The Fed cut rates back to zero, Facebook becomes the biggest company in the world and Donald Trump causes the next Great Depression. Read on to see my 10 Outrageous Predictions For 2016 and let me know what yours are…
10 Outrageous And Contrarian Predictions For 2016
Recently, Saxo Bank released their annual ‘Outrageous Predictions‘ report. This is where Saxo analysts come up with some outrageous financial predictions for the year ahead.
The report is always a good read although I thought some of the predictions could have been a little more wild. Therefore, I’ve decided to come up with my own list of outrageous and contrarian predictions for 2016.
1. The Federal Reserve takes rates back to zero
One analyst has the bank down as raising rates no less than eight times in 2016, while Fed policymakers Jeffrey Lacker and Charles Evans foresee four and two hikes each respectively.
However, a more accurate gauge comes from the markets themselves and the Federal Funds futures rate is currently predicting a rise of 0.50% over the course of the year.
The key to this will naturally boil down to the state of the economy and the US stock market. If China continues to plunge like it has in the last couple of weeks, then US stocks and the US economy will suffer the knock-on effects.
This will make it extremely difficult for Fed Chair Janet Yellen to raise rates again for fear of adding to the turmoil and pushing the nation back into recession.
Instead, financial markets will get themselves in such a bother that Yellen and Co. will be faced with the embarrassing task of actually cutting rates back to zero and bringing back the next QE. This will cause the central bank to lose credibility but ultimately it will help stabilise the markets once again.
2. Facebook becomes the world’s largest company and Mark Zuckerberg the richest person
With a market capitalisation of around $550 billion, the largest company in the world right now is Apple. But with fears of declining iPhone sales in China, could we see another company take over the coveted number one spot in 2016?
Facebook is currently the 10th largest company in America with a market cap of $275 billion and if the stock was to double from here, it would be challenging for number one.
Although such a feat seems unlikely, consider the fact that no-one really knows how to properly value Facebook even today.
The company has a monopoly on social media with a whopping 1.5 billion monthly users and has a lot of unlocked value, particularly after the acquisitions of Instagram and What’sApp.
Current global advertising revenues per user (ARPU) for Facebook sit around $6 but if the company gets that figure up to $10 and beyond, and also increases it’s user base (like expected) there are going to be huge gains ahead.
Facebook could become the biggest company in the world and that would see CEO Mark Zuckerberg on his way to the very top of the Forbes Rich List.
3. The S&P 500 returns double-digits and keeps on going
Another theme the financial community seem to be set on in 2016 is that stocks (especially US stocks) are going nowhere. Much like 2015, stocks will either flat-line or slide lower under the weight of Fed rate hikes and slowing growth. That is according to most analyst outlooks, with RBS actually predicting an all-out crash.
But in investing it’s never wise to move with the herd. Don’t forget that the stock market tends to rally just as central banks raise rates the first couple of times – higher rates are a symptom of an improving economy after all.
So prepare for a blockbuster year of stock market gains fuelled further by cheap oil and many years of cheap money.
By the end of 2016, the S&P 500 will have soared around 20% taking the index past the 2,400 level and almost matching the huge gains we saw in 2013.
4. Oil crisis sparks threat of hyperinflation
Towards the back end of 2015 we started to hear some analysts calling for $20 a barrel oil in 2016. Given oil’s history you would think that this would be somewhat of a contrarian bet in itself.
But I beg to differ. Nearly everyone seems to have a bearish opinion on oil right now, with some analysts now calling for $10 a barrel. This means that the only sensible play is take the other side and look to go long.
Considering the falls we have already seen there is the potential for a violent short-squeeze that could disrupt the downward momentum and that could lead to a complete change of fortunes.
More worryingly, a geopolitical event could send the black stuff soaring into triple figures and lead to some initial fears of hyperinflation. Once you factor energy out of the equation of recent CPI and PPI figures, then it becomes clear just how quickly real inflation could ramp up.
5. Germany outperforms every other developed nation
The German stock market ($DAX) got off to a flyer in early 2015 posting gains of over 20% in the first quarter alone. But global concerns about higher rates and a slowdown in China brought the index back down to earth with the rest of the asset class.
However, there are signs over the last few days that Germany is holding up slightly better that it’s foreign counterparts. With the ECB still in money printing mood and the euro sitting at multi-year lows, German stocks are set to outperform in 2016. Exporters in particular should benefit from the much cheaper euro.
As well, consider the catching up that European companies have to do to keep pace with the US.
According to Simon Thompson of Investors Chronicle, US corporate profits are 27% above their 2007 peak with the S&P 500 near all-time highs but eurozone profits are still a fifth below that level, with European stocks still well-off their highs. 2016 will be the year that Europe plays catch up.
6. End of the road for The Gap
The Gap fared poorly in 2015 losing almost 50% over the entire year and the company seems to be in somewhat of a downward spiral.
To be honest, I have always been a fan of The Gap and I don’t like to beat the company down but the last time I was in one of their shops it was a complete shambles. The clothes were piled up all over the place and none of them had any real uniqueness or style.
As a result, there will be more problems and more losses for The Gap in 2016. The company will either flirt with bankruptcy or be bought out by someone with deeper pockets.
7. Aggressive Fed sees meltdown in global corporate bonds
I pulled this one straight from the Saxo Bank report as I thought it was an interesting forecast.
Simon Fasdal who is head of fixed income trading at Saxo says that “Late 2016 will see Fed chief Janet Yellen embark down a hawkish path with a series of aggressive rate hikes which will trigger a huge selloff in all major bond markets as yields start to rise. As the portions of bank and broker balance sheets allotted to bond trading and market making have almost disappeared, one of the vital parts of a functioning market is simply not there. This realisation sinks in too late and the entire buy-side flee into a panic selling one-way street, as highly advanced risk models lurch into a symmetric red alert.”
Although I can’t see this happening myself – I think the Fed will be too scared to raise rates aggressively – there is no doubt volatility ahead for the bond market. Renowned investor Jim Rogers recently noted that he is currently looking to short US junk bonds.
8. The US dollar under-performs every other major currency
Another common viewpoint as we move into 2016 is that the US dollar will obviously strengthen. As the Federal Reserve continue to raise rates, yields will climb and capital will flow into the greenback as a matter of certainty.
But wait a minute. Hasn’t the greenback already climbed 17% against a basket of crosses since July 2014 – when traders started to first price in the effects of tightening? Isn’t EUR/USD already at a ten year low and USD/JPY at an eight year high?
Sure, the upward trend in the dollar could go on and on, the best trends do. But, if we see more volatility in the stock market and the Fed are forced to hold on rates, you’re going to see a mighty re-positioning among traders who are long the dollar. As a result, the greenback will end up being one of the worst performing currencies in 2016.
9. Arsenal FC win the English Premier League
The 2015/2016 English Premier League season has been one of the most unpredictable for many years.
Last year’s title holders Chelsea have struggled for form and reside firmly in the bottom half of the table having now fired their most successful manager ever, Jose Mourinho.
Meanwhile, overachievers Leicester City have managed to spend most of the season in number one spot despite being 1000/1 shots at the start of the season.
As we move into the business end of the campaign, it’s hard to see Leicester City being able to maintain their great run and if they are able to finish in the top four it will still be regarded as a huge success.
Looking at the other contenders, Chelsea are most certainly out of the race languishing back in 14th place while Manchester United also look to be flagging with the pressure building on manager Louis Van Gaal, who looks likely to be replaced by Jose Mourinho in the summer.
Manchester City are potential victors, however there are also questions being asked of their manager Manuel Pellegrini, with links being made to Bayern Munich coach Pep Guardiola. Such events could cause instability in the camp and hurt the team’s morale.
All this paves the way for Arsenal to record their first championship success for 12 years.
10. Protectionist policies lead to stock market crisis, the next Great Depression
Stock markets have already dropped sharply in the first couple of weeks of this year, with some indices posting their worst start in 100 years. And one finger could be pointed towards recent interventions by the Chinese government.
Foolishly, the Chinese authorities decided it would be a good idea to intervene in the financial markets by putting a 7% circuit breaker on the country’s shares. The idea is that a circuit breaker would limit the damage done by those selling a stock short. This has simply led to more volatility.
But of course, the move has had the reverse effect (as is so often the case when politicians try to dabble in a free economy) and investors have ended up selling their stocks early for fear of being locked out of the market.
But although this is not exactly ‘protectionist’ behaviour, policies such as these can and will cause real harm to a smooth running financial system.
So what else could happen?
Well, consider how US Presidential nominee Donald Trump recently proclaimed his big idea to ban all muslims from entering the United States.
Clearly this is a racist and protectionist attitude. And it was fierce protectionism that exacerbated many of the problems seen during the Great Depression; a time when the stock market dropped 89% with many fierce rallies in between.
Protectionism can be deadly to an economy and would no doubt lead to severe market losses. A worrying thought if Trump does manage to get into power.
(By the way, some protagonists suggest that the current trajectory of share prices is still on track with the same pattern of how markets rallied and fell back in the Depression era.)
If Trump happens to get ahead in the polls and then takes charge of the White House, anything could happen.
What are your thoughts?
The beauty (and frustrating) thing about the markets is that no-one can ever predict with any certainty what is going to occur. And although it might seem ridiculous to make two predictions that are essentially at odds with another, the truth is that anything really can happen.
Once markets start moving, and policymakers start making decisions, markets can go either way and set in place a new momentum, or a new future if you like. As an after thought, you could say that this is in keeping with George Soros’ theory of reflexivity, where cause and effect are both intertwined together.
So what are your outrageous predictions for 2016?
Please leave them down below in the comments.