Roaring ’20s redux?

The “Santa Claus rally”, a recurring trend where stocks tend to go up as the end of the year draws near, appears to be arriving on schedule, with Boris Johnson loading the sleigh.

I freely admit it: what happened on Thursday took me by surprise. While I expected the Conservatives to win with a majority, I wasn’t expecting anything like that landslide. I thought they’d win with only a slim majority courtesy of “da yoof” coming out in force to support the opposition – but that force clearly didn’t express itself the way I thought it would. With the destruction of Scottish Labour and the Scottish Lib Dems, the SNP now reigns supreme in Scotland – I see a second Scottish independence referendum on the cards…

In the nearer term, I thought there would be a spike in the VIX index before the end of the year – a sudden perception of short-term risk in the US stockmarket. It hasn’t arrived yet, and my bet was certainly driven backwards by the election of BoJo, but I can still see one last hurrah for volatility before we enter 2020. This is a short-term, tactical bet however – I think the VIX will be eviscerated over the year to come.

I spoke to Akhil Patel over at Cycles, Trends and Forecasts last week over a few beers to discuss what 2020 holds. Interestingly, in his model of the grand economic cycle, next year is the year when a “mid-cycle slowdown” occurs. This reduction in economic output should lead to a bear market for stocks.

But he, like myself, sees so much government intervention in the form of interest rate cuts, money printing, tax cuts, and government spending, that he’s cautious as to whether the economic slowdown will actually be allowed to affect stock prices.

And even more interesting, while next year is a slowdown year, by his reckoning in 2021 the economy should begin accelerating again. So imagine if you will, that next year we get a strong movement higher in stocks and bonds (or a melt-up as I predict) without economic fundamentals backing it… and then before it runs out of steam and a bear market arrives to keep it in check, economic activity begins picking up, producing a narrative that gets investors driving stocks even higher! It would be a historic melt-up of epic proportions… with a similarly historic downside once the bear finally arrives. While this certainly isn’t Akhil’s “base-case” scenario, he was open to the possibility when I suggested it.

In Akhil’s “grand-cycle” analysis, in which land prices drive a roughly 18-year repeating boom and bust economic cycle, 1926 was when the cycle-ending bust was supposed to arrive, driven by a contraction in the underlying economy. But such was the speculative fervour in the US, that the great bull market delayed that contraction for another three years, until the famous 1929 crash. Could we see a similar delay of the inevitable in the next few years, with a similar brutal ending? It would be fitting, now we’re entering the ’20s with a roar.

For the moment, I remain cynically bullish, as I explained to Nickolai Hubble in our upcoming 20/20 Visions interview series, which are coming up next week.

On the topic of long-term predictions for the 2020s, Charlie Morris over at The Fleet Street Letter Wealth Builder has made a bold prediction for gold’s performance over the coming decade. To Charlie’s eyes, the main driver of gold is simple: if the interest rate you can earn on your money minus inflation – the “real interest rate” – is going down, gold will be going up. If the real interest rate is going up, gold will be going down.

Luckily for gold investors, Charlie sees real interest rates going a lot lower over the decade to come. Using his gold model, he’s made some very specific predictions for the gold price by 2030 – down to the dollar.

I’ll share a snippet below:

Bullish scenario for 2030

As we approach 2020, 2030 predictions become irresistible.

Imagine US real rates move to -2%. Is that impossible? As a European I would have to say no. UK real rates are currently -2.3%, Sweden -1.7% and -1.3% in Germany. All you’d need is a few more rate cuts to keep the ten-year yield at or close to 2%, while inflation quietly rises towards 4%.

Under that scenario, gold’s fair value would rise to $3,378. We can assume that the gold bull market will attract the crowds, and [the premium above fair value] would rise back to 50%. That boosts the price of gold to $5,067. And don’t forget to add actual inflation of, say, 4% per year and I give you a gold price target of $7,601 by 2030. Don’t forget the $1.

Incidentally that would value the world’s above ground gold supply at approximately $50 trillion. The world’s stockmarkets are currently valued at $82 trillion. We know that’s pricey, especially in the $34 trillion US market. A burst of inflation would see the value of equities fall. Gold could be worth nearly as much as the stockmarket by 2030; a repeat of what happened in 1980.

But that would be my most bullish forecast and gold may have to settle for less. My lower end forecast would see real rates stay at 0%, with 2% inflation. With no premium, that would put gold at $1,835 in 2030. I imagine the answer will turn out to be somewhere between the two…

$7,601 per troy ounce, huh? If we end up there by 2030,  are in for a truly golden decade…

All the best,

Boaz Shoshan
Editor, Capital & Conflict 

Category: Market updates

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