Chinese Central Bank started liquidity injections again in the 4Q2019.

Cutting a long story short: it will a good year to make money by being long equities and high yield bonds. For all the wrong reasons.

PS Anyone willing to assess the probability of a Hyman Minsky Moment vs. Samuel Beckett's Waiting for Godot in 2021, please give me a ring. I'm happy to discuss.

8. Euro 2020. The European Football Championship will for the first time take place in several European countries. Portugal was European Champion in 2016. It will finish the Euro 2020 as European Champion 2016.

In June 2020 I will issue my (not so) outrageous predictions for the Euro 2020.

Seriously!


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