Sometimes a year goes by and nothing particularly significant happens. But when we look back in the future, I don’t think we’ll be saying that about this year.
Things are changing. Central banks are losing the spotlight. Politicians and political movements that represent genuine breaks with the status quo are gaining the upper hand.
Next year, we’ll start to see whether that’s good or bad news.
I’m not going to make any big predictions for you today – I’ve already done that earlier this month in MoneyWeek magazine.
Instead I just want to highlight two big things to watch for next year, and one big lesson to learn from this one…
Keep an eye on the bond market
Markets have been pretty buoyant amid all the changes this year. But there’s no point on going into next year with blind optimism that this will continue.
If there’s one thing that worries me more than anything else, it’s the turn in the bond market. People have grown used to bonds and interest rates heading in one direction only for the past 30-odd years. Thirty years is practically a working lifetime for many people. So when a 30-year trend changes, unexpected things will happen.
I also firmly believe that in recent years, bonds have moved into bubble territory. Central banks have blithely dismissed this as being due to a glut of global savings, all the while glossing over the fact that they’ve been printing money hand over fist and pumping it into bonds.
That is stopping now too. There are bond traders in the City and on Wall Street with more than five years’ experience who have yet to experience a bond market free of quantitative easing.
When bubbles burst, they don’t do it painlessly. Investors are glossing over falling bond prices by arguing that as long as economic growth rises alongside interest rates, everything will be fine.
We’ll see. But it strikes me that even the best case scenario involves a lot of people suffering some big losses. That’s rarely a recipe for market harmony.
Trump could be good for the US – but maybe not for the stockmarket
I don’t think I like Donald Trump, but I’m going to give him the benefit of the doubt in terms of whether he’ll be good for the US and the world or not (I can hear him sighing with relief already).
Here’s one big positive to my mind: he didn’t have to spend much money to get elected. That’s interesting.
It’s become a cliché to suggest that you can’t get elected in America without sucking up to a ludicrous range of lobby groups. And it’s certainly hard to understand how certain aspects of the US system (the hugely expensive healthcare system, for example) could continue to exist without certain players being given regulatory favours in exchange for political funds.
So Trump may be in a better position than any other politician in living memory to take on the anti-competitive, toxic vested interests lurking in the system. I don’t know how realistic that is – I don’t know enough about the plumbing of the US government to get a good grip on how much difference a president can actually make. But he’s certainly been picking some interesting fights – playing off Boeing and Lockheed against one another, for example.
Maybe it’ll all come to nothing. But if he does make a difference on this front, it could really shake things up. When you kick out entrenched interests, you provide opportunities for those who’ve been kept out of the system. If you want to unlock those famous “animal spirits”, that’s one way to do it.
However, this is also one reason why I question whether the US stockmarket can keep going up. As John Authers points out in a good piece for the Financial Times today, this sort of change can be great for a country’s long-term outlook. But it can be a nightmare in the short term for the stock market.
With knowing irony, Authers draws a lesson from Mexico’s stockmarket. The value of Mexico’s biggest company – the telecoms group América Móvil – has fallen by more than half since reformist president Enrique Peña Nieto was elected in 2012. That’s because Nieto drove through competition reforms that reduced Móvil’s tight grip on the market.
Just to be clear, this is a good thing. It was great news for Mexicans. But the change process proved messy for investors. And if we see anything similar in the US, there are many companies and sectors that might find that the assumptions underpinning their business plans and earnings expectations are turned upside down.
The biggest lesson of 2016 – be a sceptical investor
Finally, a last little thought for the year. If ever a year proved the need for a contrarian mindset, it’s this one.
Most people (including me and lots of others who voted “leave”) didn’t expect Brexit to happen. It happened. People didn’t expect Trump to win. He won.
Moreover, many expert analysts expected the vote for Brexit to cause a recession before the end of the year. It didn’t. And most expected a Trump victory to cause a stockmarket crash. Instead, the Dow Jones is likely to finish 2016 at around its highest level ever.
What’s the lesson? In the economics sphere at least, there’s nothing wrong with distrusting “experts”. Evidence shows that they get it wrong at least as often as you or I do.
More to the point, “experts” often have a political or institutional or academic bias to push. So they can’t look at the actual evidence on the ground as dispassionately as an individual might. That makes it even harder for them to get things right. (And it doesn’t half make them defensive when they get things wrong).
We’ve all got our own biases. But just try to get into the habit, when you’re looking at markets, or politics, or anything else, of asking yourself: “What if?” It could end up being very profitable one day.
Have a great Christmas, and a wonderful New Year, whatever you’re up to, and we’ll be back bright and early on Tuesday 3 January.
Until 2017