The editorial team here at Southbank Investment Research wishes you a happy new year.
But will it be?
I don’t even know if my last one was or not.
When it comes to being happy, the events in your personal life probably dominated anything you read about here in Capital & Conflict in 2017. And that’s something to be grateful for.
It’s also my prediction for 2018. Spending time with family and friends will make you happier than reading about whatever happens this year.
However, sometimes these two things are connected. Not just because financial markets, economics and politics can be immensely entertaining. President Donald Trump will be working hard to ensure that in 2018.
Your wealth is a crucially important part of your life and relationships. It determines your ability to take care of yourself and loved ones – probably your primary motivation in life. It’s a sort of prerequisite. Come up short and nobody is going to be terribly happy about it.
That’s why our mission is to help you protect and make money in 2018. Not because of the money itself. But because of what it buys you. Whether that’s peace of mind, golf clubs or your grandchildren’s Christmas presents is entirely up to you.
With that in mind, what does the world in 2018 have in store for you?
Predictions and probability
Below I’ll launch into a series of predictions for 2018. But first, take a moment to think about the nature of predicting something.
Predicting the 2008 global financial crisis in great detail back in 2002 did not win Ron Paul much popularity. You probably haven’t even heard of the American politician. His speech to Congress about the housing bubble, failure of Fannie Mae and Freddie Mac and much more was simply ignored at the time.
The episode shows how thinking about predictions in the wrong way is fraught with danger. A prediction is not a simple binary matter. It’s not just something that is right or wrong in time.
There are many types of predictions. You need to think differently about them and recognise what sort of prediction they are if you want to make the most of them.
A warning about something unlikely but worth worrying about is still useful, even if it doesn’t come to pass. Especially if all you need to do to prepare is easy.
Explaining that something is significantly more or less likely than people assume is what gives you an edge in financial markets over time. It’s this dissonance that allows you to make money. But “more likely than people realise” can still mean “unlikely”.
Even when something you expected does happen, usually there are many variables affecting the consequences. You might be right about your prediction, but wrong about the final outcome.
With all that in mind, what are my predictions for 2018?
What to keep your eye on in 2018
Expect war in Korea
The incentives faced by Kim Jong-un and Trump lead them along a path to military conflict. Only China and Russia stand in the way.
The reasons are simple. North Korea is a hostage taker that grows stronger over time – the number of cities it can attack increases with every missile and bomb test. Faced with a future where North Korea that can make demands backed by threats, the US will feel the need to attack sooner rather than later.
Kim’s legitimacy and safety rely on growing his threat. Saddam and Ghaddafi cooperated with the UN and paid for it. Iran and Assad continued their belligerence and remain standing. What path do you think Kim will choose?
Trump’s own belligerence towards Russia and China provide him with the bargaining chips he needs to pay for their cooperation.
As depressing as it may be, the South Korean stockmarket will be an extraordinary buying opportunity in the wake of a war.
Russia becomes politically correct
Tied to North Korea’s standoff is Russia’s political position in the world. Only the political establishment in Europe and the US benefit from bad relations with Russia. And both are losing support and legitimacy.
I expect a sudden improvement in relations with Russia driven by the Korean situation, Brexit, political change inside the EU and the false collusion drama connecting Russia and Trump.
Russia’s resurgence is an excellent investable trend.
Brexit antagonism becomes pragmatism
The antagonistic Brexit rhetoric will continue to slowly fall apart in 2018. The political benefits of the EU’s posturing you’ve seen so far will disappear very quickly. Again, these displays are only in the interest of the political establishment in Europe, not in voters’ interests.
Enterprising and ambitious European politicians will present good relations with Britain as important for EU harmony, reversing public perception. If they don’t change their tune, populist politicians from the left or right will steal that narrative and become even more popular. Voters care about their jobs, not punishing Britain.
In the end, trade is a good or a bad thing, regardless of whether you’re in the EU or out of it. In a game of win-win or lose-lose, politicians will eventually get it right.
Central bankers won’t fall off the tightrope
Central bankers finally learned to tightrope walk in 2017. They won’t fall off in 2018 as they manage the balance between the deflation risks (stockmarket crashes, recessions and unemployment) and the risk of inflation.
The taper tantrum and European sovereign debt crisis were the only wobbles since central bankers took on the job of keeping the world safe for kleptocracy. Any sign of trouble and their ability to paper over problems with billions is extraordinarily high.
We now know that with certainty, unlike in 2008, when their ability to save the world wasn’t confirmed yet.
With central bankers in control, trouble can’t break out in the first place. There will be no Lehman Brothers. If you agree with this, malaise is the worst possible outcome. Even Brexit critics aren’t expecting a recession.
I’m not entirely convinced central bankers can create a utopia indefinitely, but it’s the most plausible outlook for 2018. Enjoy it while it lasts.
Governments are slowly getting their act together on cryptocurrencies. The EU and Russia are on the move in particular. And signs are not encouraging.
But cryptocurrencies needn’t be inherently anti-government. Investing in the cryptocurrencies that comply with coming government rules and regulations will be the most successful investment of 2018. That’s because it’s also the year that cryptocurrencies become genuinely useful, even while governments crack down on them.
Travellers will use cryptocurrencies, desperate people in failed states will continue to use them, the online economy will adopt them and I might even give them a try.
As for the cryptocurrencies which governments won’t look favourably on, it isn’t worth the risk of owning them. In Australia, the major banks have been blocking their customers’ cryptocurrency related transactions because they’re not sure how to comply with the law. That hurts with bitcoin down dozens of per cent from highs.And if you are interested in capturing some of the searing growth of cryptos, my old friend from Australia Sam Volkering is the man to show you the ropes. Sam is preparing something very special: on 4 January he is going to show investors how to raid the rip-roaring initial coin offering (ICO) market. His aim? To lock on to gains of 1,000% or more within weeks. Perhaps even days. Everything will be revealed in an urgent broadcast at 2pm on 4 January. You need to register to view it. You can do so here. (You’ll get access to a load of valuable crypto research from Sam to prepare you for the broadcast.)
Energy and mining stocks will boom
Small-cap miners used to offer the incredible gains that cryptocurrency traders chase now. Actually, they still do!
But the energy and mining markets were silent in 2017. Oil and gas rarely made the news, despite remarkable events in both markets.
Well, valuations and commodity prices may have bottomed out. It’s time to buy. And it’s no coincidence that an energy market expert in James Allen joined Southbank Investment Research to help you do it.
Gold will repeat the run from 2000-2010
Did you know that gold and silver dramatically outperformed the stockmarket in the decade to 2010? Yep, a lump of metal made you more wealthy than owning a share in the world’s largest companies.
The narrative here is interesting because the outperformance came before the crash, not just during it. Gold isn’t just a crisis hedge.
As gold and silver are priced in US dollars, the appropriate comparison is to US stocks. Gold and silver, in their respective colours, made the Dow Jones and S&P 500 in blue and red look rubbish.
But since 2010, the trend reversed. Stocks outperformed gold and silver dramatically. That’s because these were the years that monetary policy didn’t make it into the real economy. It just reflated imploding financial markets.
Now that inflation is back, unemployment is low and central banks are operating far from tight monetary policy, the conditions which helped gold and silver in the 2000s are going to help gold along again.
Artificial stability wins
If you’re waiting for something to snap in 2018, you’ll be waiting a long time. Apart from war in Korea, all the problematic developments I can see coming are long-term trends, not events. They’re changes, not shocks.
And so investing in the optimistic trends is the way to go this year. Gold, Russia, energy and commodities, the right cryptocurrencies and much more will feature in 2018.
Until next time,
Capital & Conflict
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