Update to Global Geopolitical Macro Outlook: great time for our followers (out of stocks: in cash & gold)

By Christian Takushi MA UZH, 10 Feb 2016, Switzerland.

Kindly find attached the latest Update to our GLOBAL GEOPOLITICAL MACRO OUTLOOK. I’m glad our loyal readers and clients entered 2016 with no equities and heavy positions in Cash & Gold. There are readers thanking us, but we humbly pass any praise to God, who has guided us in our thorough research. Out of experience, we are staying very alert and monitor the 24 global geopolitical macro trends & new developments, ready to change our outlook if necessary.

Reason for the Update 

I’m doing this update after analyzing the recent geopolitical-political moves by the USA, Russia, China, Japan and Iran, the US primaries in New Hampshire last night and the Congressional Hearing of the FED chairwoman this evening.

I’m very glad we have also been avoiding bonds and other products issued by Banks, and that we have waited with buying Emerging Markets stocks. Many investors have suffered heavy losses in their portfolios since the beginning of the year. From their peaks major bank stocks are down 20% to 60%. There are also heavy losses among high yield bonds and high yield structured products. I’ve reviewed our Outlook also to address the risk that we might get over-confident in our Global Outlook and miss new developments.

1) Update to our GLOBAL GEOPOLITICAL MACRO OUTLOOK

Our Global Geopolitical Macro Outlook remains consistent with a cautious Investment Strategy. We have been continually expecting a lower Global Economic Growth than the IMF in 2015 and this holds for 2016. We have warned of the growing risk of a recession, but currently our main scenario does not imply such a recession. The risk is on the downside though.  

Since Q3 2015 we are expecting the Dow Jones to hit a Low of 14’000 during 2016-2017; we are also expecting Gold to hit a High of USD 1’550 during 2016-2017. It is possible though, that these limits will be overrun or exceeded, depending on policy and market response. As we have predicted and forewarned on Twitter (@ChrisTakushi), Gold is staging a noticeable rally; specially when the performance of Gold is measured against stocks. See table below for macro forecasts. We have also been forewarning that investors heavily underestimate the risks emanating from the Americans in 2016. The USA, Venezuela and Brazil are poised to be great sources of uncertainty and risk during this year.

Due to the growing Risk that the US political process may surprise investors and the reversal of the USD bull market, we expect the EURO to rise versus the USD. This is highly dependent on policy responses and counter-responses though. We have therefor only suggested to shift gradually from USD into EUR. Europe has more risks than the USA, but Europe’s risks are mostly known to investors. The USD rose 40% over three years on expectations of FED normalization and 3 to 4 rate hikes – those expectations have been shattered. As we have been warning, the FED failed to normalize in 2012-2014 and it began normalization right into the period 2015-2018 when Global Geopolitical Trends are converging – thus, just when the FED has the least control over global risk factors.

Our steady avoidance of Bonds and other products issued by banks is also proving correct. Our latest Outlook suggests we should continue overweighting Cash and underweighting Risk Assets. This means for example: holding high grade bonds versus high yield bonds. But I warn of too passive a stance or leaning back. We have avoided the big traps the past one year, but we need to stay alert. I reiterate: prioritizing Capital Gain and taking too many risks could be “lethal” during 2015-2018, but even aiming for Capital Protection may prove tricky as big global risk factors number over 30. The global situation is so fluid, we need to continually monitor all relevant factors to avoid unnecessary risks and to quickly assess any new shock in less than 12 or 24 hours at the max. That will allow us to respond much faster to any shock than most investors. The Good News: The period 2015-2018 offers good opportunities for proactive & risk-conscious Tactical Adjustments.

One factor supporting Global Economic Growth is the massive Arms Race raging all over the world. Even Europe has joined it after two decades of dismantling its military forces. Berlin alone will invest USD 140 Bn in coming years to rebuild the “Wehrmacht”. Governments will also invest heavily in Energy and Security. The role of governments as a whole is growing and the Free Market Economy continues to fade away. As you may know, long term we see a Global Currency Reform, massive wealth transfers, powerful supranational institutions and super-governments.

2) Update of our Global Geopolitical Macro Outlook after primary elections in New Hampshire and Mrs. Yellen’s testimony at the US Congress

The results of the first US election primaries last night were in line with our predictions as discussed with you recently. As we have been warning since Q4 2015, there are growing signs that approximately half of all potential US voters are supporting a significant or radical overhaul of the US economy. And their number is growing. This is not the typical temporary protest vote, markets can smile at. This could be a systemic shock. One that would have a big impact on discounted Corporate Earnings and Cash Flows. This would hit financial markets hard. The impact will not be limited to stock markets, it will also sweep over corporate bonds; it would hit global trade and key aspects of globalization (i.e. taxation and the ability of multinationals to outsource production and services to low-cost nations). We will have high uncertainty until Super Tuesday on March 1st, when 15 states vote.

The growing likelihood of a US political shock in 2016 towards “socialization” of education, health care and banking, or of a reversal of US production shifted to China, Asia and Mexico and outsourced services to India, would have tremendous consequences across the World Economy. It would quickly sweep over Europe and the World Economy. Even if we know that some of the Free Trade and Globalization we had in the last decade was unhealthy, the reversal or either of them will have knock-on effects.

I reiterate my advice to you to keep a cautious stance for both Investment Strategy and Corporate Strategy.

3) The most challenging questions/comments by Congress to Mrs Yellen – with systemic relevance: 

1. Leading & respected economists are opposed to your economic assessments and monetary policies
2. Do you have the authority to introduce Negative Interest Rates?
3. Too big to fail should be too big to exist, or not?
4. You said, if we have a major shock, you’ll cut interest rates, how can you do that?  Mrs. Yellen struggled somehow and said expectations would lower long term rates

I’m commenting on this testimony, because the Congress took an unusually tough stance on the FED chair. The tough questions on these issues may now influence the way the FED will go about those issues. The FED seems to have failed to provide documents to the Congress that were requested repeatedly last year. Mrs. Yellen didn’t seem to know what to say about it, and depending on the way the US elections evolve, this may resurface.

4) Key current sources of risk for the world economy and financial markets

1. Emerging Markets distress
2. Distress in the energy complex – led by Oil and resources. Big confusion over causality or correlation between affected factors.
3. Distress in the High Yield bond markets
4. Fear of a further destabilization in the Middle East & North Africa (MENA)
5. Waning liquidity across financial markets: a by-product of extraordinary & overextended Monetary Policies
6. Growing stress in major banks: e.g. Deutsche Bank down 40% YTD, Co-Co’s originally designed to absorb risk, are now a source of risk

5) What investors and even political analysts are still underestimating 

• The growing convergence of global geopolitical and macroeconomic trends during 2015-2018: e.g. few investors realize the connection between geo-strategic moves by the Obama administration and the low Oil price. The current overlap of risk factors is greatly diminishing the Nuclear Security over Europe. The unrelenting expansion of NATO & EU eastwards to encircle Russia is now tragically overlapping with multiple global crises (see our reports from 2011 to-date).
• Because of the above and the unprecedented Global Arms Race, we continue to warn of the growing likelihood of powerful price spikes in Oil, Food, Volatility, Gold, but also Inflation and Interest Rates. Sustained extreme downward pressure on them adds to spike amplitude. 

• 

  The USA becomes a major source of risk and uncertainty in 2016: major shocks to the system possible from the US election process. We are warning since Q3 2015 that anti-establishment outsiders are having a support not seen since the days of Reagan and Eisenhower.  The potential for sweeping changes to the US and World Economy as we know it is substantial and not priced in by markets yet

• Overextended QE and ultra-low Interest Rates within a context of fast-deteriorating Demographics and growing geopolitical tensions are exacerbating Deflation in the Real Economy and Inflation among Financial Assets. This policy combination is also incentivizing debt-driven M&A and artificial EPS growth, at the expense of Investments in Organic Growth & the Real Economy. Thus, Monetary Policies are adding to the vulnerability of the political system in this transition period. We disagree with those economists saying extended QE and negative rates will straightforwardly bring hyper-inflation. Based on the overlap of Macroeconomic, Price and Monetary Theories I believe the current policies within our given context are rather increasing the likelihood of both powerful fat tail Inflation- and Deflation- events. This is consistent with an unstable political-economic system – one that can easily be tipped out of balance. A major external shock or a cascading of events, thus, could easily create systemic risk. The intermediate End Game is a Global Currency Reform; reason why I believe central banks are “quietly” acquiring gold in large quantities. For National Security reasons (systemic risk), they can not disclose it.

6) Caution against “too bearish” or apocalyptic an outlook near market bottoms

Having said the above, I would also like to reiterate my strategic analysis conclusion from (since) late Spring 2015: The highly vulnerable transition period of 2015-2018 calls for Capital Protection and Loss Minimization. Those holding on to traditional investment processes limited to financial-economic research will continue prioritizing Capital Gain and possibly suffer substantial losses. The transition period of 2015-2018 will be rather ideal for a cautious & proactive “Tactical Approach including Trading” than the “Buy & Hold strategy” of 2009-2015. Thus, a cautious stance could involve: holding maximum cash, buying into weakness, and taking profits into any recoveries. If one can avoid too greedy a stance and take profits already at modest (just as example) 5-10% price recoveries, this proactive Tactical Approach can add to Total Portfolio Returns. Trading skills in itself may not suffice though, a clear Big Picture is crucial for its success. This should be done of course only within the appropriate institutional framework and the Investment Process – i.e. deviations from benchmark tolerated. Investors could use market excesses for Tactical Adjustments to enhance performance – that depends on skills and risk-budgets of course.

When should we really get concerned about a serious (existential) shock to the system? If more Geopolitical Trends join the Global Convergence or/and when the Middle East goes to large-scale war. Obama’s US-Iran Deal has set the Middle East on course for such a war. The war in Syria is only a pre-stage. But to call for this now is probably premature. Nevertheless. once Saudi Arabia installs the newly purchased missiles with nuclear warheads and Iran purchases nuclear war-heads for her recently upgraded missiles with a reach of over 4’000 KM (enough to reach London, Berlin and Paris), then we could see the most serious Global Crisis since WW2. Both parties are not far away from achieving this.

7) Three risks to look out for

1. As 12 of the 24 most important Global Geopolitical Macro Trends converge (overlap), the Risk of a global recession is increasing
2. Risk of military conflicts and aggressive geopolitical moves (e.g. Turkey, Iran, North Korea etc) is growing given the lack of US leadership in 2016
3. Risk of Negative Interest Rates in the USA is growing

8) Some Investment suggestions: for qualified and seasoned investors only
– all other readers are strongly urged to seek professional aid

We recommend our readers to keep the zero weight in stocks and maximum weights in Cash & Gold. But to remain ready to start buying risk assets into extreme sell-off’s; this if they have the necessary risk-budgets. After shifting from a strong USD to EURO in recent months, we also suggest to stick to the EURO overweight. We keep our stance to avoid any bonds issued by banks, bank-related structured products and high yield bonds. Even if bank-related securities are suffering heavy losses, we urge you to resist the temptation unless you have enough risk-budget. Having said that, the highly vulnerable period 2015-2018 should pose great opportunities for proactive risk-conscious tactical trading. Of course, this will work best for those clients that went into 2016 with no equities and a combined position in cash & gold higher of around 50%. It is no time to get over-confident though, investors that began 2016 with more than 20% in gold, should consider taking profits step by step.

The same holds to some extent for institutional investors that follow our geopolitical research and took measures to underweight risk assets in favor of overweighting cash, gold and high grade bonds. Highly benchmarked and complex portfolios with derivative & structured products may suffer heavy losses during 2016-2017.

Christian Takushi MA UZH, Macro Economist & Strategist, 10 Feb 2016, Switzerland.

(link to Cash newspaper, article to which we contributed – how US elections are beginning to cast their shadows)

http://www.cash.ch/news/front/wie_der_neue_praesident_die_boersen_bewegt-3417750-449

General Disclaimer: Global Macro and Geopolitical Analysis are highly complex and subject to sudden changes. No analytical method is without certain disadvantages. We may change our 3-pronged outlook within less than 3-6 hours following an event or data release. Global macro analysis can be extremely time-sensitive and the first 24 hours after an event are critical for the response of a corporation or pension. Only qualified investors should make use of macro reports and any investment conclusions, and treat them as an additional independent perspective. Every investor should weigh different perspectives as well as “opportunities & risks” before making any investment decision. What is published on our website was written normally a few days earlier. If you are not a qualified or professional investor, you should get professional advice before taking any investment decisions.