This will be
my second attempt at making annual predictions. Last year I was six for ten,
and I blame the Cubs for wrecking my average! You would think that after being
wrong almost half of the time, I would not try to do this again. What can I
say? I'm stubborn. I will not be officially predicting the Cubs this year, though
I do think they will be bad. Instead, I will be focusing on three major
categories: financial, the COVID-19 pandemic, and politics. I hope you enjoy
the predictions, and I would love to hear your thoughts even if you totally
disagree! So, here we go again:
1. The Return of Slope
I took a shot at this last
year…and missed, but I am going to re-up it this year. Here is an excerpt of my
prediction last year: "As the market begins to anticipate some inflation, we
will see some slope return to the yield curve. The 10-year U.S. Treasury closed
out the year at roughly 0.91% and the 2-year was at around 0.12% which gives us
a slope of 79 basis points…I like my chances. My prediction is a slope between
2s and 10s of at least 200 bps, which means the 10-year would have to go
higher."
It turned out that slope was
unchanged for the year. I really think it must increase with the now very
apparent inflation expectations. As of January 1st, the slope between 2's (0.80%)
and 10's (1.60%) was 80 basis points*. I will restate my prediction that slope
between these maturities will be at least 200 bps by the end of the year.
2. 10% Correction in the Stock Market
I think this
is probably long overdue. I was taught a long time ago that there are no
straight lines in nature. If you see a straight line, it means that it isn't
real. To wit, trees do not have perfectly straight lines. In fact, if you
happened to see a perfectly straight branch your mind would tell you something
is wrong. The stock market has gone in an almost perfectly straight line in the
upward direction since March of 2009. The only "crooked" piece of the move was
due to the start of the pandemic from February to March of 2020. We need more
crooked bits. I will consider this a correct guess if at any point in 2022 we
move from a peak to a trough of at least 10%.
3. Decentralized Autonomous Organization
This is a bit
of a play on the crypto world. These decentralized autonomous organizations
have become players in expensive one-off transactions this year. The most
notable example is that of the group that almost purchased one of only 13 original
copies of the U.S. constitution. According to TechCrunch:
Austin Cain and Graham Novak, two 25-year-old Atlanta
residents working in finance, first started a Discord chat to launch the
effort, which now has more than 8,000 members. Within a week of launching, the
DAO raised over $40 million worth of ETH on Juicebox, an early stage DAO
platform.
To see the
full article, click here**.
Think about
that: 8,000 people who do not know each other all donated money towards buying
something that none of them would ever see or have any real rights to. It was
just a bunch of strangers taking up a cause to do something they thought was
important. We have seen similar moves in some weird stock plays over the course
of the last 12 months.
My prediction
is this. A DAO will purchase something significant, something highly surprising,
with a market value of at least 50mm. It might be art, a small-to-medium-sized
public company, or a smaller-market sports team. My guess isn't quite specific,
so let's call any transaction of >50mm a success.
4. Inflation Will Continue to Rise and the Fed Will Raise Rates Accordingly
Some of you may think that this is too obvious. Prices have
been going up in almost everything for the last 12 months and my prediction is
that this trend will continue—and accelerate—over the next 12 months. The
supply chain and the cost of moving goods around the country is not getting better.
On the contrary, it is getting worse. I was on a flight from Denver to Chicago
this week, and a flight attendant I spoke to said that they are getting paid triple
the normal rate just to show up. The same is true for pilots, and I would
have to guess the associated ground crews and support staff are also getting
paid extra to show up during this spike in COVID-19 cases and traffic bottlenecks.
The airlines cannot afford to just eat these additional costs—it will be passed
on to consumers. This flows through to all industries. Worker shortages, demands for higher pay, higher
cost of goods, all these things add up to higher and higher prices. How will I
measure success or failure? I'll use CPI, which is a measure of prices paid by
consumers for a basket of consumer goods and services. It just hit a
multi-decade high of 6.8% (annualized). I think it will hit at least 10% by the
end of 2022. I hope I am wrong on this one!
5. Oil Will Touch, and Probably Exceed, $100/Barrel
I'm not sure this one needs a long-winded explanation. It ties into number four a little bit and will also be driven by some of my political predictions below. There are many things that can contribute to this guess. U.S. Politics has caused much of the rise to date, but it may turn out to be more geopolitical in 2022. Many different factors could result in my prediction coming true, so I feel like this is one where I need to put my money where my mouth is.
6. The COVID-19 Pandemic
We are in the middle of a surge in case counts right now due
to the Omicron variant. The country and many states are seeing record high
infection numbers. Thankfully, as of this writing, hospitalizations and deaths
have not skyrocketed in sync. In October, I wrote two pieces on the Spanish
flu that started in 1915 and "ended" in 1921. It was far more deadly than COVID-19,
mostly due to the lack of quality medical care and an understanding of viruses.
I did not know this until I did my research for the two articles, but there was
a lot of fear, mask mandates, school closings and the like. Please read my
entire piece at your leisure. You can find it here.
I found this cartoon from the New York times published
around the new year in 1921…almost exactly 100 years ago!
So, what is my exact prediction? That's a little tricky, but
here is how I will frame it: COVID-19 will become a more every day, albeit less
serious, threat than it is today, much more like the flu or a common cold. Less
than three states will have mask mandates and we will be able to fly on an
airplane without a mask.
7. Republicans Will Sweep
The House's composition is established by Article One of the
United States Constitution. The House is composed of representatives who sit in
congressional districts allocated to each state on a basis of population as
measured by the U.S. Census, with each district having one representative,
provided that each state is entitled to at least one. Since its inception in
1789, all representatives have been directly elected. The number of voting
representatives is fixed by law at 435. Currently, the breakdown is 221
Democrats and 212 Republicans leaving a handful of independents and a few
districts that are waiting for redistricting.
2022 will be a big year for elections in the House. Here is a map of
what is at stake. I am not going to take
a political position on this, but the Democrats, and I think most pundits, believe
that the House will almost certainly flip to a Republican majority. But will
the Senate flip? It will be close.
My prediction is this: In the House, the Republicans will have
at least 240 seats, and in the Senate, they will have at least 52.
8. China Will Seize Taiwan
The Chinese consider Taiwan to be part of China already. It's
kind of like an unruly child that has been stomping its foot, kicking, and
screaming for just over a century. Taiwan gained its independence from Japan on
January 1st of 1912, and China has been seeking to reclaim it ever
since. China lost Taiwan to Japan in 1895. China is famously known for its long-term
view of strategy, perhaps best evidenced by Premier Zhou Enlai's famous quote
in 1968, when asked what the implications of the 1789 French Revolution, "It's
too early to tell."
China wants Taiwan and believes it should be part of China.
They have built islands and bases all over the South China Sea. I believe the
current Premier, Xi Jinping, does not believe the United States—or anyone else—will
do anything if he takes possession. I do not believe it will be a shooting war,
but I do believe they will use something like Germany did in World War II and
claim that Chinese residents of Taiwan are being mistreated and are calling for
Chinese help. When it comes down to the exact mechanics of how it will happen,
I am not familiar enough with the politics, but I do believe China—or a direct
puppet of Xi Jinping—will be in charge in Taipei the end of the year.
9. Turkey's President Will Fall
Recep Erdogan has been the President of Turkey since 2014
and was re-elected in 2019. According to the Republic's terms of office, a
person may only be elected to two terms. However, Mr. Erdogan does not like to
follow the rules. He has driven the Turkish Lira into the ground as he has
tried to remove the "Dollarization" of Turkey's currency. Prior to a recent
move by the Turkish government, the Lira had lost nearly half of its value.
This is, of course, causing massive inflation. There are shortages of many
common goods. S&P and Fitch have both lowered their credit ratings to
negative. Erdogan's hold on power is now tentative at best; people hate massive
inflation and food shortages. This is a bit of a long shot for me, but I do
think his Presidency will end in calendar year 2022.
10. Russia Will Invade Ukraine
This builds a little on number eight; Putin sees the U.S.
political situation as a weakness. The build-up along the border of Ukraine is
not an exercise. I believe that he thinks that the U.S. is unwilling to send in
troops either alone or with NATO to fight a war in a country most people could
not locate on a map. President Biden is making financial threats and I think
Putin just doesn't care. This is his opportunity. He will invade and conquer a
significant portion of Ukraine, and no one will do anything serious about it. I
think that is the political reality at the moment.
So, there you have it.
I hope I can beat last year's performance—or maybe I hope not, on some
of these. I also hope you enjoyed this
piece. Either way, I would love to hear your thoughts.
Final, final thought:
Homemade lasagna with homemade noodles is hard to beat.
*A basis point is one hundredth of a percent or equivalently one percent of one percent or one ten thousandth.
**Link provided for information purposes only and does not reflect views/opinions of PTCP. Clicking the link will take you away from the Performance Trust website and to a third party site.
Fill out the form below to subscribe to my weekly blog.
The information, analysis, guidance and
opinions expressed herein are for general and educational purposes only and are
not intended to constitute legal, tax, securities or investment advice or a
recommended course of action in any given situation. Information obtained from
third party resources are believed to be reliable but not guaranteed. All
opinions and views constitute our judgments as of the date of writing and are
subject to change at any time without notice. Past performance does not
guarantee future results.
