The 247Bull financial & economic forecast for 2013 & beyond

This article lays out the 247Bull forecast for 2013 and beyond. It explores the primary factors that will shape our financial and economic futures and aims to prepare investors for the real financial crisis that still lies ahead.

Where are we & where are we going?

Many different factors contributed to the global financial crisis of 2008, including: excessive liquidity, rising house prices, poorly regulated mortgage markets, an explosion of complex mortgage products (MBS etc.), ineffectual credit rating agencies, a lack of capital within large and midsize financial orgainisations, and highly correlated asset classes which created poorly understood counterparty risk. At the heart of it all however, was a huge excess of private debt.

When the debt bubble burst western governments were quickly faced with the worst financial crisis since the Great Depression. However rather than allowing the bubble to deflate, they stepped in as lender of last resort, bailing out insolvent banks and backstopping huge new stimulus programs designed to save the system.

Rather than fixing the problem of too much debt, we merely transferred it from the private sector (where a few must pay for the risks they took), to the public sector (where all must pay), and the debt is growing rapidly.

Five and a half years of “can kicking” via the usual neo-Keynesian remedies of slash (interest rates) and print (money) has failed to produce a lasting recovery. By now it should be clear to just about everyone that the policies being pursued in Britain (as well as the US, Europe and Japan) are taking us in the wrong direction. The question is, what is that direction and where does it lead?

History shows us very clearly that it leads to another debt crisis, which, this time, will play out as a currency crisis.

Right now these nations are able to finance their deficits via the international bond market – something which is still cheap to do thanks to record low interest rates. However, interest rates can’t stay low forever.

When our creditors lose faith in our ability to get our fiscal houses in order, they will begin to demand higher rates in order to compensate them for holding our IOUs. Governments (currently led by the US and Japan) are turning to ever more desperate measures in the misguided belief that the problem is not money printing per se, it is that we are not printing enough money.

As we noted in July 2012, “between now and the end of 2014 the world’s top 10 debtor nations have to rollover $12.7 trillion (£8.2 trillion) in maturing sovereign debt”, and there are already signs that the bond market is choking on the sheer quantity of debt it is being forced to swallow. As a result central banks are opting to monetise their own countries’ debt. The US is currently printing the money to buy around 75% of all the new debt issued by the US Treasury, while Bank of England is buying around 50% of new debt issued by the UK Treasury.

This is a very worrying trend, and although to some extent it negates the argument that the “bond vigilantes” will suddenly send rates higher, it is the road that leads to hyper-inflation.

Sooner or later all of this fiscal lunacy will lead to a loss of confidence in our government’s ability to manage the situation. When confidence is lost events are likely to gather pace with falling bond markets triggering higher interest rates debt a spate of debt downgrades.

At this point the losses incurred by the banks and other firms that hold sovereign bonds will trigger a rush to get out of what were previously seen as “safe haven” assets. In addition the sharp rise in the cost of issuing, rolling over and serving debt will cause deficits to balloon resulting in further downgrades.

The jump in interest rates is also certain to take a huge toll on the UK and peripheral European property markets. Here in Britain an estimated 7.8 million people are already struggling to keep up with their rent or mortgage payments and a spike in interest rates would be devastating for those who are not on fixed rate loans.

Faced with economic crisis and cut off from cheap foreign lending, the British government can be expected to fuel the inflationary fire with even greater money printing. In its desperate attempts to prevent the “great reset”, they will turn a sovereign debt crisis into a currency crisis by deliberately devaluing the British pound. This period of hyper-stagflation will allow us to continue to meet our payment obligations (albeit in considerably devalued currency) and avoid an outright default – at least for a while.

How to invest in a world of fiscal lunacy

What all this amounts to is a form a tacit default, the brunt of which is borne by savers and those on fixed incomes.

It is our opinion that 2013 will be the year that cracks start to form in the sovereign bond market. It is our contention that those holding government debt, particularly medium and long-term paper, should use the next rally to get out of bonds.

During 2013 the vast amount of liquidity that the world’s central banks have injected into the financial system will begin to seep into the economy resulting in a pickup of inflation – something which will likely gather pace in 2014. Oil prices are also likely to head higher in the coming months contributing to inflation.

2013 is also likely to be the year that the coming financial collapse reaches the shores of Japan. If new hawkish Prime Minister Shinzo Abe achieves his goal of spurring inflation, then interest rates on the nation’s colossal debt could begin to rise, something which is likely to set Japan up as the first major debt domino to fall.

The 247Bull outlook summary

Asset/ Asset Class

Short-term outlook

(1-2 years)

Medium-term outlook

(2-5 years)

Long-term outlook

(5 years +)

Cash

Neutral

Bearish

Very Bearish

Government Bonds

Bullish

Very Bearish

Very Bearish

Corporate Bonds

Neutral

Bearish

Very Bearish

Stocks (see notes below)

Bullish

Bullish

Bullish

Commercial Property

Neutral

Neutral

Neutral

Residential Property

Neutral

Bearish

Very Bearish

Commodities-           Lean Hogs-           Live Cattle-           Corn-           Wheat

-           Soybeans

-           Copper

-           Zinc

-           Nickel

-           Aluminium

-           Tin

Neutral

Neutral

Neutral

Neutral

Neutral

Bullish

Neutral

Neutral

Neutral

Neutral

Bullish

Bullish

Bullish

Bullish

Neutral

Bullish

Neutral

Neutral

Neutral

Bullish

Bullish

Bullish

Bullish

Bullish

Bullish

Bullish

Bullish

Bullish

Bullish

Bullish

Energy-           Crude Oil-           Natural Gas-           Uranium

Bullish

Neutral

Bullish

Very Bullish

Bullish

Neutral

Very Bullish

Bullish

Bullish

Precious Metals-           Gold-           Silver-           Platinum-           Palladium

Bullish

Bullish

Bullish

Bullish

Very Bullish

Very Bullish

Bullish

Bullish

Very Bullish

Very Bullish

Bullish

Bullish

Rare metals/ materials-           Graphene-           Lanthanum-           Neodymium

Bullish

Neutral

Neutral

Bullish

Bullish

Bullish

Bullish

Bullish

Bullish

Currencies-           British Pound-           US Dollar-           Euro-           Japanese Yen

Neutral

Neutral

Neutral

Very Bearish

Bearish

Bearish

Bearish

Very Bearish

Very Bearish

Very Bearish

Very Bearish

Very Bearish

KEY: Very Bullish, Bullish, Neutral, Bearish, Very Bearish

Notes: Broad equity markets should continue to benefit from ultra-loose monetary policy. In the medium-term stocks should also benefit from an inflow of funds – both from investors who are currently sitting in cash, and those we expect to flee the bond market.

Equities related to banks and other financial firms are likely to participate in the liquidity-fuelled run-up for a time, however they carry a great deal of risk and should generally be avoided.

The best performing sectors are likely to be precious metals, energy, raw materials and agricultural stocks. Japanese and Chinese stocks should also perform well.

Dividend paying stocks will continue to play a key role within the 247bull investment portfolio. That’s because we are being paid to wait for our investment thesis to play out. This is important since the precise timing of the collapse is difficult. Our best guess puts the crisis window around 2014 to 2016.

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