2017 was not a good year for Byron Wien predictions. While the traditionally bullish vice chairman of Blackstone’s Private Wealth Solutions group one year ago predicted – correctly – that the market would rise to 2,500, this is hardly remarkable as Wien has had a bullish stock forecast virtually every single year. The problem is with Wien’s other forecasts, most of which missed the mark by a mile.
Starting with Wien’s prediction that US GDP would rise above 3% (it did not), continuing to his forecast that Trump would move away from his more extreme positions “on virtually all issues” (one look at recent newspaper front pages clearly shows how off the mark this was), going to Wien’s dead wrong prediction that macro investors would “make a killing on currency fluctuations” – with the USDJPY rising to 130 and cable tumbling to 1.10 – when FX vol actually tumbled to near record lows in 2017; Wien’s expectation that inflation would move toward 3% and the 10Y would hit 4%, also both dead wrong, almost as wrong in predicting that populism would accelerate in Europe, resulting in a loss for Merkel in last year’s elections, not to mention active discussions to close down the EU and abandon the euro, then touching on Wien’s inaccurate forecast about warming of trade relations with China, and finally his prediction that the “Middle East cools down” (although he was right that Bashar Assad will remain in power), it was a one in ten batting average… two if being generous.
Which brings us to the latest forecast by the Blackstone veteran, who today issued his list of Ten Surprises for 2018.
This is the 33rd year Byron has given his views on a number of economic, financial market and political surprises for the coming year. And, as every other year, Byron defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening.
Notably, for once Wien is less optimistic about the year ahead, and warns that stock speculation will get ahead of itself in 2018, leading to a short correction in the S&P 500, while oil will vault above $80 as “populism, tribalism and anarchy spread around the world.”
Wien however echoes Bank of America, and predicts that even with the decline to 2,300, the S&P will end the year above 3,000 as profits rise and economic growth approaches 4%.
Among his other calls for this year:
- A rehash of his FX call from last year, according to which the euro will drop to 1.10 versus the dollar and the yen will hit 120 against the U.S. currency.
- Another deja vu from last year: interest rates will climb, with U.S. Treasury yields moving toward 4%, as inflation becomes a bigger concern and the Federal Reserve tightens four times.
- Republicans will lose control of both chambers of Congress in November
- In the United Kingdom Jeremy Corbyn becomes the next prime minister.
- Catalonia remains turbulent in spite of repressive action by the Spanish government,
- And speaking of the UK, Wien predicts that despite the adverse economic consequences of the Brexit vote, the unintended positive consequence is that it brings continental Europe “closer together with more economic cooperation and faster growth.”
Wien started the practice over 30 years ago, in 1986, when he was the Chief U.S. Investment Strategist at Morgan Stanley, and continued into his current post after joining Blackstone in September 2009 as an advisor to both the firm and its clients in analyzing economic, political, market and social trends.
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Below is the full list of Byron’s Ten Surprises for 2018:
- China finally decides that a nuclear capability in the hands of an unpredictable leader on its border is not tolerable even though North Korea is a communist buffer between itself and democratic South Korea. China cuts off all fuel and food shipments to North Korea, which agrees to suspend its nuclear development program but not give up its current weapons arsenal.
- Populism, tribalism and anarchy spread around the world. In the United Kingdom Jeremy Corbyn becomes the next Prime Minister. In spite of repressive action by the Spanish government, Catalonia remains turbulent. Despite the adverse economic consequences of the Brexit vote, the unintended positive consequence is that it brings continental Europe closer together with more economic cooperation and faster growth.
- The dollar finally comes to life. Real growth exceeds 3% in the United States, which, coupled with the implementation of some components of the Trump pro-business agenda, renews investor interest in owning dollar-denominated assets, and the euro drops to 1.10 and the yen to 120 against the dollar. Repatriation of foreign profits held abroad by U.S. companies helps.
- The U.S. economy has a better year than 2017, but speculation reaches an extreme and ultimately the S&P 500 has a 10% correction. The index drops toward 2300, partly because of higher interest rates, but ends the year above 3000 since earnings continue to expand and economic growth heads toward 4%.
- The price of West Texas Intermediate Crude moves above $80. The price rises because of continued world growth and unexpected demand from developing markets, together with disappointing hydraulic fracking production, diminished inventories, OPEC discipline and only modest production increases from Russia, Nigeria, Venezuela, Iraq and Iran.
- Inflation becomes an issue of concern. Continued world GDP growth puts pressure on commodity prices. Tight labor markets in the industrialized countries create wage increases. In the United States, average hourly earnings gains approach 4% and the Consumer Price Index pushes above 3%.
- With higher inflation, interest rates begin to rise. The Federal Reserve increases short-term rates four times in 2018 and the 10-year U.S. Treasury yield moves toward 4%, but the Fed shrinks its balance sheet only modestly because of the potential impact on the financial markets. High yield spreads widen, causing concern in the equity market.
- Both NAFTA and the Iran agreement endure in spite of Trump railing against them. Too many American jobs would be lost if NAFTA ended, and our allies universally support continuing the Iran agreement. Trump begins to think that not signing on to the Trans-Pacific Partnership was a mistake as he sees the rise of China’s influence around the world. He presses for more bilateral trade deals in Asia.
- The Republicans lose control of both the Senate and the House of Representatives in the November election. Voters feel disappointed that many promises made during Trump’s presidential campaign were not implemented in legislation and there is a growing negative reaction to his endless Tweets. The mid-term election turns out to be a referendum on the Trump Presidency.
- Xi Jinping, having broadened his authority at the 19th Party Congress in October, focuses on China’s credit problems and decides to limit business borrowing even if it means slowing the economy down and creating fewer jobs. Real GDP growth drops to 5.5%, with, only minor implications for world growth. Xi proclaims this move will ensure the sustainability of China’s growth over the long term.
Then there are the “also-rans”, or as Wien explains “Every year there are always a few Surprises that do not make the Ten because either I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are “probable.”
- Investors recognize that the earnings of companies in Europe, the Far East and the emerging markets are growing faster than those in the United States while the price earnings ratios in those regions are lower than those in America. Global investments become more broadly represented in institutional portfolios.
- The Mueller investigation of the 2016 presidential election fails to implicate any members of the Trump family in collusion with Russian operatives.
- Artificial intelligence gains visible momentum. Service sector jobs are automated, particularly clerks in legal and finance professions, as well as workers in fast food outlets and healthcare. Economists begin to question the unemployment data because the rate drops below 4% while so many people still appear to be out of work and seeking government assistance.
- Cyberattacks become more prevalent and begin to affect consumer confidence. A major money center bank suspends deposits or withdrawals for three days because its system is penetrated. Numerous retail organizations report that customer personal information has been obtained by hackers. Those invading corporate information systems appear to be smarter and more innovative than the internal employees protecting the computer data, suggesting that the systems themselves need to be upgraded.
- The regulatory authorities in Europe and the United States finally get concerned about the creative destruction of Internet-related businesses. As a result of pressure from retailers and traditional media companies, they begin an investigation of anti-competitive practices at Amazon, Facebook and Google. The public begins to think these companies have too much power.
- The risks in Bitcoin are so great that regulatory authorities restrict trading. Among their concerns are: no regulatory overnight; no safety and soundness measures; no recourse in the event of mistaken or miscalculated transactions; high cyber risk; no deposit insurance. (Risk source: Morgan Stanley.)
Check back in one year for the smirk.
Source: Blackstone
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