Let us for a moment pretend that we have a crystal ball. I have made a list of ten predictions which I seriously consider for this new year. Some predictions are somewhat more daring than others, but every one of the scenarios have, according to my judgment, decent odds to actually become reality in 2018. I cannot give guarantees, of course, but I can only assure you that I put my money where my mouth is. In other words, I follow Nassim Taleb’s principle of “skin in the game.”
The dollar rally was off to a good start last year. Yet it was not for long before the euro began to strengthen against the dollar. The EUR/USD is currently at 1.23, but that will not be for long the way I see it. Given the interest rate differential, a worsening economic cycle (observe the yield curve) and the protectionist plans om American president Donald Trump, 2018 seems to become the year of the dollar. Euro investors would be advised to withdraw their euro balances and convert them into gold and/or dollars.
The gold price in dollar terms might surprise on the downside for 2018, despite the recent increase to over $1,300 per troy ounce. On the contrary, the gold price in euros will most likely rise slightly or at least not decline. Whatever the case, rising interest rates do not mean good news for gold. There does seem to be a trend reversal in the cards this year, especially given the recent developments regarding the yield curve in the back of our minds.
In contrast to what many other analysts forecast, I predict that silver prices will perform worse against the gold price. The gold/silver ratio is currently close to 80/1 (that is, an ounce of gold is currently selling at 80 times an ounce of silver). Lower economic growth and a lower demand for electronics (computers, smartphones, et cetera) will weigh on the price of silver. Gold is less volatile and precious metals prices seem to be stuck in a bear market for now.
Donald Trump has focused most of its efforts on his tax reform last year, but he did not forget about his trade war with China, Canada and Mexico. The first thing that Trump will try to do this year is, therefore, to pull out of the NAFTA free trade agreement. Moreover, Trump might even decide to impose other import tariffs and restrictions. His trade policies will lead to a hostile response of countries such as China, which now appear to refuse to help the United States with its conflict with North Korea. In the meanwhile, tensions are building in South-Korea, where the stock market is getting hammered and the demand for cryptocurrencies is also declining. Even a trade will be, at first, favorable for the value of the US dollar. The Mexican peso and Canadian dollar will drop further; the Canadian housing market is bound to collapse.
After a series of excellent years with high returns, the bottom will finally fall out under the US stock market. As I have remarked earlier, the stock market has been extremely overvalued for various years. That means that the odds of negative returns or a crash are high. The European stock market seems, on the other hand, less overvalued, and some foreign stock markets even seem relatively cheap.
The Fed is likely to begin the year prematurely with its rate hike trajectory, but will reconsider its stance in the second half of the year. The reason is simple: the yield curve will flatten further. And even though Yellen and the Fed for now pretend not to worry about the yield curve, I am pretty sure there are great concerns. With an excuse amounting to something like “inflation is too low,” the Fed might delay further rate hikes in the second half of the year.
Cryptocurrencies suffered a bad start of the year. The first fifteen days were not very favorable to the world’s most important cryptocurrencies. Yet, generally, a rally on financial markets will not end like this, with a movement straight to a high followed by straight free fall. Usually, prices consolidate, only to rise again. This could lead to investors thinking that the investment is rock solid and that corrections are just “temporary” setbacks, opportunities to catch its breath and good moments to buy even more. Only after this phase of unshakable euphoria, bubbles are inclined to pop.
There is even a greater storm brewing in Chinese and Canadian real estate markets. And what if it precisely happens to be the case that some Chinese and Canadian banks are heavily invested in their respective real estate markets? Trump’s trade war might even turn real estate declines into a negative spiral. Possible government rescue measures will be discussed.
Companies such as Spotify and Uber seem to go public and get listed on US stock markets, and why not? Stock market valuations are sky-high and the sky is the limit. But just as in 2001, the stock market seems to be priced for perfection. What is the sign of a reversal? Perhaps a relatively large initial public offering (IPO) that completely flops. Spotify already announced to go public, even though their IPO will be rather unusual. Spotify will do a direct listing, which involves no issuance of new shares. Spotify will not raise any capital and no investment banks are involved. A direct listing merely allows the current owners of Spotify to sell their positions to third parties. Dropbox is another candidate for an IPO this year, just like Lyft (Uber’s main competitor), perhaps Uber itself, Pininterest, Aston Martin and Airbnb, among others.
As we reached year-end, oil prices climbed to $70 dollars per barrel. The underlying reasons were mostly the geopolitical unrest in oil-producing countries in the Middle-East, as well as an extension of the production cuts which the OPEC cartel and Russia agreed upon earlier last year. Whatever the case, this price rally seems to have reached a premature end: worldwide economic growth will most likely disappoint this year and the US shale oil production is likely to be raised.