01 Jan Surprise Surprise!
One of the most robust findings in the psychology literature is that we humans are overconfident and think we know more than we do…which is why I wanted to reflect briefly on five of today’s seemingly “obvious” beliefs worth questioning: 1) a strong US Dollar, 2) rates that can only rise, 3) stable food prices, 4) improving labor markets, and 5) struggling emerging markets. Consider the following five questions, intended not to predict but rather to provoke thought.
1) Could the US dollar depreciate against other currencies? What does this mean for commodity prices, Japan, the emerging markets, or US treasuries? Might the big move in the Yen be overdone? What if lower oil prices stimulate Chinese growth, which in turn drives trade and economic activity in Europe? Could the Euro be undervalued? If the dollar does depreciate, will it bail out Putin and Iran via higher oil prices?
2) Is it conceivable that US interest rates fall from here? Deflationary pressures are rearing their ugly head in many parts of the world, and the recent oil price drop isn’t helping generate inflation anywhere. What if automation (see #5 below) applies downward pressure on wages? Could continued low (or lower) rates spur a housing bubble? Should investors be (gasp!) buying bonds?! Will deflationary pressures increase the worldwide stretch for yield into increasingly risky assets?
3) What if food prices plunge (or surge)? Might the recent drop in oil prices provide political cover for the removal of ethanol and other renewable fuel mandates? Given that 40% of North American corn currently heads to ethanol plants, it’s easy to see corn prices plunging. Alternatively, bad weather could shock supply while emerging market protein demand surges — generating skyrocketing food prices. How might food prices affect global stability?
4) Is 2015 the year of robotics, and if so, does it mean higher unemployment? Might machine automation of labor-intensive tasks drive a productivity boom in global manufacturing? But what would that mean for labor markets and wages? Isn’t a productivity gain defined as more output using fewer people? Let’s not forget automation is a deflationary force. Will we each have a personal drone by January 1, 2016? Will Japanese robots figure out how to take care of the booming population of elderly Japanese citizens?
5) Will emerging markets positively surprise investors in 2015? The impacts of a slowing China, weakening commodity prices, and a stronger dollar all seem to be incrementally dissipating and may even reverse. If China manages to avoid a financial crisis (a big “if”), many currently submerging markets will again rise. Structural reforms of state owned enterprises (SOEs represent ~50% of EM market capitalization) can further support this story, and demographics in most countries are supportive of growth. India is a clear winner with lower oil prices, and deflationary pressures globally are likely to spur monetary easing in many countries in 2015.
I hope these five topics spur thoughts. Listed below are links to my most recent comments. As always, I’d welcome feedback on any of these thoughts. All my best for a happy, healthy, and productive 2015!
PS. If you have 6 minutes, I’d appreciate your reaction to this short overview video that was recently added to my website…Thanks!
Rapidly Receding Reserves
My latest comment was about the link between oil prices and reserves. The blunt reality that few seem to acknowledge is that oil reserves are price dependent — and this means the world just lost billions of barrels of reserves as oil prices fell. Read more HERE.
Egg Supplies (and Price) Scrambled…
California regulations that go into effect today have the possibility to meaningfully affect national egg supplies and prices. To understand why breakfast may cost more in 2015, read my comment HERE.
Mirage of a Miracle
As the Russian economy teetered on the edge of collapse, I received dozens of inquiries regarding the Asian Financial Crisis and Russia’s 1998 economic implosion. John Wiley and Sons graciously released my chapter about the 1997-1998 financial crisis. Click HERE to read “The Mirage of a Miracle.”
Oil Plunge! Winners & Losers
The falling oil price is great news for China, India, the US consumer, and Europe, among others. Russia, Iran, Venezuela, Nigeria and others suffer. But there is a BIG complication: lower oil prices add deflationary pressures to a world that is desperately seeking inflation. Read my thoughts HERE.
Fringy Folks & Flammable Ice
The next big needle-moving development in the energy markets may come from methane hydrates–ice that you can literally light on fire. Here’s a shocking statistic: methane hydrates are believed to contain enough energy to meet US consumption needs for between 100 and 3 million years. Click HERE for my comment.
Going Green, Collapsing Citrus…
It is highly possible that Florida will not have a citrus industry within five years. Let me repeat that, Florida’s orange groves are infected by a greening bacteria that will probably kill every citrus tree in the state. One possible silver lining: slowing gang warfare in Mexico. Click HERE to learn more.
Water Wars Everywhere
Rising pressures of freshwater supplies are resulting in water wars. Global risk assessments are now focusing on the possibilities of armed conflict for water, and warning signs are flashing from Barcelona to Brazil. Read my comment HERE.
Falling Food, Riot Risk…
Food prices have been falling recently, but are masking underlying price pressures. In this comment, I decompose the UN food price index and evaluate its various sub-indices, noting the meat price index is surging. My note is available HERE.