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2020 and Beyond – Thoughts About Markets and More…
Advisory Letter: 09th January, 2020
Good day from Kristal Advisors!
And a very Happy New Year to you, wherever you are.
New all-time highs for major indices, an airstrike by Trump, environmental devastation in Australia – the very first days of this new year have been filled to the brim with news of global magnitude and repercussions. We are entering the third decade of the new millennium, and 2020 has the potential to become a very special one for various reasons.
I still remember the year 2000, the fears and dreams we had, that by 2020 the world will be a better place as long as not all our computers crash on 01.01.00.
China was at the gates of WTO submission, which marked the beginning of a great globalization move. It resulted in deflationary trends for the following 20 years due to lower goods prices – thanks not only to cheap iPhones from China, but also an aging population in the western hemisphere, as boomers changed their spending habits going into retirement.
After Trump pulled the plug on China Trade in 2018, we are now at the cusp of a total reversal and heading towards de-globalization. Supply chains are changing and giants like Amazon promising ever shorter delivery times to their customers, require a gradual shift of production closer to the consumer. It may sound overly pessimistic writing these lines at the very same moment as reading – what feels like the 135th time – a Trump announcement on Twitter about a trade deal close to being signed. But here we are…
What is also special is the upcoming US presidential election which will shape the fortune of the US financial markets for the foreseeable future. My base case is that Trump will retain the White House for another 4 years, but watch out for outrageous promises for fiscal stimulus from both sides. This should keep markets supported, but be mindful of the tail risk from a democratic victory, which (depending on the candidate) could well turn into a sharp pullback in equities.
I see 2020 as a tale of two sides: I think the market is complacent towards global political headline risk (trade war, populism, civil unrest) and this will keep any recovery L-shaped at best. On the other side, unless we see a significant spike in inflation, it is unlikely that central banks will remove the punch bowl of monetary stimulus, which should keep risk assets underpinned overall. Our outlook is for a continuation of the positive risk sentiment for another few months, but heading into summer 2020, clients should pare back on risk allocations and seek refuge in safe-haven assets or at least buy some insurance to protect their gains.
The 2020 Moonshots
Take a look at US public spending on Transportation and Water infrastructure since 1956 (Source: CBO.gov)
If we adjust these numbers for inflation, the US has been heavily underspending in these sectors over the past 20 years. I also looked at the cyclicality: Usually, major projects like water treatment plants have a lifecycle of around 20 to 30 years. This means that after the past cycle from the mid-’90s has come to an end, another cyclical wave of replacement and upgrades will be necessary. This is also a topic that will find bipartisan support in an election year, and both parties of the aisle will likely outbid each other with infrastructure investments as a form to stimulate the US economy.
2. Water, Food, Cyber, AI
Technological revolution is still very much in the making. I see revolutionary developments in areas like 3D printing, robotics, also stemming from the need to shorten supply chains. Cybercrime is also increasing, forcing consumers and corporations alike to step up investment in this sector.
The Looney-Moonshot Prediction
- A fiscal and dollar crisis at the end of 2020.
- The dollar has reached a threshold in terms of debt/GDP ratios (>105%) which make it no longer appealing in its status as a global reserve currency. Trade war has also undermined the willingness of overseas governments to invest in US Treasuries and they start to flee the currency selling their UST holdings.
- Trump, after winning the 2020 election with an overwhelming margin of 85% is jubilant at first given a lower dollar is all he wanted to narrow trade deficits. Treasury yields rise to 4% and the Department of treasury needs to raise its debt ceiling to just service existing coupon payments and refinancing. But the hardest impact is on the US corporate sector, especially those companies who had leveraged and borrowed to buy back their own shares. Refinancing cost rises dramatically and interest expense as % of net income reaches a level of 300%, surpassing the 2008 peak.
As always, we’re here to help you navigate the market’s moods. 2019 was a good year, despite all its roller-coasters (as you can see below). Here’s to a stable 2020, Presidents willing, for all of us!
The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.
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