U.S. Markets Moving Higher Until November 2018 - Part I

Our trading partners at The Technical Traders Ltd. have been laboring over the recent market moves attempting to identify if and when the market may be likely to turn lower or contract. They’ve been pouring over all types of various data from numerous sources and have concluded the following is the most likely outcome for when the US stock markets may find a reason to pause of contract.

As you read this research post, please allow us a brief introduction of the facts that supported our research.

                              Source: Palisade Research

First, our research team started this investigative work after watching the Buffet Indicator climb from the 2015-16 rotation levels to new highs and achieve some recent news events. This indicator, being one of Warren Buffett’s favorite tools for understanding market valuations in comparison to debt levels provides some interesting components for our team to study. Yet, we believed this indicator chart lacked something relating to the global markets and the use of the debt capital to spur future global economic activity.

Therefore, our team went off in search of something that could help us rationalize these high Buffet Indicator levels in true relation to the global markets and in relation to the capital shift that we believe is currently taking place throughout the planet. The first component of our assumption about the global markets is that capital is rushing away from riskier markets and towards more stable markets. The second component of our assumption is that national debt obligations are being re-evaluated based on perceived risks and contagion issues throughout the globe. The last component of our assumption is that the new US President is shaking up quite a bit of the old constructs throughout the globe and that the processes and policies put in place by President Trump are creating a very dynamic global capital market environment at the moment.

When you consider these three components and their combined results on the global capital markets, we have to understand that there is a very strong possibility that the largest GDP producing countries on the planet, and their banking, institutional and investor classes, are all operating within some aspect of these three components. This means there is a potential for at least $7 to $15 Trillion (10~20% of total global GDP) US Dollars that are actively sourcing and seeking secure returns while avoiding risks and debt contagion. This is a massive capital shift that is taking place currently – likely the largest the planet has ever seen.

As the Buffet Indicator is showing, the US stock market is nearing or passing all-time highs in valuation in relation to US debt levels. Yet, how does the Buffet Indicator correlate the global capital shift that is taking place and equate these dynamics into fair value. The US market, being the likely target of this massive capital shift, is a fair source for valuations comparisons, but we are experiencing a capital shift that has never before been seen at the levels we are currently experiencing. Sure, there have been shifts of capital before – but not at the $10 to 20 trillion USD level.

If we compare the Buffet Indicator to this Fred Global Stock Market Capitalization to GDP chart, some interesting facts begin to take shape. First, the peaks in 1974, 1999, 2008 and 2018 on the Buffet Indicator are not as evident on this chart. The 1974 peak is relatively nonexistent. The 1999 peak is a much more muted (28%) peak than on the Buffet Indicator chart and the 2008 and 2018 peaks are relatively correlated to the Buffet Indicator chart. One should be asking the question, “why are the two most recent peaks more correlated than previous peaks on this global capitalization to GDP chart?”. Our answer to that question is that after the 1999~2000 US market peak, the globe entered into a much more cooperative economic phase with the EU, China, South America and many other nations operating as global peers vs. global competitors. It was after this time that the capital markets began to “sync” in some form to the central banks policies and the unification processes that were taking place throughout the globe.

We should, therefore, assume that any global market contagion or crisis will likely take place in some measured form throughout nearly all global markets when it happens. Additionally, as regional debt or capital market crisis events occur in certain nations, capital that was deployed in these nations or capital markets will likely rush to new, safer environments for periods of time. Capital is always hunting for the safest and most secure returns while attempting to avoid risk and devaluation.

The central bank policies of the past two decades have allowed a massive increase in the available capital throughout the globe. Global GDP has risen from $33.57 Trillion in 2000 to $80.68 Trillion today – a whopping 140% increase in only 18 years. Historically, global GDP has risen by approximately these levels every 15~20 year for the past 50+ years. This is likely the result of the US moving away from the Gold standard and foreign nations following along with fiat currency central banks since after the 1960s-70s.

This tells us that the peak in 2000 on this global capital market to GDP chart resulted in a moderately isolated capital market peak that was uniquely available within the US and major economies – not globally. The 2008 peak represented a more globally equal capital market peak. This means the majority of the global capital market experienced capital appreciation. The same thing is happening right now – the global markets are experiencing an overall capital market appreciation that is a result of the past 20+ years of central bank policies and economic recovery efforts.

Stay Tuned for PART II Next with Charts and Trading Analysis!

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Two Days with Real and Wannabee Elite

By Doug Casey

Recently I made a few comments about the world’s self-identified “elite”, and also about the migrants that are plaguing Europe. Happily, I was able to do some one stop shopping on both of these topics when I was in New York to attend a very elitist and Globalist conference. I’m not going to name it because its organizers/sponsors are business partners of mine. 

And since they spent multi millions putting it together, and I pretty much despised their invitees, I’m not about to identify it exactly. Just let me say that the conclave has aspirations to become another Council on Foreign Relations, Bilderberg, Bohemian Grove, Atlantic Council, or Davos. Same kind of people, same ideas. Uniformly bad ideas. But ideas that the public has been brainwashed into thinking are good.

A lot of people are afraid these groups control the world, or at least governments. They don’t. They’re social gatherings for high level government employees and NGO types who like to network, and feel relevant. And lots of their minions, who enjoy the rich food, pretending they’re big shots too, while listening to pontifications by actual big shots. They hope they can cozy up to them, close enough to ride a richer gravy train.

The avowed purpose of this conclave was to “build the public private partnership”—the exact definition of fascism. So there were also lots of big league corporate types who want to “make a difference”, and rich guys who want to be known for something besides having money.

Warren Buffett

The program opened with Warren Buffett’s talk about how he didn’t need $50 billion, didn’t believe anybody else did either, and why he was a “philanthropist” who would give it all away. The avuncular Buffett is an investment genius; I enjoyed and agreed with everything he said on investing. But, like his friend Bill Gates, he’s also an autistic idiot savant. That’s someone who is a genius at one thing, and a fool at most everything else.

Most people assume that if you know about investing, you must also know about economics, which is a related discipline. But that’s completely untrue. It’s analogous to thinking that someone who knows how to drive a car also knows how one works. Economics is the study of how men go about producing and consuming; investing is the practice of allocating capital for maximum returns. Buffett’s grasp of economics is shallow, conventional, and unrelated to his success as an investor.

Furthermore, if Buffett was really a philanthropist he wouldn’t dissipate his $50 billion on poor people in Third World countries (which is where I suspect most of what’s left after administrative expenses will go). That will assuage some liberal guilt, but will vanish without a trace like water poured into the Sahara.
And actually just make the root problem worse in many ways. If he really wants to help his fellow man, he would continue compounding capital at 20%, forever. Capital makes the world wealthy; consuming or frittering away capital makes the world poor. But enough on Buffett. He only exasperated me for about 40 minutes out of two full days.

George Soros

Much worse was George Soros. He spent his time not just passively endorsing (like Buffett), but actively promoting disastrous policies. In essence, these were his major points. 

1) Brexit should be overturned, regardless of the vote. 
2) The EU should spend at least $200 billion a year (in addition to what individual countries spend) both to make migrants welcome, and to install a Marshall Plan for Africa. 
3) All of Europe should import migrants at least proportionally to the 1mm entering Germany. He recognized that the migrants represent an “existential crisis” for Europe, but believes the solution is to accommodate them. 
4) The EU should actively arm against Russia. 
5) The EU in Brussels should be granted the right to tax.

As I listened to him I felt I’d been transported to Bizzarro World, or perhaps some magic land from Gulliver’s Travels, where everything is upside down, wrong is right, and black is white. Just as much of Soros’ presentation was on migration, so was much of the rest of the conference. It’s very much on the minds of the “elite”.

His new Marshall Plan would consist of Europe and the US sending trillions to African governments to develop the Continent. Strange, really. Africa has received about a trillion of foreign aid over the last 50 years; that capital has either been wasted on uneconomic boondoggles, or shipped off to the bank accounts of the ruling class. Soros is far from naïve; he’s got to know this. 

I wonder what he actually hopes to accomplish, and why? After all, he’s 84 years old, and doesn’t need any more money. Well, it’s hard to be sure how some people’s minds are wired. And, as The Phantom once asked, “Who knows what evil lurks in the hearts of men?”

Incidentally—completely contrary to conventional wisdom—I consider the much lauded Marshall Plan to have been an unnecessary and destructive boondoggle. But this isn’t the moment to explain why that’s true.
As I said above, the Summit was centered on migration. I’ve recently commented on the subject, and will reiterate a few points below before returning to the views of the Globalists and self-identified Elite.

A Word on Migration

Let me start by saying I’m all for immigration and completely open borders to enable opportunity seekers from anyplace to move anyplace else. With two big, critically important, caveats..... 

1) there can be no welfare or free government services, so everyone has to pay his own way, and no freeloaders are attracted 
2) all property is privately owned, to minimize the possibility of squatter camps full of beggars.

In the absence of welfare benefits, immigrants are usually the best of people because you get mobile, aggressive, and opportunity seeking people that want to leave stagnant and repressive cultures for vibrant and liberal ones. That was the case with the millions of immigrants who came to the US in the late 19th and early 20th centuries. And they had zero in the way of state support.

But what is going on in Europe today is entirely different. The migrants coming to Europe aren’t being attracted by opportunity in the new land so much as the welfare benefits and the soft life. Western Europe is a massive welfare state that providing free food, housing, medical care, schooling, and living expenses to all comers. Benefits like these will naturally draw in poor people from poor countries. For the most part they’ll be unskilled, poorly educated, and many will have a bad attitude. The question arises why—since they’re almost all Muslims—they aren’t being welcomed by Saudi Arabia, the UAE, Qatar, or Brunei, which are wealthy Muslim countries.

What we’re talking about here is the migration of millions of people of different language, different race, different religion, different culture, and different mode of living. If you’re an alien and you’re 1 out of 10,000, or 1000, or even 100, you’re a curiosity, an interesting outsider. And you’d have to integrate in the new society. But an influx of millions of migrants can only destroy the old culture. And guarantee antagonism—especially when the locals are forced to pay for it. In many ways, what’s happening now isn’t just comparable to what happened 2,000 years ago with the migration of the Germanic barbarians into the Roman Empire. It’s potentially much more serious.

Although most of the migration will be out of Africa, it’s supposed to be official Chinese policy to migrate about 300 million Chinese into Africa in the years to come. They’re employed in building roads, mines, railroads and other infrastructure. The Africans like the goodies, but don’t like the Chinese. It has the makings of a race war a generation or so in the future. 

The problem won’t only be tens or hundreds of millions of Africans migrating to Europe, but tens or hundreds of millions of Chinese migrating to Africa. The EU is a huge aggravating factor with the migrant situation. Brussels is full of globalists and doctrinaire socialists who not only promote bad policies, but make the whole continent pay for the mistakes of its most misguided members.

The migrants, who are manifestly unwelcome in Hungary, Poland, and other Eastern European countries, will prove another big impetus for the breakup of the EU. Millions of Africans will want to emigrate, especially to the homelands of their ex-colonial masters in Europe. The colonizers are now themselves being colonized. Fair enough, I suppose; a case of the sins of the father truly devolving upon the sons.

If I was an African from south of the Sahara, I’d absolutely try to get to Italy or Greece or France or Spain or on my way to Northern Europe to cash in on the largesse of these stupid Europeans. I’m a fan of what’s left of Western Civilization. I hate to see it washed away. But that’s what will happen if the floodgate is opened.

Unless the Europeans get in front of this situation, it’s not just some refugees from the Near East they’ll have to deal with. Especially with the economic chaos of The Greater Depression, it’s going to be many millions from Africa, and then perhaps millions more from Central Asia, and even India and Bangladesh. The world is becoming a very small place. What happens when scores of thousands of migrants set up a squatter camp someplace—with no food, shelter, or sanitary facilities? What will happen when there are scores or hundreds of squatter camps? Unlike the Goths and the Vandals, who became the new aristocracy, the chances of the Africans integrating is essentially zero. 

The situation is likely to be most stressful…..

Some will say “But you have to be charitable, you can’t just let them starve because they’ve had some bad luck”. To that I’d say an individual, or a family, can have some bad luck. But the places these people come from have had “bad luck” for centuries. Their bad luck is the consequence of their political, economic, and social systems. Their cultures—let me note the elephant in the room—are backward, degraded, and unproductive. It makes no sense, it’s idiotic, to import—at huge expense—masses of people that have a culture of “bad luck”.

On just one day recently, the Italian Coast Guard rescued 10,000 Africans off the Libyan coast—almost all men from Guinea, Gambia, Nigeria, and neighboring countries—and transported them to Italy. It’s hard to see them ever going back home. But it’s certain they’ll encourage they’re friends and families to join them.
The situation can only get worse. Why? In 1950, the 250 million Africans were only 9% of the world’s population; it’s 27% now, but there will be 4 billion, for 40%, in 2100. 

Making that observation is highly politically incorrect, and presumably racist. I’ll have more to say on racism in the future. But the fact is that Africa has always been an economic basket case; if Vasco Da Gama had thrown out a wheel when he was rounding the Cape, he would also have had to throw out an instruction book on how to use it. But nobody could have read it.

Be that as it may. But Europeans made things worse when they conquered the continent and divided it up into political entities that made zero sense from a cultural, linguistic, religious or tribal viewpoint. That guaranteed chaos for the indefinite future. That’s why it’s always a mad scramble to get control of the government in these countries, in order to loot the treasury, entrench ones cronies, and punish ones enemies. Until there’s a bloody revolution, and the shoe goes on another foot.

Here’s the takeaway. The population of Africa is going up by several billion people in the years to come. The net wealth of the continent is going nowhere. The locals will want to move wholesale to Europe, where the living is easy. And where the politically correct Cultural Marxists are anxious to destroy their own civilization.
Meanwhile, there are hundreds of think tanks in the U.S. alone, most located within the Washington Beltway who believe that these people should be encouraged to migrate, or imported en masse. They’re populated by partisan academics, ex-politicos, retired generals and others circulating through the revolving doors of the military/industrial/political/academic complex.

They’re really just propaganda outlets, funded by foundations, and donors who want to give an intellectual patina to their views and, to use a popular phrase, “make a difference”.

Think tanks, and their cousins, the lobbyists and the NGOs, are mostly what I like to call Running Dogs, who act as a support system for the Top Dogs in the Deep State. Their product is “policy recommendations,” which influence how much tax you have to pay and how many new regulations you have to obey. Think tanks are populated almost exclusively by people who are, simultaneously, both “useful idiots” and “useless mouths.” They’re no friends of the common man.

The migration policies they’re promoting are creating minor chaos now. With world-class chaos in the wings.
Let me repeat, and re-emphasize, what I said earlier. The free-market solution to the migrant situation is quite simple. If all the property of a country is privately owned, anyone can come and stay as long as he can pay for his accommodations. When even the streets and parks are privately owned, trespassers, beggars, squatters, migrants, vagrants and the like have a problem. A country with 100% private property, and zero welfare, would only attract people who like those conditions. And they’d undoubtedly be welcome as individuals. But “migration” would be impossible.

This is how the migration problem could be solved. You don’t need the government. You don’t need the army. You don’t need visas or quotas. You don’t need laws. You don’t need treaties to solve the migration problem. All you need is privately owned property and the lack of welfare benefits. Instead, think tanks will come up with some cockamamie political solution. But the good news is that it will speed up the disintegration of the EU.

My prediction that the Continent will one day just be a giant petting zoo for the Chinese is intact—assuming the current wave of migrants approve. There will also be an exodus of capital and people from Europe to parts of Latin America, plus to the U.S., Canada, Australia, and New Zealand. This is, obviously, bad for Europe and good for the recipient countries, since these emigrants will be educated and affluent.
But, having said that, let me take you back to the conference where migration was a major topic of discussion by the elite.

Back to the Conference

Those are my thoughts on the topic of migration. Here’s what other attendees thought....

I spent a couple of hours listening to a panel entitled “Corruption in Latin America”. A bunch of ex-Presidents commiserated on how awful corruption is, and how new laws ought to be passed to stamp it out once and for all. They were all skilled, even enthusiastic, bullshit artists, who knew how to blather meaninglessly, saying nothing. They all agreed that illegal drugs were a major cause for corruption, but nobody thought to mention that maybe the problem wasn’t the drugs, but the fact they were illegal.
None of these people understood the actual causes and the nature of corruption. Which is ironic, since most of them were quite wealthy—something that’s hard to do on a Third World politician’s salary.

One especially naive panelist, representing the US State Department, said “many see the private sector as part of the problem”. What, one might ask, actually causes the problem?

The short answer was supplied by Tacitus 1900 years ago. He said “The more numerous the laws, the more corrupt the State”. That’s because the laws invariably have economic consequences, benefiting one group at the expense of another. The most practical way to obviate them is by paying off an official.

Naturally, nobody even broached the subject that laws themselves cause corruption. And corruption is actually not only necessary, but is encouraged, whenever economic laws are passed. Plan your life around corruption remaining endemic, no matter how much self-righteous apparatchiks blather on about it at conferences.

General David Petraeus

I listened to David Petraeus offer solutions to the world’s problems. They were what you might expect from an ex-general and CIA director. To David it’s all about using force and money “intelligently”. It never seemed to cross his mind that adventures like those in Iraq and Afghanistan ($6 trillion and counting, to accomplish absolutely nothing) might actually bankrupt the US. Or that he was intimately involved in the ongoing disaster.

My takeaway is that, after David collects say $20 million in the “private sector”, we’ll see him resurface as a candidate for the US Presidency. He’s smooth, polished, and confident. I was somewhat surprised that some general wasn’t tapped this election for a VP slot, since the military is the US Government’s most trusted branch by far. Rest assured there will be a general running in 2020.

Donald Rumsfeld also held the stage for 40 minutes. He was affable, likable, and entertaining, as are many sociopaths. Not even the faintest acknowledgement passed his lips about how the current migrant disaster was rooted in his unprovoked attacks on backward countries on the other side of the world. But why should he care? He’s already collected his $20 million in the “private sector” after many years of “service”.

The Migration Round Table

Another highlight was listening to a Round table on “The Public/ Private Partnership on Migration”. It might as well have been a meeting of the Soviet politburo, where everyone implicitly accepted the same totally flawed principles, speaking seriously and sincerely to each other about how they plan to change the world. These people were mainly interested in reinforcing each others views, like a conversation on NPR.

How to solve the refugee/migrant situation? No solutions were proposed by any of the 40 high government officials and think tank big shots. Everybody’s attention focused on two things: how awful the situation is, and how they can feed, clothe, and house the masses. I was amused at the sight of parasites talking to parasites about parasites.

References were made to “broader economic integration”, a nebulous phrase that can mean almost anything, and no references at all to freer markets. There were continual references to a “partnership” between the public and private sectors. It made me feel I was among aliens. How can there be a partnership between producers, and those who not only steal 50% of the production, but then want to direct where the remainder goes. These people all seemed to believe that if you earned money, you didn’t deserve to keep it. But if you needed money, you were entitled to it.

There was a discussion about how the crisis that started in 2007 has set back the progress of Africa. But zero discussion of what caused the crisis. Or what would happen when it stated up again (which is happening right now). The only discussion of how to create prosperity was about Special Economic Zones—areas insulated from the taxes and regulations affecting the rest of the country. Needless to say no one thought to ask why an entire country couldn’t become an SEZ.

A question occurred to me about the several hundred thousand refugees/migrants that still might be imported to the US—although it's much less likely with Trump as the President: Exactly who will pay for them, and how much will the pleasure of their company cost? These people have nothing but the rags on their backs. 

Will they be ferried to the US on commercial airliners? When they land, how will they be clothed? They’ll need to be fed for an indefinite period. And housed. And entertained. Mosques must be found, or founded, so they can worship. Very few have any marketable skills, and very few even speak English. Most of them could just stay on welfare for the rest of their lives.

It seems completely insane. But it’s clearly the “Globalist agenda”, endorsed by all these people. Of course there’s some perverse justice at work if the US winds up having to import a few million Muslim refuges. The Muslim world was, at least, stable before Bush and Obama went on a wild “regime change” adventure. Now chaos reigns in Iraq, Afghanistan, Syria, and Libya.

One justification put forward for migration to Europe was that its population was dropping, and it would need people, if only to take care of the oldsters. For what it’s worth, we’ll have robots doing that within a decade.

Conclusion?

You’re perhaps wondering how any sensible person could sit there and listen to such blather and nonsense for two days without reacting. Of course I wanted to debunk about 95% of what I heard. But the Summit was structured so that Guests didn’t have a forum from which to challenge the Nomenklatura and their Apparatchiks. So I sat there, observing an alien species in a sort of formalized mating ritual. No opportunity presented itself to shock these copulating dogs with a bucket of cold water. Certainly not from a seat in the Peanut Gallery.

Are conferences like this one, and its lookalikes, a waste of time? Completely. And keep that in mind before you make a contribution to a charity or an NGO. Could it have been worthwhile? Yes. If it had addressed the questions I posed above. But, even then, the answers would have been worthless, given the attendees.

I think migration is going to be one of the biggest problems in the next generation. It’s a sure thing that not just millions, but tens of millions of “feet people” and “boat people” are going to try to overrun Europe. If they’re accepted and resettled it will destroy what’s left of Western Civilization. If they’re repelled, it could result in millions of deaths, and be quite a scandal. I don’t know how this will sort out. But it’s going to be a big deal. And ugly.

What should you do? Own plenty of gold and silver, and make sure that you have one or more residences that are out of harm’s way.

Editor’s Note: If you haven't seen it yet, Doug Casey has just released his latest and most controversial prediction yet. It involves a shocking currency ban (not gold) that may soon take effect under the Trump presidency. 

Already, Fed members have met in private to discuss this matter. And the savings of millions could be devalued if this goes into effect. 

To watch the video and discover the 4 steps Doug is taking to prepare, click here.

The article Doug Casey’s Two Days with the Real and Wannabee Elite was originally published at caseyresearch.com.

Will Warren Buffett Really Let This Deep Value Slip By?

By Jeff Clark, Senior Precious Metals Analyst

Right now, even the staunchest gold investors are weary of the years-long drubbing the gold price has taken since its $1,921 peak in August 2011. Whether the frustrating experience is the work of a market rigging conspiracy, government manipulation of data to hide inflation, those blindingly loyal Keynesians who keep pounding us with messages that gold is nothing but a “shiny bitcoin,” or the gullibility of mainstream investors who tell themselves that, gee, since Warren Buffett is a billionaire, his “gold has no utility” mantra must be right, it hasn’t been fun. The nasty downcycle has offered no respite.

That’s all about to change.

If there’s one constant in the resource sector, it’s the boom-bust-repeat cycle that over the past 40 years has been almost predictable. This is particularly the case with gold stocks.

We charted every major cycle for gold stocks (producers) from 1975—when gold again became legal to own in the US—to the present. You can easily see that not only do gold stocks cycle up and down repeatedly, but the percentage gains for buyers at a cycle bottom can be downright mouthwatering.

What’s interesting about where we sit today in early 2015 is that gold stocks have now logged the second-deepest bear market since 1975—rougher even than the selloff following the 1980 mania.

This history teaches three “how to get rich” lessons.

1. For the recent bear market, the bottom for gold stocks is almost certainly in.

2. The next major cycle in gold stocks will be up.

3. The profits could be spectacular, because as the patterns show, triple-digit gains have been common.

Gold stocks have finished the bust that tormented investors for more than three years and are now preparing for another boom. All you have to do is hold on and wait for the next cycle to begin. No timing required.

The only thing we don’t know is if Mr. Buffett will see this chart and jump on the in-your-face deep value that gold stocks are showing right now.

Gold stocks will soon go vertical again—just as they have many times in the past—and investors with just a smidgen of patience will see their gold portfolios driven by a hurricane-force bull market. Virtually all gold stocks will go much higher. As in the past, gains for the strongest juniors will be 10-to-1, and you can expect a few superstars to return 100-to-1.

I talk about this rich opportunity with some of the most successful investors in the gold sector—Pierre Lassaonde, Frank Holmes, Rick Rule, Bob Quartermain, Ron Netolitzky, Doug Casey, and Louis James. Check out our free webcast, Going Vertical, a can’t miss one hour event that will show you the life-changing profits waiting just ahead.

And yes, we extend our invitation to Warren Buffett.

The article Will Warren Buffett Really Let This Deep Value Slip By? was originally published at caseyresearch.com.

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15 Surprises for 2015

By John Mauldin

It’s that time of year when people start thinking about New Year’s resolutions and investment planning for the future. It’s also the time of year when analysts feel more or less compelled to offer up forecasts. My friend Doug Kass turns the forecasting process on its head by offering 15 potential surprises for 2015 (plus 10 also-rans).  But he does so with a healthy measure of humility, starting out with a quote from our mutual friend James Montier (now at GMO):

(E)conomists can't forecast for toffee ... They have missed every recession in the last four decades. And it isn't just growth that economists can't forecast; it's also inflation, bond yields, unemployment, stock market price targets and pretty much everything else ... If we add greater uncertainty, as reflected by the distribution of the new normal, to the mix, then the difficulty of investing based upon economic forecasts is likely to be squared!

Lessons Learned Over the Years

"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown." – Woody Allen

There are five core lessons I have learned over the course of my investing career that form the foundation of my annual surprise lists:

1. How wrong conventional wisdom can consistently be.
    
2. That uncertainty will persist.
    
3. To expect the unexpected.
    
4. That the occurrence of black swan events are growing in frequency.
    
5. With rapidly-changing conditions, investors can't change the direction of the wind, but we can adjust our sails (and our portfolios) in an attempt to reach our destination of good investment returns.

Quoting from a very eclectic group of names, Doug does indeed give us a few surprises to think about, and I pass his thoughts on to you as this week’s Outside the Box. (Doug publishes his regular writings in RealMoneyPro on theStreet.com.)

As a bonus, and as a thoughtful way to begin the new year, we have a letter that my good friend and co-author of my last two books Jonathan Tepper wrote to his nephews. He began penning it on a very turbulent plane ride that he was uncertain of surviving. It made him think hard about what was really important that he would want to pass on to his nephews. As the song goes, I found a few aces that I can keep in this hand. I think you will too.

His letter made me think about what I want to be passing on to my grandchildren, including the newest one, Henry Junior, who showed up less than 24 hours ago. They are going to grow up in a very different world than the one I grew up in, and I mostly think that’s a good thing. But the values that I hope can be passed on don’t change. Good character never goes out of fashion.

My associate Worth Wray came down with a very nasty bug this past weekend, so he missed his deadline for delivering his 2015 forecast to you. We’re giving him a few more days and will run it this weekend – which also of course gives me a little more time to mull over my own forecast. Taking to heart James Montier’s quote above, I’m going to forgo the usual 12-month forecast and look farther out, thinking about what major events are likely to come our way over the next five years. I actually think that approach will be for more useful for our longer term planning.

Thanks for being with me and the rest of the team at Mauldin Economics this past year; and from all of us, but especially from me, we wish you the best and most prosperous of new years.
You’re staring hard at crystal balls analyst,

John Mauldin, Editor
Outside the Boxsubscribers@mauldineconomics.com

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15 Surprises for 2015

Doug Kass, Seabreeze Partners
Dec. 29, 2014 | 8:12 AM EST
Stock quotes in this article:
C, SBUX, TSLA, TWTR, GM, GLD, JNK, SPY, QQQ, AAPL, BAC, GOOGL, FB, CSCO

It’s that time of year again.
"Never make predictions, especially about the future." – Casey Stengel

By means of background and for those new to Real Money Pro, 12 years ago I set out and prepared a list of possible surprises for the coming year, taking a page out of the estimable Byron Wien's playbook. Wien originally delivered his list while chief investment strategist at Morgan Stanley, then Pequot Capital Management and now at Blackstone. (Byron Wien's list will be out in early January and it will be fun to compare our surprises.)

It takes me about two to three weeks of thinking and writing to compile and construct my annual surprise list column. I typically start with about 30-40 surprises, which are accumulated during the months leading up to my column. In the days leading up to this publication I cull the list to come up with my final 15 surprises. (Last year I included five also ran surprises.)

I often speak to and get input from some of the wise men and women that I know in the investment and media businesses. I have always associated the moment of writing the final draft (in the weekend before publication) of my annual surprise list with a moment of lift, of joy and hopefully with the thought of unexpected investment rewards in the New Year.

This year is no different.

I set out as a primary objective for my surprise list to deliver a critical and variant view relative to consensus that can provide alpha or excess returns.  The publication of my annual surprise list is in recognition that economic and stock market histories have proven that (more often than generally thought) consensus expectations of critical economic and market variables may be off base.

History demonstrates that inflection points are relatively rare and that the crowds often outsmart the remnants. In recognition, investors, strategists, economists and money managers tend to operate and think in crowds. They are far more comfortable being a part of the herd rather than expressing – in their views and portfolio structure – a variant or extreme vision.

Confidence is the most abundant quality on Wall Street as, over time, stocks climb higher. Good markets mean happy investors and even happier investment professionals.

The factors stated above help to explain the crowded and benign consensus that every year begins with, whether measured either by economic, market or interest-rate forecasts.

But an outlier's studied view can be profitable and add alpha. Consider the course of interest rates and commodities in 2014, which differed dramatically from the consensus expectations.

To a large degree the business media perpetuates group-think. Consider the preponderance of bullish talk in the financial press. All too often the opinions of guests who failed to see the crippling 2007-09 drama are forgotten and some of the same (and previously wrong-footed) talking heads are paraded as seers in the media after continued market gains in recent years.

Memories are short (especially of a media kind). Nevertheless, if the criteria for appearances was accuracy there would have been few available guests in 2009-2010 qualified to appear on CNBC, Bloomberg and Fox News Business.

Indeed, the few bears remaining are now ridiculed openly by the business media in their limited appearances, reminding me of Mickey Mantle's quote, "You don't know how easy this game is until you enter the broadcasting booth."

Abba Eban, the Israeli foreign minister in the late 1960s and early 1970s once said that the consensus is what many people say in chorus, but do not believe as individuals.

GMO's James Moniter, in an excellent essay published several years ago, made note of the consistent weakness embodied in consensus forecasts.

As he put it:

"(E)conomists can't forecast for toffee ... They have missed every recession in the last four decades. And it isn't just growth that economists can't forecast; it's also inflation, bond yields, unemployment, stock market price targets and pretty much everything else ... If we add greater uncertainty, as reflected by the distribution of the new normal, to the mix, then the difficulty of investing based upon economic forecasts is likely to be squared!"

Lessons Learned Over the Years

"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown." – Woody Allen
There are five core lessons I have learned over the course of my investing career that form the foundation of my annual surprise lists:

1. How wrong conventional wisdom can consistently be.
    
2. That uncertainty will persist.
    
3. To expect the unexpected.
    
4. That the occurrence of black swan events are growing in frequency.
    
5. With rapidly-changing conditions, investors can't change the direction of the wind, but we can adjust our sails (and our portfolios) in an attempt to reach our destination of good investment returns.

"Let's face it: Bottom-up consensus earnings forecasts have a miserable track record. The traditional bias is well-known. And even when analysts, as a group, rein in their enthusiasm, they are typically the last ones to anticipate swings in margins." – UBS (top 10 surprises for 2012)

Let's get back to what I mean to accomplish in creating my annual surprise list.

It is important to note that my surprises are not intended to be predictions, but rather events that have a reasonable chance of occurring despite being at odds with the consensus. I call these possible-improbable events. In sports, betting my surprises would be called an overlay, a term commonly used when the odds on a proposition are in favor of the bettor rather than the house.

The real purpose of this endeavor is a practical one – that is, to consider positioning a portion of my portfolio in accordance with outlier events, with the potential for large payoffs on small wagers/investments.

Since the mid-1990s, Wall Street research has deteriorated in quantity and quality (due to competition for human capital at hedge funds, brokerage industry consolidation and former New York Attorney General Eliot Spitzer-initiated reforms) and remains, more than ever, maintenance-oriented, conventional and group-think (or group-stink, as I prefer to call it). Mainstream and consensus expectations are just that and, in most cases, they are deeply embedded into today's stock prices.

It has been said that if life were predictable, it would cease to be life, so if I succeed in making you think (and possibly position) for outlier events, then my endeavor has been worthwhile.

Nothing is more obstinate than a fashionable consensus and my annual exercise recognizes that, over the course of time, conventional wisdom is often wrong.

As a society (and as investors), we are consistently bamboozled by appearance and consensus.

Too often, we are played as suckers, as we just accept the trend, momentum and/or the superficial as certain truth without a shred of criticism. Just look at those who bought into the success of Enron, Saddam Hussein's weapons of mass destruction, the heroic home run production of steroid laced Major League Baseball players Barry Bonds and Mark McGwire, the financial supermarket concept at what was once the largest money center bank, Citigroup (C), the uninterrupted profit growth at Fannie Mae and Freddie Mac, housing's new paradigm (in the mid-2000s) of non-cyclical growth and ever rising home prices, the uncompromising principles of former New York Governor Eliot Spitzer, the morality of other politicians (e.g., John Edwards, John Ensign and Larry Craig), the consistency of Bernie Madoff's investment returns (and those of other hucksters) and the clean-cut image of Tiger Woods.

My Surprises for 2014

These generally proved in line with my historic percentages.
"How'm I doin'?" –  Ed Koch, former New York City mayor

While over recent years many of my surprise lists have been eerily prescient (e.g. my 2011 surprise that the S&P 500 would end exactly flat was exactly correct), my 15 Surprises for 2014 had a success rate of about 40%, about in line with what I have achieved over the last 11 years.

As we entered 2014, most strategists expressed a constructive economic view of a self sustaining domestic recovery, held to an upbeat (though not wide-eyed) corporate profits picture and generally shared the view that the S&P 500 would rise by between 8-10%.

Those strategists proved to be correct on profit growth (but only because of several non operating factors and financial engineering), were too optimistic regarding domestic and global economic growth and recognized (unlike myself) that excessive liquidity provided by the world's central bankers would continue to lift valuations and promote attractive market gains in 2015. Not one major strategist foresaw the emerging deflationary conditions, the precipitous drop in the price of oil and the broad decline in domestic and non-U.S. interest rates.

Many readers of this annual column assume that my surprise list will have a bearish bent (to be sure that is the case for 2015). But I have not always expressed a negative outlook in my surprise list. Two years ago my 2012 surprise list had an out-of-consensus positive tone to it, but 2013's list was noticeably downbeat relative to the general expectations. I specifically called for a stock market top in early 2013, which couldn't have been further from last year's reality, as January proved to be the market's nadir. The S&P closed at its high on the last day of the year and exhibited its largest yearly advance since 1997. (I steadily increased my fair market value calculation throughout the year and, at last count, I concluded that the S&P 500's fair market value was about 1645.)

As I said, in 2014 my success rate was at about 40% (which included five also-ran predictions).
This contrasted with my 15 surprises for 2013, which had the poorest success rate since 2005's list (20%).
By comparison, my 2012 surprise list achieved about a 50% hit ratio, similar to my experience in 2011.

About 40% of my 2010 surprises were achieved, while I had a 50% success rate in 2009, 60% in 2008, 50% in 2007, 33% in 2006, 20% in 2005, 45% in 2004 and 33% came to pass in the first year of my surprises in 2003.

Below is a report card of my 15 surprises for 2014 (and the five also-ran  surprises).

Surprise No. 1: Slowing global economic growth. RIGHT

Surprise No. 2: Corporate profits disappoint. HALF RIGHT (as financial engineering buoyed EPS).

Surprise No. 3: Stock prices and P/E multiples decline. WRONG

Surprise No. 4: Bonds outperform stocks. Closed-end municipal bond funds are among the best asset classes, achieving a total return of +15%. VERY RIGHT

Surprise No. 5: A number of major surprises affect individual stocks and sectors. (Starbucks (SBUX) falls, 3D printing stocks halve in price, General Motors (GM) drops by 20% in 2014). MORE WRONG THAN RIGHT

Surprise No. 6: Volkswagen AG acquires Tesla Motors (TSLA). WRONG

Surprise No. 7: Twitter's (TWTR) shares fall by 70% as a disruptive competitor appears. MORE RIGHT THAN WRONG

Surprise No. 8:  Buffett names successor. WRONG

Surprise No. 9: Bitcoin becomes a roller coaster. RIGHT

Surprise No. 10: The Republican Party gains control of the Senate and maintains control of the House. Obama becomes a lame duck President incapable of launching policy initiatives. RIGHT

Surprise No. 11: Secretary Hillary Clinton bows out as a presidential candidate. WRONG

Surprise No. 12: Social unrest and riots appear in the U.S. RIGHT

Surprise No. 13: Africa becomes a new hotbed of turmoil and South Africa precipitates an emerging debt crisis. HALF RIGHT

Surprise No. 14: The next big thing? A marijuana IPO rises by more than 400% on its first day of trading. WRONG

Surprise No. 15: An escalation of friction between China and Japan hints at war-like behavior between the two countries. WRONG

Also-Ran Surprises: Crude oil trades under $75 a barrel (short crude and energy stocks) RIGHT, VIX trades under 10 (short VIX) RIGHT, gold trades under $1,000 (Short GLD) DIRECTIONALLY RIGHT.

What Was the Consensus for 2014 and What Is the Consensus for 2015?

"The only thing people are worried about is that no one is worried about anything ... That isn't a real worry." – Adam Parker, chief U.S. strategist at Morgan Stanley

"In ambiguous situations, it's a good bet that the crowd will generally stick together – and be wrong." – Doug Sherman and William Hendricks

As mentioned earlier, we entered 2014 there was a generally upbeat outlook for global economic and profit growth, as well as upbeat prospects for the U.S. stock market. Projections for bond yields were universally for higher yields throughout the year and the same could be said for the general expectation of rising oil prices.  As is typical, most sell-side projections for earnings, the economy, bond yields and stock prices were grouped in an extraordinarily tight range.

• Both U.S. and global economic growth disappointed the consensus (despite a strong third quarter 2014 U.S. GDP number).
   
• S&P earnings were a slight beat, but only because of more aggressive than anticipated share repurchase programs, lower depreciation and interest expenses and a decline in effective tax rates.
   
• Bond yields declined unexpectedly. The 10-year yield dropped to about 2.2% from 3.05%.
   
• Deflationary forces were also a surprise, most notably no one projected that oil prices would fall to under $60 s barrel and that the Bloomberg Commodity Index would hit a five-year low in December, 2014.
   
• Stock prices ended the year about 5% above beginning of the year consensus forecasts.

Virtually all strategists are now self-confident bulls, as gloom and doom forecasts have all but disappeared. After another year with no reactions of 10% or more, any future setbacks are being viewed by the consensus as bumps in the road and as opportunities to buy because (after the correction(s)) we will be up, up and away."

After missing the 25% rise in valuations in 2013 (and a further expansion in P/E ratios in 2014), the consensus now assumes that valuations will expand slightly again in 2015. (Note: The average P/E ratio has increased by about 2% per year over the last 25 years.)

The domestic economy has forward momentum (as witnessed by +5% Real GDP growth in 3Q 2014), so the extrapolation of heady growth is now in full force by the consensus.

In terms of the markets, the consensus remains of the view that liquidity (albeit, at a slowing rate) will overcome complacency and valuations again as it did last year, but my surprises incorporate the notion that the extremes that exist today (in price and bullish sentiment) put the markets in a different and less secure starting point in 2015.

"We expect the growth recovery to broaden as global growth picks up to 3.4% in 2015 from 3% in 2014. Inflation is likely to remain low, in part due to declines in commodity prices, and as a result monetary policy should remain easy. We think this backdrop supports a pro-risk asset allocation." – Goldman Sachs, Global Opportunity Asset Locator (December 2014)

As we enter 2015, investors and strategists are again grouped in a narrow consensus and expect a sweet spot of global economic corporate profit growth that will translate to higher stock prices.

The consensus is for U.S. economic growth of +2.5% to +3.25% real GDP, bond yields to be 50-75 basis points higher than year-end 2014 and closing 2015 stock market price targets to be up by about 8-10% (on average). Indeed, most strategists suggest (in sharp contrast to their views 12 months ago) that the big surprise for 2015 will be that there is upside to consensus economic growth and stock market price targets.
Here were Goldman Sach's views for 2014 made 12 months ago (with actual in parentheses). As can be seen, the brokerage's growth forecasts for the real economy (as was the entire sell side) were too optimistic, while price targets for the S&P were not ambitious enough:

• U.S. real GDP was estimated at +3.1% for 2014. ( +2.4%A)
   
• Global real GDP was estimated at+3.6% for 2014. (+3.0%A)
   
• S&P 500 EPS $116 top-down estimate and $119 bottom-up estimate for 2014 ($119/shareA)
   
• Year-end S&P 2014 S&P 500 price target was estimated for 2014 at 1900 (2080A)
   
• Inflation/headline CPI +1.5% for 2014. (+1.1%A)
   
• U.S 10-year Treasury yield 3.25% for year-end 2014. (2.20%A)

Again, let's use Goldman Sachs' principal 2015s views of expected economic growth, corporate profits, inflation, interest rates and stock market performance as a proxy for the consensus for the coming year. This year the brokerage, like most, is following the bullish trend and is more optimistic on the market relative to its uninspiring expectations last year.

• 2015/2016 U.S. real GDP +3.1%, +3.0%
   
• 2015/2016 global real GDP +3.6%, +3.9%
   
• 2015 S&P 500 operating per share profits $122/share
   
• Year-end 2015 S&P 500 price target 2100
   
• 2015/2016 Consumer Prices +1.0%, +2.4%
   
• 2015 closing yield on the U.S. 10 year Treasury note 3%

The Rationale Behind My Downbeat Surprises for 2015

There are numerous reasons for my downbeat theme this year. In no order of importance: corporate profit margins remain elevated, the rate of domestic economic growth is decelerating (despite five years of QE and ZIRP), a quarter of the world is experiencing minimum growth in GDP, optimism and complacency are elevated, signs of malinvestment are appearing, valuations (P/E ratios) rose again after a 25% expansion in 2013 (compared to only +2% annual growth since the late-1980s. As well, so many gauges of valuations are stretched (market cap/GDP, the Shiller P/E ratio and many others).

Above all, I expect the theme of the U.S. as an oasis of prosperity will be tested in 2015-16 as contagion might be a bi**h.

Moreover, given the large array of potentially adverse economic, geopolitical and other outcomes, the markets have grown complacent after a trebling in prices over the last five years.

Finally, my downbeat surprises this year recognize, that as we enter 2015, we should not lose sight of the notion that if pessimism is the friend of the rational buyer, optimism is the enemy of the rational buyer.

My 15 Surprises for 2015

At last, here are my 15 surprises for 2015 (with a strategy that might be employed in order for an investor to profit from the occurrence of these possible improbables).

Surprise No.1 – Faith in central bankers is tested (stocks sink and gold soars).

"Investment bubbles and high animal spirits do not materialize out of thin air.  They need extremely favorable economic fundamentals together with free and easy, cheap credit and they need it for at least two or three years. Importantly, they also need serial pleasant surprises in such critical variables as global GNP growth." – Jeremy Grantham

"The highly abnormal is becoming uncomfortably normal. Central banks and markets have been pushing benchmark sovereign yields to extraordinary lows – unimaginable just a few years back. Three-year government bond yields are well below zero in Germany, around zero in Japan and below 1 per cent in the United States. Moreover, estimates of term premia are pointing south again, with some evolving firmly in negative territory. And as all this is happening, global growth – in inflation-adjusted terms – is close to historical averages. There is something vaguely troubling when the unthinkable becomes routine." – Claudio Borio

European QE Backfires: The ECB initiates a sovereign QE in January 2015, but it is modest in scale (relative to expectations) as Germany won't permit a more aggressive strategy. Markets are disappointed with the small size of the ECB's initiative and European banks choose to hold their bonds instead of selling. ECB balance sheet still can't get to 3 trillion euros and the euro actually rallies sharply. Bottom line, QE fails to work (economic growth doesn't accelerate and inflationary expectations don't lift).

Draghi Is Exposed: Mario Draghi is exposed for what he really is: the big kid of which everyone is scared. For some time, no one wanted to fight him (or fade sovereign debt bonds, which would be contra to his policy). But, after the meek January QE, the response changes. He is now seen as the bully who never throws a punch and who always has gotten his way. But at the time of the January QE a medium sized kid (and a market participant) teases him and Draghi warns him again to stop it. The kid keeps teasing. Draghi the bully takes a swing, it turns out he can't fight and the medium-sized kid whips his butt. From then on, the big kid is feared no more. For some time Draghi has said he will do "whatever it takes," but he never really had to do anything. When he finally gets going and has to act rather than talk, he will expose himself as only a bully and as a weak big kid. Mario Draghi gets fed up with the Germans and returns to Italy (where he was governor of the Bank of Italy between 2006-2011) and becomes the country's president.

Shinzo Abe and Haruhiko Kuroda Resign: Kuroda, an advocate of looser monetary policy, stays on at the Bank of Japan (for most of the year), but the yen enters freefall to 140 vs. the dollar and wage growth lags badly. Japanese people have had enough and, by year end, Prime Minister Shinzo Abe and Haruhiko Kuroda are forced to resign.

The Fed Is Trapped: The Federal Reserve surprises the markets and hikes the federal funds rate in April 2015. A modest 25-basis-point rise in rates causes such global market turmoil that it is the only hike made all year. The Federal Reserve is now viewed by market participants as completely trapped, as an ah-ha-moment arrives in which there is limited policy flexibility to cope with a steepening downturn in the business cycle in late 2015/early 2016. Stated simply, the bull market in confidence in the Federal Reserve comes to an abrupt halt.

Malinvestment Becomes the It-Word in 2015: Steeped in denial of past mistakes and bathing in the buoyancy of liquidity and the elevation of stock prices in 2014, market participants come to the realization that the world's central bankers in general, and the Fed in particular, once again has taken us down an all too familiar and dangerous path that previously set the stage for The Great Decession of 2007-09. It becomes clear that the consequences of unprecedented monetary easing and the repression of interest rates has only invited unproductive investment and speculative carry trades. The impact of a lengthy period of depressed interest rates uncork malinvestment that has percolated and detonates among differing asset classes as the year progresses. Already seen in the deterioration and heightened volatility in commodities (the price of crude, copper, etc.), in widening spreads in the energy high yield (with yields up to 10% today, compared with only 5% a few months ago) and with the average yield on the SPDR Barclays High Yield Bond ETF (JNK) up to 7% (from a low of 5% earlier in 2014), the consequences of financial engineering (zero-interest-rate policy and quantitative easing) and lack of attention to burgeoning country debt loads and central bankers' balance sheets, in addition to inertia on the fiscal front result in rising volatility in the currency markets. Malinvestment in countries like Brazil (where consumer debt has risen by 8x and export accounts have quintupled over the last eight years on the strength of a peaking export boom, in oil and iron ore, so dependent on the China infrastructure story that has now ended) translate into a deepening economic crisis in Latin America and in other emerging markets.

Then, EU sovereign debt yields, suppressed so long by Draghi's jawboning, begin to rise. Slowly at first and then more rapidly, EU bond prices fall, putting intense pressure on the entire European banking system. (In his greatest score, George Soros makes $2.5 billion shorting German Bunds). The contagion spreads to other region's financial institutions. Shortly after, social media and high valuation stocks get routed and, ultimately, so does the world's stock markets.

As a result of the influences above, the VIX rises above 30. The price of gold soars to $1,800-$2000 and the precious metal is the best-performing asset class for all of 2015. Strategy: Buy GLD and VIX, Short SPY/QQQ and German Bunds

Surprise No. 2 – The U.S. stock market falters in 2015.

"In a theater, it happened that a fire started offstage. The clown came out to tell the audience. They thought it was a joke and applauded. He told them again and they became more hilarious. This is the way, I suppose, that the world will be destroyed – amid the universal hilarity of wits and wags who think it is all a joke." – Soren Kierkegaard.

Market High Seen in January, Low Seen in December (at Year End): The U.S. stock market experiences a 10%+ loss for the full year. (Note: Not one single strategist in Barron's Survey is calling for a lower stock market in 2015. Projected gains by the sell side are between +6-16%, with a median market gain forecast at +11%). The S&P Index makes its yearly high in the first quarter and closes 2015 at its yearly low as signs of a deepening global economic slowdown intensify in the June-December period.

While earnings expectations disappoint, the real source of the market decline in 2015 is a contraction in valuations (price-earnings multiples) after several years of robust gains. Investors begin to recognize that low interest rates, massive corporate buybacks, the suppression of wages, phony stock option accounting and other factors artificially goosed reported earnings and that earnings power and organic earnings are less than previously thought. So, 2015 is a year in which the relevant ways of measuring overvaluation (market cap/GDP currently at 1.25 vs. 0.70 mean) and the Shiller CAPE ratio (currently at 27x vs. 17x mean) become, well, relevant.

With few having the intestinal fortitude to maintain skepticism and short positions into the unrelenting bull market of 2013-14, there is none of the customary support of short sellers to cover positions and soften the market decline, when it occurs.

Stocks begin to drop in the first half, well before the real economy tapers, underscoring the notion (often forgotten) that the stock market is not the economy.

But by mid-year it becomes clear that U.S. economic growth is unable to thrive without the Fed's support.
Year-over-year profits for the S&P decline modestly in the second half of 2015. Domestic Real GDP growth falls to under +1.5% in the third and fourth quarters.

By year end the market begins to focus on The Recession of 2016-17, which looms ahead in the not so distant future. Strategy: Short SPY

Surprise No. 3 – The drop in oil prices fails to help the economy.

"In its November 14, 2014 Daily Observations ("The Implications of $75 Oil for the US Economy"), the highly respected hedge fund Bridgewater Associates, LP confirmed that lower oil prices will have a negative impact on the economy. After an initial transitory positive impact on GDP, Bridgewater explains that lower oil investment and production will lead to a drag on real growth of 0.5% of GDP. The firm noted that over the past few years, oil production and investment have been adding about 0.5% to nominal GDP growth but that if oil levels out at $75 per barrel, this would shift to something like -0.7% over the next year, creating a material hit to income growth of 1-1.5%." – Mike Lewitt, The Credit Strategist

Despite the near universal view that lower oil prices will benefit the economy, the reverse turns out to be the case in 2015 as the economy as a whole may not have more money – it might have less money.

Continued higher costs for food, rent, insurance, education, etc. eat up the benefit of lower oil prices. Some of the savings from lower oil is saved by the consumer who is frightened by slowing domestic growth, a slowdown in job creation and a deceleration in the rate of growth in wages and salaries.

And the unfavorable drain on oil related capital spending and lower employment levels serve to further drain the benefits of lower gasoline and heating oil prices.

In The Financial Times, recently, Martin Wolf wrote: "(A) $40 fall in the price of oil represents a shift of roughly $1.3 trillion (close to 2 per cent of world gross output) from producers to consumers annually. This is significant. Since, on balance, consumers are also more likely to spend quickly than producers, this should generate a modest boost to world demand."

But Wolf, and the many other observers, as Mike Lewitt again reminds us, "fail to explain how the $1.3 trillion that has been deducted from the global economy is able to shift from one group to another. "

Surprise No. 4: The mother of all flash crashes.

"America is the 'arch criminal' and 'unchangeable principal enemy' of North Korea." (Dec. 22, 2014)
"America is a 'toothless wolf' and 'the empire of devils."" (March 27, 2010)
"North Korean missiles will reduce Washington, D.C. to 'ashes.'" (August 19, 2014)
"America is a 'group of Satan' bent on destroying Korean religion." (April 22, 2013)
"American 'ideological and cultural poisoning' is undermining socialism around the world." (July 16, 2014)

– Selected quotes from North Korea's state-controlled media

Hackers attack the NYSE and Nasdaq computer apparatus and systems by introducing a flood of fictitious sell orders that result in a flash crash that dwarfs anything ever seen in history.

In the space of one hour the S&P Index falls by more than 5%.

The identity of the attacker goes unknown for several days and it turns out to be North Korea.  Strategy: Buy VIX, Short SPY/QQQ

Surprise No. 5: The great three-decade bull market in bonds is over in 2015.

"Take then thy bond thou thy pound of flesh..." – Portia, The Merchant of Venice
Last year not one strategist saw lower interest rates (though that was my No. 1 Surprise last year). This year, not one strategist expects a spike in interest rates.

In the first half of 2015, European yields and U.S. yields start to converge, in that European yields begin to jump to where the U.S. 10-year yield resides. The failure of Draghi's policy (see Surprise No. 1) will result in an acceleration in the European debt yields rising and in a decay in debt prices. That will mark the end of the great three-decade bond bull market in the U.S. and it will occur as global growth eases. Strategy: None

Surprise No.6 – China devalues its currency by more than 3% vs. the U.S. dollar.

"It's not like I'm anti-China. I just think it's ridiculous that we allow them to do what they're doing to this country, with the manipulation of the currency, that you write about and understand, and all of the other things that they do." – Donald Trump

For years, China has essentially pegged it's currency to the U.S. dollar. (liberalization meant that a narrow trading range is permitted). With the huge run in the U.S. Dollar, China's currency has appreciated compared with other Asian currencies. As a result, China has lost its manufacturing edge and its trade surplus has all but disappeared. Whether it's a permitted day-to-day weakening, changing the peg from the dollar to a basket of currencies or whether there is an overnight surprise devaluation, China's currency will weaken materially in 2015. Strategy: None

Surprise No. 7 – Apple (AAPL) becomes the first $1 trillion company.

"There's an old Wayne Gretzky quote that I love. 'I skate to where the puck is going to be, not where it has been.' And we've always tried to do that at Apple. Since the very, very beginning. And we always will." – Steve Jobs

Apple's next generation iPhone is seen to likely outsell its latest phone iteration as Re/Code uncovers (and reveals) some amazing and unique new features/applications that are planned for the next generation phone.
I don't know what features it will have or how it will improve design or performance. But I think there is now a near-consensus that it won't and that the next product upgrade cycle is a while away.

So, I predict Apple 2016 estimates rise significantly (to $10/share) and, despite a weak market backdrop, Apple becomes the first $1 trillion dollar market-cap company and the best-performing large-cap in 2015.
Apple becomes the only one-decision stock during the stock market swoon during the last half of 2015. It is a must own. Strategy: Buy APPL

Surprise No. 8 – Legislation is introduced that allows for repatriation for foreign cash.

"The only difference between death and taxes is that death doesn't get worse every time Congress meets." – Will Rogers
As signs of domestic economic growth fade in the second half of 2015, Congress and the Administration agree on a broad program to repatriate foreign cash at a low tax rate.
The deal briefly rallies the U.S. stock market, but equities soon succumb to a slowing domestic economy and diminishing corporate profit growth.   Strategy: None

Surprise No. 9 – Energy goes from the worst-performing group in 2014 to the best-performing group in the first half of 2015 and then falls back later in the year.

"Oil vey!" – Kass Daily Diary term
Energy stocks are on a roller coaster in 2015.

As the price of crude oil rises steadily (towards $65 a barrel) in early 2015, the energy sector (which was among the worst in 2014) becomes the best market group in the first half of the year. Slowing global economic growth during the last half of the year leads to profit-taking in the energy sector as the price of crude oil closes the year at under $50 and at its lowest price in 2015.

In a surprise move, the president signs approval for the Keystone Pipeline in the second half of the year.
Strategy: Buy oil stocks in first six months of the year, sell/short mid-year.

Surprise No. 10 – More chaos in the Democratic Party.

"Mothers all want their sons to grow up to be president, but they don't want them to become politicians in the process." – John F. Kennedy

Sen. Elizabeth Warren pushes Secretary Hillary Clinton so far to the left that she loses independent voters, though she easily gains the Democratic nomination for president.  Former President George H.W. Bush passes away during the first half of the year and Governor Jeb Bush immediately declares his candidacy. By the end of 2015, Jeb Bush is well ahead in the polls and is a big favorite to win the presidency in 2016.
Strategy: None

Surprise No. 11 – Food inflation accelerates after Russia halts wheat exports.

"As life's pleasures go, food is second only to sex. Except for salami and eggs. Now that's better than sex, but only if the salami is thickly sliced." – Alan King

Russian turmoil continues and Putin decides to halt exports of wheat again to keep as much homeland as possible, resulting in a price spike in wheat, but also corn and soybeans. This price rise, on top of U.S. food inflation that is already running higher, offsets the consumer benefit of still-relatively-low gasoline and heating oil prices. Strategy: None

Surprise No. 12 – Home prices fall in the second half of 2015.

"I told my mother-in-law that my house was her house and she said, 'Get the hell off my property.'" – Joan Rivers

Under the weight of reduced home affordability, still low household formation gains and continued pressure on real incomes, home prices fall in 2015. Builders lose pricing power. Strategy: Short homebuilders.

Surprise No. 13 – Individual and sector market surprises.

"Those who are easily shocked should be shocked more often." – Mae West

• Bank Stocks Fall – Though bank stocks have been recent market leaders, the weight of a flattening yield curve, still-tepid loan demand and an implosion in the European banking system make the sector among the worst market performers. Moreover, a major cyber attack against Bank of America (BAC) that actually destroys a percentage of customer records further diminishes enthusiasm for the group.
   
• Twitter Feeding – Carl Icahn, calling it his "new Netflix," discloses a 9.9% position in Twitter. This stimulates a bidding war between Google (GOOGL) and Facebook (FB) to acquire the company. Google wins the battle and pays $60 a share for Twitter.
   
• Volatility Rising – The VIX rises to over 30 in the second half of the year.
   
• Google Institutes a Share Buyback and Shaves Capital Spending – After a lackluster performance in 2014, Google's management reverses course on its previously outsized capital spending program on non-core businesses and becomes more shareholder friendly. The company dials back spending and institutes a stock buyback program.
   
• Corporate Inefficiency in Large-Cap Technology Targets Activist Investors –- Two hedge funds establish a filing position in Cisco (CSCO) and force Chairman John Chambers out. The new CEO announces a large special dividend and a massive stock buyback and a cutback to the employees' too-generous stock option plan. More than 10% of the workforce is laid off and Cisco's shares soar. Several other tech companies are targeted.

Strategy: Long AAPL TWTR, CSCO, VIX, GOOGL and short banks


Surprise No. 14 – Berkshire Hathaway (BRK.A) makes its largest acquisition in history.
"When I was 15 years old, I read an articls about Ivan Boesky, the well-known takeover trader – turned out years later it was all on inside information! But before that came to light, he was very successful, very flamboyant. And I thought, 'This is what I want to do.' So I'm 15 years old, I decide I'm going to Wall Street." –  Karen Finerman

During the depths of the market's swoon in the later part of the year, Warren Buffett scoops up his largest acquisition ever. The $55+ billion acquisition is not in his customary comfort zone (a consumer goods company), but rather the deal is for a company in the energy, retail or construction/equipment areas. Strategy: None

Surprise No. 15 – A derivative blowup precipitates an abrupt market drop.

"I view derivatives as time bombs, both for the parties that deal in them and the economic system." – Warren Buffett

The $300 trillion holdings of derivatives by the U.S. banking industry has been all but forgotten. The four largest U.S. banks account for $240 trillion of that total, dwarfing their combined $750 billion in statutory capital! This sort of exposure in which notional derivatives are more than 300x the banks' net worth, is, as my friend The Credit Strategist's Mike Lewitt has written, "would be laughable if the consequences of a financial accident were not so potentially catastrophic."

To make matters worse, the passage of the $1.1 trillion spending bill passed this month (written by lobbyists and voted on by bought-and-paid-for legislators who probably neither read nor understood the complex spending bill) has kept taxpayers on the hook –through the FDIC – for those derivatives (what Warren Buffett previously called "financial weapons of mass destruction.")

On any measure, the sheer size of these derivative portfolios pose potential risk to the world's financial stability. What we have learned from the past cycle is how opaque the exposure really is and how stupid and avaricious our bankers really are when allowed to venture into territories of leverage.

Whether it is energy derivatives or some other asset class, a derivative blowup in 2015 will serve to preserve the wise words of Benjamin Disraeli (who served twice as Great Britain's Prime Minister) that "what we have learned from history is that we haven't learned from history." It will also harm our markets, once again. Strategy: Short SPY

10 Also-Ran Suprises for 2015

By DOUG KASS
Dec. 26, 2014 | 7:32 AM EST
Stock quotes in this article: BABA, SHLD, IBM, BRK.A, MONIF

• On Monday I will deliver my 15 Surprises for 2015.  I think it is my most interesting list in years.

Here are my 10 also-ran Surprises for 2015 that I had considered but didn't make the top 15.

1. China's Real GDP growth falls below 5% in 2015 as economic growth decelerates markedly in the second half of the year.
    
2. An accounting "discrepancy" is found at Alibaba (BABA). The shares plummet and the hedge fund community feels the pain.
    
3. Under pressure from suppliers and a falling stock price, Ron Johnson is installed as CEO ofSears Holdings (SHLD).
    
4. George Soros makes $2.5 billion by shorting German Bunds.
    
5. The price of crude oil drops below $40 a barrel in the second half of 2015.
    
6. The consumer price index turns negative (year over year).
    
7. IBM (IBM) whiffs and the share price drops below $125 a share. Berkshire Hathaway(BRK.A) suffers a near-$4 billion loss (on paper). At Buffett's suggestion, senior management is replaced.
    
8. Warren Buffett announces his successor.
    
9. Uber goes public at a $50 billion capitalization. The share price never exceeds the IPO price in 2015.
    
10. Monitise's (MONIF) subscription adds far outpace expectations this year. (The shares double in price).
11. 
    

Letter to My Nephews

By Jonathan Tepper
December 29, 2014 in Uncategorized

You can learn a lot from books, but many things can only be learned the hard way by living, suffering and enjoying life. A year and a half ago, I was in a plane with very bad turbulence, and I worried that if the plane went down, many of the lessons I’ve learned in life would end up at the bottom of the ocean.  I wrote a letter to my nephews for them to read when they were older.  I hope they’ll find it useful.
—————–
Dear nephews,
I’m writing this on a plane. The reason I started writing this was that I feared the plane might go down, and if it went down, all the lessons I’ve learned in life would disappear with me. By writing this, I hope to pass on the few lessons I’ve learned.

The most important lesson is that the vast majority of things you worry about will not bother you the next day. A year later you will not even be able to remember them if you try. When you grow older, you will not worry about what grades you got. You won’t worry about games you lost.   You won’t worry about what other people thought about you. Most of the things you worry about will never happen. Even if the worst things that you worry about happen, life will still go on. Learn to enjoy every day, and try to enjoy it as if it is your last. It has taken me a long time to understand this, and I wish I had understood it sooner.

Happiness is not a destination but a journey. You will never be smart enough, rich enough, have a pretty enough girlfriend, boyfriend, husband or wife, or win enough prizes and awards. Whatever it is you want, there is always something better. Enjoy the journey of learning, working, and living. If you enjoy the journey, you’ll probably achieve a lot more than if you focused on goals.

Money can provide security, but once you have security, more money cannot buy you more happiness. If you show me someone who thinks money can buy happiness, I’ll show you someone who has never had a lot of money.

Things don’t make you happy, but memories will always stay with you. Whatever it is that you buy, you will soon get used to it. It will make you happy for a short while, but it will not make you happy forever.

Experiences and memories can make you happy forever. I can’t even remember most of the toys I’ve had in my life, but I still think of my times with Timothy and your Grandmom with great happiness and fondness. I remember walking Timothy to school and how happy we were. I remember hugging your Gradmom when I came home for a weekend. Those memories will never go away. The happiest memories of my friends are my travels and dinners with them, not the things I’ve bought for myself. You’ll remember dinners and travels with friends and family more than any shiny things you’ll ever have.

Your family is the most important thing you have in life. Friends, boyfriends, girlfriends and co-workers come and go, but the only thing that you can always count on is your family. (If you find a friend who is always there for you, you’re extremely lucky. They exist, but they’re very rare.) One day, you will have your own family. You must love them and look after them. You will understand one day that just as your grandparents die, your parents will as well. Strive to be a good son and daughter. One day, you will be like your parents. Your parents are not perfect, and you will not be either. But you can be loving and be a good son and daughter. One day you can be a good parent.

Never stop learning, and always be ready to teach yourself things you don’t know. The only things you will remember are things you care about. You will forget about all the rest. You must teach yourself and care about what you learn. No one can teach you everything you need to know at school or university. You will also forget most of what you study, and that is fine. As Jacques Barzun said, “Civilization is all that remains after you have forgot all that you specifically set out to remember.”

Never live someone else’s life. Find your gifts and the things that give you pleasure, develop those gifts, and pursue them.   Do what makes you happy and be great at it. You have skills and gifts that no one will ever have or see again. If you’re a businessman, build businesses. If you’re a writer, write. If you’re a scientist, discover. If you do what you love and love what you do, you will work very hard, but you will enjoy every day.

One of the things that most influenced me was something Steve Jobs once said:

When you grow up, you tend to get told that the world is the way it is and your life is just to live your life inside the world, try not to bash into the walls too much, try to have a nice family life, have fun, save a little money.

That’s a very limited life. Life can be much broader once you discover one simple fact, and that is that everything around you that you call life was made up by people that were no smarter than you. And you can change it, you can influence it, you can build your own things that other people can use. Once you learn that, you’ll never be the same again.

And the minute that you understand that you can poke life and actually something will, you know if you push in, something will pop out the other side, that you can change it, you can mold it. That’s maybe the most important thing. It’s to shake off this erroneous notion that life is there and you’re just going live in it, versus embrace it, change it, improve it, make your mark upon it.

I think that’s very important and however you learn that, once you learn it, you’ll want to change life and make it better, cause it’s kind of messed up, in a lot of ways. Once you learn that, you’ll never be the same again.

I hope that you will find what you love and you will change the world.

Life is full of struggle, and many bad things will happen to you. This is one thing that I can guarantee you. Most of my friends died of AIDS, and your uncle Timothy died in a car accident and your Grandmother committed suicide after suffering from a very bad brain tumor. These things happened and cannot be changed. Many people suffer great tragedies and live full and happy lives. Remember the people you love and mourn them. Accept that terrible things happen, and try to live as if each day is your last with those you love. There is nothing else you can do.

The best way to avoid anxiety, stress and unhappiness is to avoid internal contradiction. Don’t think that one thing is right and do the opposite. Listen to your conscience and obey it. Be a good person and live according to your convictions. You cannot answer for other people, but you can always answer for yourself.

As long as you live according to your most basic beliefs, you will not have regrets or guilt. You will be able to die happily knowing that you looked after the poor and needy, that you were loving to those around you, and that you failed often but did your best. You will not lose a night of sleep if you always try to do your best. I love you very much.
Much love,
Uncle Jonathan

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The article Outside the Box: 15 Surprises for 2015 was originally published at mauldineconomics.com.

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