Airplanes spend about 70% of their flight time deviating from their planned flight path. That does not imply having a flight path is useless. The flight path serves as a guide, and the planes use that guidance to course correct.
Forecasting is somewhat similar. Reality is going to deviate anywhere between 70-99% from the forecast, but the forecast helps one to recognize the deviations and course correct. So, even though my forecasts for the year are almost certainly going to be wrong, it still pays to make the effort.
Short answer: to help guide investment decision making.
Where we stand today
- Stocks have been on a long bull run since the 2008 crisis. As a result, valuations have gotten ahead of reality. By any reasonable valuation measure, most stocks are overvalued. That does not mean they cannot become still more overvalued, but at these valuations, flat to negative returns seem to be baked in
- Bonds have also been on a tear as central banks globally have pushed interest rates to as low as they can go, and then some. If you want to buy a Nestle bond, you now have to pay the company for the privilege. Interest rates have gone negative in the Eurozone and Japan. US auctioned T-bills at 0% interest. Adjusting for inflation (which the pundits say we have none of), bond returns are negative for the most part
- Commodities have caused a lot of heartburn, with the Bloomberg Commodity Index now surpassing its 1999 lows. That 1999 low marked the start of the great 1999-2011 commodity bull run so that’s significant
- All major currencies, as well as all the basket case currencies, have depreciated against the dollar. There’s talk of a secular dollar bull market. Emerging economies and commodity producing nations are unloved partly due to China worries and partly due to currency devaluation concerns
- FANGs over GSOCs. Facebook, Amazon, Netflix and Google got a lot of love from investors even as Gold, Silver, Oil and Copper were treated as smelly excrements. The stuff the world actually consumes everyday – commodities – are regarded as terrible investments while the stuff that’s only recently gained market adoption – internet-dependent stocks – are selling at breathtakingly high earnings multiples. It’s a new era where valuation doesn’t matter… until it does
Where do we go from here?
My intuition is that we are at a turning point. Many shall be restored that are now fallen, and many shall fall that are now in honour. It’s always that way in the markets. That quote is actually attributed to Horace, so as you can see it’s pretty dated. So let’s get right to it. Here are my predictions for 2016:
- We will realize that gold bottomed in 2015. The overwhelming investment demand for physical gold will push prices at least 20-30% higher by the end of this year
- Silver, like a coiled spring, will piggyback on gold’s rise and deliver massive gains, erasing all the red ink over the past four years and then some
- Bonds have only one way to go: down. Many bond investors are going to get K.O.’ed. Especially the ones holding negative yielding bonds. It’s not a new era, this time is not different. Mistakes have to be paid for, and egregious mistakes will be paid for in permanent loss of capital
- A 900 PE stock going down 90% will still give it a PE of 90, which is extremely high. This is the year we will see tech stocks go down 50-90%, and the people who buy the dips are going to get scorched because they are not paying attention to valuation
- While oil demand might decline due to the onset of a global depression, the price of oil will soar due to a “supply shock”. Catalysts: geopolitical tensions in the Middle East, no new supply coming online due to lack of exploration spending, depletion of current well-fields and the decline curve starting to bite
- Greece hits the news again, for all the same reasons as it hit the news previously
- Border controls resume in the Schengen area as the European Union disintegrates politically
- “Index investing”, which has become popular due to the ETFization of markets, will have a comeuppance
- At least one country leaves the European Union
- I’m going to be wrong on at least 6 of the above 9 predictions
Investment implication: I’m going to be very happy I own my favourite gold and silver miners and wasn’t fooled into handing over my capital to the expert fund managers who have done so well in the last half-cycle. Value investing is going to pay off big time.