The 2019 DEFLATION SCARE triggered record-low interest rates and massive liquidity injection through rate cuts and Central Bank balance sheet expansion.

The net effect was to EXTEND the cycle and feed speculative bubbles in almost every asset class.

In 2020, we expect a RETURN OF INFLATION, a RE-NORMALIZATION OF INTEREST RATES and ultimately STAGFLATION.

We also expect Chinese Assets to take a lease of life of their own together with some emerging markets, while US, European Japanese, and other Emerging equities peak out.

The Macro-Economic background

The Juglar Cycle is one of the major economic cycles, where every decade we see a significant economic cooldown or even a recession.

In the financial markets, the Juglar Cycle is one of the major drivers of long-term trends – bull and bear markets -as it dictates both the liquidity environment and the health of corporate earnings.

It was initially our assessment that the current Juglar Cycle would peak in 2018, marking the starting point for significant asset trend changes into 2019 or early 2020 and setting up the stage for a secular bear market in global equities.

Our macro view was, that a Juglar Cycle top would finally bring us a global recession into the first half of the 2020s, where statistically, most of the Juglar Cycles in the past took place in the first 3 to 4 years of a new decade as the set-up for a new economic expansion.

A recession is bearish equities, it is deflationary and suggests falling yields. In this context, we believed that with global equities moving into a cyclical bear market, sooner or later, we would see an aggressive turn in the central banking regime back into rate cuts and Quantitative Easing.

However, if the US was ahead of the cycle and in a monetary policy normalization phase, this was not the case yet for Europe and Japan and two exogenous events had the effect of pushing the top of the cycle further down the road, making this current Juglar cycle one of the longest in history.

In 2017, Donald Trump enacted a completely counter-cyclical tax cut that had the effect of boosting consumption, economic growth and added almost 10 % to US corporate earnings overnight.

The one-off shot in the arm to the US economy is clearly visible on this US GDP growth chart where it appears very clearly that growth was boosted sharply in 2008 but started declining again in 2019 and will probably settle below 2 % in the 4th quarter of 2019

The second exogenous event was Donald Trump’s trade war with China, launched in February 2018, that had the effect of freezing investments almost everywhere, choking off the nascent recovery in highly industrialized and export-oriented economies such as Germany, Switzerland, Sweden or Japan while making China’s transition from an export-led to a consumption-led economy less smooth.

The following charts of Germany and Switzerland’s GDP growth rates illustrate the sudden and brutal collapse in GDP from 3.4 % in Germany in Q1 2018 to 0.3 % in Q2 of 2019.

The US tax cut extended the economic cycle in the US, boosting employment and wages to levels not seen since 1969, while the Trade War sent Bond investors and Central banks in panic mode, fearing a massive deflationary event with a global spillover from collapsing manufacturing to consumption as Business confidence descended to the abyss.

As a result, global bonds went flying sending yields to record low levels, in excess of 16 Trillion of debt in negative territory, negative nominal rates of German 30 year Government bonds for the first time in history, and an inversion of the US yield curve, all that in the summer of 2019.

The chart of the US 30-Year Government bond yield shows how the Trade war brutally changed the uptrend in bond yields to a sharp collapse taking them to below 2 %, a level not seen since the 1950s.

As, at the same time, Inflation actually did NOT decrease, but quite the contrary rose to the highest in a decade at 2.3 % on the US core CPI.

As a consequence, FOR THE FIRST TIME IN HISTORY, THE ENTIRE US YIELD CURVE WAS DELIVERING NEGATIVE REAL RATES.

Bond investors were not the only ones to get scared by the US Trade Wars.

Departing from its data-dependent policies, the US FED reversed the course of monetary policy “in a pre-emptive and cautionary way” and lowered rates three times in 2019 despite resilient inflation and strong wage inflation in a red hot labor market.

The European and Japanese Central Banks resumed quantitative easing in the summer and drove the entire yield curve into NEGATIVE Nominal yields, a first in history. Belgium’s 100 – year bond yielded less than 1 % and Danish banks started charging their clients on their credit balances.

Strong difficulties in the Repo market in the 4th quarter and at year-end have led the FED to add US$ 400 Billion of liquidity by expanding its balance sheet since September, of which another 83 Billion in the first 10 days of January 2020. Adding liquidity to the repo market is not quantitative easing per say in the sense that the Fed is not trying to manipulate the interest rate market to move the economy, but it still adds massive liquidity boosting asset prices.

The people who use the repo cash are mostly investment funds that carry leveraged positions, meaning they borrow money to invest. When money is scarce, they have to pay higher interest rates to borrow, which the Fed does not like. The repo market rates rose to 10 % at one point in October. By providing more cash, the Fed gives these institutional investors new money they can use to buy stocks and other securities.

Add to all the above the fact that China’s PBOC has finally started injecting liquidity at the beginning of the year, as we predicted, and you have an environment flush with liquidity that has extended the bull market in almost every asset class and particularly equity markets, explaining how they could have a record year in 2019 despite declining corporate earnings and softer economic growth.

Rarely has the world economy seen so much liquidity being pumped at the same time and NEVER since 1969 has the US economy received so much liquidity injection at once

As this chart shows, there is usually a correlation between liquidity and the global business cycle and the sharp increase in global liquidity would, in theory, point to a more positive business cycle ahead.

HOWEVER, with the increasing ineffectiveness of rate cuts and QE, the economic future of the next decade will be the fiscal stimulus, as Christine Lagarde, the new head of the ECB has already confirmed.

Fiscal stimulus is structurally bullish inflation, and, as we know, rising inflation sooner or later kills every bull market (cyclical and secular bull markets).

Analytically, this means that as long as we do not see a significant pickup in inflation we are in the sweet spot of a classic “goldilocks” scenario which is bullish for risk assets. However, as we will see below, this may change rather quickly

US equities are trading in a major wave V and moving into a secular peak, so we should see very soon a significant rise of inflation, which is indeed one of our main theses for the next 2 years.

So, despite the US and global equity markets hitting new all-time highs in H2 2019, our 2018 long-term macro base case/cycle roadmap is unchanged albeit the timing has been delayed.In the US, the current economic cycle has been extended and the length of the current economic expansion has reached record territory.

However, we continue to think the Juglar Cycle is mature and a decline into a recession is imminent, although the fine timing of the decline has obviously changed from last year’s scenario.

Together with a major USD bear market at hand, which is also inflationary and a nascent secular bull market in commodities, which is also inflationary, we have all the pieces for a potential structural comeback of inflation into this decade and the strong likelihood of moving into a stagflation scenario in the western developed economies.

China, on the other hand, should be relieved from the Trade War pressures as we get into a US Presidential election and Donald Trump needs “victories” and it will complete both its morphing into a consumer economy and the opening up of its financial markets, unleashing significant flows of capital into its bond and equity markets.

Having laid out the macro-economic environment, it is time to formulate our 7 strategic calls for the first year of the new decade

OUR SEVEN INVESTMENT CALLS FOR 2020

Macro-economic trends determine monetary policies that determine the liquidity environment, which, in turn, and together with investors psychology, determine the behavior of asset classes and the trends in valuation expansion or contraction.

We are entering 2020 with excessive liquidity having lifted ALL asset classes to record highs and extreme greed and speculation in equity markets.

At the same time, in the US, valuations have been pushed to multi-decade highs by massive share buybacks, corporate leverage has increased alarmingly, interest rates are at unsustainably low levels and financing a ballooning budget deficit will be a challenge.

Key Call # 1: STAGFLATION

STAGFLATION, what a horrible word!

Not only semantically because it is the artificial contraction of STAGNATION and INFLATION but because of the economic reality, it describes, which is probably the worst possible combination for the financial markets in general.

Let’s first look at the economic prospects for 2020.

Economic stagnation, at best
Recession at worst

In 2019, a year where momentum in manufacturing activity has weakened substantially, to levels not seen since the global financial crisis. Rising trade and geopolitical tensions have increased uncertainty about the future of the global trading system and international cooperation more generally, taking a toll on business confidence, investment decisions, and global trade in general.

In the second half of the year, accommodative monetary policies have supported asset prices and boosted consumption, cushioning somewhat the deceleration in growth.

This is a snapshot of the world largest economies in January 2020:

Global economic growth is forecast to edge up slightly to 2.5% in 2020 as investment and trade gradually recover from last year’s significant weakness but downward risks persist according to the World Bank January 2020 Global Economic Prospects.

Growth among advanced economies as a group is anticipated to slip to 1.4% in 2020 in part due to continued softness in manufacturing. Some advanced economies may actually flirt with a recession in 2020, particularly in the 1st or second quarter of the year.

Growth in emerging market and developing economies is expected to accelerate this year to 4.1%.

This rebound will not be broad-based. It assumes the improved performance of a small group of large economies while about a third of the emerging market and developing economies are projected to decelerate due to weaker-than-expected exports and investment.

In 2019, after slowing sharply in the first three quarters of 2019, the pace of US economic activity remains weak and we expect the fourth quarter to be particularly weak with a US GDP growth expected at 1.7 % year on year.

U.S. growth is forecast to slow to 1.8% in 2020 reflecting the negative impact of earlier tariff increases and elevated uncertainties. The signing of the Phase-1 Trade Agreement with China on January 15th will lift some of them but many issues remain unsolved and will hang in the balance as factors of uncertainty.

Euro Area growth is projected to slip to a downwardly revised 1% in 2020 amid weak industrial activity. Southern Europe is expected to outperform Northern Europe with the exception of Italy.

Japan’s economy is growing at 1.7 % year-on-year at the moment and should slow down to 1.4 % in 2020.

China‘s 2019 fourth-quarter GDP is expected to come out at 6 % year-on-year and slow down marginally to 5.9 % for the year 2020.

Growth in the Asian region is projected to ease to 5.7% in 2020, reflecting a further moderate slowdown in China to 5.9% this year while regional growth excluding China is projected to slightly recover to 4.9%, as domestic demand benefits from generally supportive financial conditions amid low inflation and robust capital flows in countries like Cambodia, the Philippines, Thailand, and Vietnam, and as large public infrastructure projects come onstream in the Philippines and Thailand.

In India, where weakness in credit from non-bank financial companies is expected to linger, growth is projected to slow to 5% in FY 2019/20, which ends March 31 and recover to 5.8% the following fiscal year.

The global scenario for 2020 is, therefore, one where the world economy continues to weaken in the first and second quarter of 2020 before recovering in the second half of the year.

However, in the main economies apart from China, we could reach a stage of STAGNATION in the second quarter of the year.

In addition, there are significant downside risks to the outlook.

Downside risks to the global outlook predominate, and their materialization could slow growth substantially. These risks include a re-escalation of trade tensions and trade policy uncertainty, a sharper-than-expected downturn in major economies, and financial turmoil.

Low global interest rates create a dangerous background to a potential financial crisis, and the world is now in its FOURTH WAVE OF DEBT ACCUMULATION.

The history of past waves of debt accumulation shows that these waves tend to have unhappy endings.

There have been four waves of debt accumulation in the last 50 years. The latest wave, which started in 2010, has seen the largest, fastest, and most broad-based increase in debt among the four. We have now exceeded US$ 250 Trillion of total debt for about US$ 86.5 Trillion of global world GDP or almost 290 % of GDP.

NEVER in the history of the financial markets have such high levels of debt been accumulated and the bulk of the increase has taken place at the corporate and Government levels,

The three previous waves of broad-based debt accumulation ALL ended with widespread financial crises and this time around, the extremely low level of interest rates makes the situation even more critical.

Every 1 % increase in nominal interest rates will represent either 30 or 50 % increases in the final cost of servicing the debt, US$ 2.5 Trillion of additional cost in an 86.5 Trillion economy, or 3 % of GDP

The return of inflation

The worrying part for the predictable scenario for 2020 is a global and coincident increase in inflation on the back of stronger labor markets and higher commodity prices, and in particular, soft commodities.

One of the most intriguing macro-economic features of 2019 has been the RESILIENCE of inflation almost everywhere despite the economic deceleration AND the strength of wage costs.

In the US, contrary to expectations, the core CPI has not diminished and it ended the year at one of the highest levels of the past 10 years at 2.3 %.

In Europe and Japan, inflation has also remained resilient, albeit at lower levels and is now gaining traction as liquidity is flushing asset prices.

In low-income countries, inflation has tumbled to a median of 3% in mid-2019 from 25% in 1994. and the decline has been supported by more flexible exchange rate regimes, greater central bank independence, lower government debt, and a more benign external environment.

However, there are advanced signs that this disinflationary trend is reaching a trough!

Negative REAL interest rates feed inflation. They first feed asset inflation, as was the case in 2019 with ALL asset classes rising at the same time and then they feed into Consumer and Producer Prices Inflation gauges

The table below shows how we currently are in an environment where REAL INTEREST RATES are NEGATIVE everywhere apart from Brazil where they are positive and China and India where they are marginally negative.

And indeed it is starting to filter through the inflation gauges of most of the economies of the world.

EUROZONE inflation

USA inflation

Japan inflation

Canada Inflation

Australia Inflation

When inflation starts rising like this in a global way, only increases in interest rates can contain the advance.

Another disturbing trend in the US, in particular, is the sharp increase in wage inflation which has now reached almost 4 % in the fourth quarter of 2019 on the back of the lowest unemployment rate in 50 years.

In addition, if, as we expect, the decade-long decline in commodities and particularly soft commodity prices has ended and a new bull market in commodity prices takes place in 2020, inflation may accelerate upwards significantly.

As we detail below, in soft commodities ten years of declining prices have reduced the planted acreages, which are now at the lowest in a decade while climate change is having a massive disruptive impact on supply. – see the wildfires in California and Australia or the floods in Dubai to be convinced of the climatic changes

All this to say that when it comes to inflation, the trend and the risks are to the upside and we would not be surprised to see global inflation rise by a full percentage point in 2020.

World inflation was at 3.41 % in 2019, the world bank expects it to rise to 3.56 %, but we see it jumping to 4.3 or 4.4 % on the back of stronger commodity prices and stronger labor costs.

The chart below shows the probable course of action of US inflation next year, a break out of the 10-year triangle that has been containing it.

As nominal interest rates are abnormally low and real interest rates are negative in many parts of the world, including the USA, any signs that inflation is on the run will send bond prices tanking and bond yields rising significantly.

In 2019, we have reached record lows in bond yields and in nominal interest rates and for the first time in history the entire German yield curve, including the 30-year bond yielded negative returns, the US long bond traded below 2 % and the entire US yield curve was in negative real interest rates.

Despite this exceptionally stimulative environment and US$ 16 trillion of debt yielding negative returns, growth has been faltering, demonstrating the limits of monetary policy when interest rates are that low – the proverbial liquidity trap.

Moreover, If inflation is to rise towards the Central banks’ objectives as we expect, Central banks will have no choice but to raise interest rates and normalize monetary policies.

It is therefore likely, and we already have hints of it, that in 2020 economic stimulus will come from budget deficits. Increasing budget deficits will put upward pressure on interest rates as Nations will compete with the private sector for the available pool of savings.

In other words, the 2020 predictable economic cocktail is highly dangerous as low economic growth, higher inflation and higher budget deficits will all combine to push interest rates higher in an over-indebted world.

Higher interest rates will eat into consumers’ disposable incomes through higher financial costs on their mortgages and credit card bills,

Higher interest rates will eat into corporate earnings through increases in financial costs,

Higher Interest rates will push Government deficits even higher as the cost of servicing the public debt will soar.

Higher mortgage rates will push real estate prices lower.
Lower corporate profits will push equity prices lower.
Higher interest rates will make equity valuations untenable.

Lower equity markets and lower Real estate prices will dent consumption, pushing economic growth lower and even possibly in recession.

It has to be noted that in the summer of 2019, the US yield curve inverted pointing to a likely recession in 2020.

Without wanting to play Cassandra, the current accumulation of debt and record asset prices and valuations reached in 2019 lay the ground for a potentially drastic debt-deflation in the coming three years with significant damages to the world equity markets.

Key Call # 2: A WEAKER US DOLLAR

EURUSD chart

In 2009, we successfully called the secular bottom in the US Dollar on the back of our macro conclusion that the US economy would recover from the financial crisis faster than its counterparts and indeed the US Dollar engaged into a secular bull market that lasted the whole decade.

In 2018, when the EUR was trading at 1.26 we called a 4-year cycle bottom in the US dollar, which we saw as the basis for a larger wave 5 bull cycle and the setup for completing the underlying 2011 secular US dollar bull market into a late 2019/early 2020 major top.

In November 2019, we recommended investors to BUY the EUR at 1.10 with an initial target at 1.18.

As can be seen from the chart above, the US Dollar has just recorded a lower high ( Higher low ) bouncing on the VERY long term trend dating back to 1984 and 2002, and although it is too soon to expect the US Dollar to break out of its uptrend ( downtrend) channel just yet, the likelihood is that it will at least test its upper boundary in 2020 and even maybe break it.

DXY Index

The same applies to the US Dollar Index that peaked just on the very long term downtrend while the moving averages are rolling down and a head-and-shoulder is forming with the 2015 and 2016 tops. The next move has targets towards 94 initially and then 90 on the index.

USD JPY Chart

The Japanese Yen is about to break out of a four-year appreciation phase that would take it towards 120.

From a more fundamental standpoint

There are three main reasons why we see the US Dollar weakening from here :

1. Inflation will rise faster in the USA than in the rest of the world because of its red-hot labor market and rising wage inflation. As such REAL INTEREST rate differentials will move against the US Dollar enticing investors to shift from the US to other higher-yielding real rate currencies.
2. America is going to face a budget deficit problem as soon as 2020 as lower economic growth hits tax receipts and higher bond yields increase the cost of servicing the debt to the tune of US$ 250 Billion. The sharp increase in the US deficit will make investors less confident in the global role of the US Dollar as a reserve currency and may push bond yields higher.
3. The easing of tensions on the Trade War front should unleash a secular bull market in the value of the Chinese Yuan which has already started in 2020. That will push the US Dollar lower against all currencies as more and more investors switch in favor of the Chinese Yuan.

CNY USD Chart

Key Call # 3: ​ A SECULAR TOP IN EQUITIES

It was a key element of our 2018 strategy that the 2018 top in global equities should be the basis for a longer-lasting bear market into 2019 or Q1 2020 at the latest before starting a new cyclical bull market.

In 2018, we saw the correction wave A (26% bear market in the Russell-2000), which was the logical consequence of the Fed tightening in 2017 – 2018

Into 2019, we started the year with a hugely contrarian bearish market sentiment, which was the base for the strong rebound in January and Q 1 2019 and we expected another sharp wave C down after the July top projection.

Thematically, we believed wave B would be a classic mean reversion move (after the 2018 A bear market) before starting correction wave C into our later 2019/early 2020 major bottom projection as the next major buying opportunity.

However, although the main indexes topped in July, the initial correction into August
was significantly milder than expected, and the sharp drop in bond yields worldwide caused by the deflation scare put a floor under equities and opened the way to rotation into more cyclical stocks and laggard markets such as Europe and Japan.

Liquidity drives the markets and, in December 2018, the verbal intervention of the Fed with the S&P-500 in bear market territory (-20%) was not a big surprise as this is part of the Fed model.
The big game-changer on the macro side was the aggressive pace of the U-Turn and the preemptive rate cuts at the point where the S&P-500 was hitting a new all-time high.

The preemptive – insurance and not data-point- rate cuts by the FED, and by more than 20 central banks globally cutting rates and going back into Quantitative Easing, the whole liquidity cycle turned earlier and more aggressively than expected with significant consequences for all asset classes as we have seen in the fourth quarter of 2019.

China was very much part of the reflation cycle and the 35 % advance of Chinese equities in 2019 are a reflection of the easy monetary policies pursued by the PBOC in a stealth manner.

Another important feature of the equity markets in 2019 has been the complete shift from “extreme fear” at the beginning of 2019 to “extreme greed” at the end of 2019, and the increasing disconnect between some high flying stocks- Apple, Microsoft – and the rest of the market.

Portfolio Concentration is definitely an issue as the top five publicly-traded American companies now make up a record 18% share of the benchmark’s capitalization — higher than during the tech bubble, and their valuations are at extremes rarely seen in mega caps.

For 2020

Equity markets are displaying very different characteristics depending on what we look at.

As mentioned in our macro-economic introduction, a normal economic scenario would be one where economic growth falters and flirts with a recession in the first and the beginning of the second quarter of 2019 and where the massive liquidity impulse of the 4th quarter of 2019 starts lifting the economies by the second half of 2020.

However, the combination of abnormally low-interest rates and the highly probable return of inflation in an overly leveraged world could have drastic consequences on corporate earnings, equity market valuations and ultimately consumption of a new financial crisis unfolds. The world, and the west, in particular, would fall into recession and equity markets into a bear market that could last for several years.

The key question for equity markets is obviously, whether the aggressive U-Turn of the central banking cycle is able to start a complete new multi-year cycle, which would be bullish equities globally, or whether it will just extend the current cycle for one year with a mild reflation.

if we look at key economic indicators in the US such as consumer confidence or the labor market, these indicators are on absolute boom levels, like in 2000.

Taking this into a historical context, it is clear for us that the economic cycle in the US is very toppish, and highly sensitive to any turnaround in bond yields and interest rates because of the leverage of the economy. It is therefore extremely sensitive to any strengthening in inflation and  It is our deep belief that the current rate cuts Quantitative Easing cycle does not have the power to trigger a completely new economic expansion cycle.

So if we do not believe in a significant extension of the cycle then the critical point for 2020 is obviously, whether the 2019 decline in global manufacturing was just the warm-up phase for a broader recession in 2020.

The consequence would be clear, as it would be outright bearish equities, where the rally in global equities of the last 5 months would have just been a huge bull trap.

For the time being, there is NO indication that US Manufacturing is recovering.

If we are in the bull trap scenario, then we can expect a major breakdown anytime sooncaused by either a sharp increase in bond yields following strong inflation numbers or a sharply negative credit event.

We are also entering the corporate earnings season and analysts have been extremely busy revising up their expectations, with a record number of upward revision in one day taking place in December with 100 stocks out of the 500 of the SP being revised up in one single day.

Optimism has definitely spilled over from individual investors to analysts.
Negative surprises could also send equities lower in the US.

However, we could also be in a scenario similar to the one of 1998 where the collapse in manufacturing was followed by a mini-expansion phase in 1999 before collapsing ultimately in 2000.

In 1998, we saw 3 security rate cuts by the Fed (LTCM), which is what we saw in 2019 (trade war). What followed was a temporary steepening of the yield curve and a mini reflation cycle as an extension of the 1992 economic cycle into 2000 (where US 10-year yields rallied from 4.10% to 6.80%!!) before the whole cycle finally peaked and the US moved into a recession with all the consequences we know today.

Brought back to 2019, that would mean that we could experience a surprisingly strong economic rebound in 2020 before the final collapse in 2021.

This scenario would call for a brief but sharp correction from now till March 2020, followed by another leg up towards the final top of the economic cycle sometimes in late summer 2020, or at the latest at the very beginning of 2021, with maximum targets of 2800 on the MSCI World Index and 3600 on the SP500 Index.

MSCI World Equity Index

SP 500 Index

In conclusion, we are either very close to or only 10 % away from a major secular top in global equities.

To determine where we are exactly, it will be important to monitor three variables :

1. The US ISM Manufacturing MUST rebound very quickly, otherwise, we are not in a 1998 environment ( see chart above )
2. US Corporate earnings MUST rebound very quickly, otherwise, we are NOT in a 1998-1999 environment
3. Inflation and bond yields must be watched very closely as any break out in inflation will send bond and equity markets tanking.

Tactically, after the aggressive Q4 2019 rally, markets are starting very overbought into 2020, and the risks of a classic tactical washout from an early January top into a March bottom is very high.

In the 1998-1999 scenario, a potential summer top would be the worst-case scenario as the starting point of a volatile distributive top building process into Q1 2021 in the US.

For the rest of the world, the breakdown in the value of the US Dollar is reflationary and should benefit European equity markets, particularly in Spain, Italy, Portugal, and Greece as well as Emerging markets in general, boosted by the commodity cycle.

Japanese equities have been trading sideways for two years and a breakdown of the Japanese Yen coupled with strong inflation and very negative real interest rates will boost Japanese equities towards 30’000 before a major top is in place.

However, all of them are in a final Wave 5 of the bull market that started in 2009.

We discuss the Chinese equity market prospects in the next section

Key Call # 4: THE CHINESE DECADE

A bit of History

Investors should always remember that 40 years ago, when Deng XiaoPing took the helm of China, after 48 years of communism and the cultural revolution and its 50 million deaths, the sleeping giant was one of the poorest, least equipped, most traumatized and most populated country of our planet.

The economic miracle of China becoming the largest economy of the world at 29.7 Trillion USD in PPP terms as per the IMF classification in 40 years has no equivalent in human history! The Purchasing Parity comparison is more appropriate as it eliminates foreign exchange fluctuations.

China’s GDP per capita rose from $184 to $9,780 from 1978 to 2019, which translates into 16’186.80 US dollars in 2018, when adjusted by purchasing power parity (PPP). This is equivalent to 91 percent of the world’s average.

Never in the past 200’000 years of human history do we have such an elevation of the standards of living of such a massive population in such a short period of time.

Today, not only is China the largest economy of the world, but it is also the best equipped in infrastructure, transportation, internet, fiber optics, high-speed trains, airports, ports, highways, power generation, dams, mobile phones, mobile payments, Artificial Intelligence, Big data, electric vehicles, etc. etc. and the best managed if one looks at its public finances and economic ratios, Trade surpluses, Current account surpluses, foreign exchange reserves, debt to GDP, household debt, fixed capital formation, etc.

A superior system of Public Governance

China’s four-decades miracle is NOT a miracle!

It finds its roots in a political, social and economic eco-system that is MORE EFFICIENT, in terms of economic and social achievements then Western democracies.

As we have developed this theme in many of our articles, we shall only touch very briefly here on the subject.

In a nutshell, when Deng Xiaoping took power in 1978, he visited Lee Kuan Yew of Singapore to take his advice on how to make China a prosperous nation and Lee Kuan Yew told him two things:

. The only economic agents that create wealth are the “entrepreneurs”, economic agents that invest to make profits, be they individuals, corporations or the State. The capitalist system creates wealth.

. The only efficient Governance model is the model of Western Private Corporations and not the model of public governance of western democracies.

The Governance system of western private corporations has been built pragmatically over 400 years since the creation of the Dutch East India Company in 1600 and has been improved to what it is today, with stakeholders – Clients, Employees, Shareholders, General assembly, Board of directors and finally Executives that are carefully selected by the Board of Directors and operate under its control.

This is exactly how the Chinese political eco-system and public governance system is organized with the People ( the Clients), the employees ( the civil servants), the shareholders ( the 94 million members of the Communist Party ), the General Assembly ( the NCPC Congress ), its Board of directors ( The Standing Committee of the Communist Party ) and the executive team, ( The Chairman and the Prime Minister ) designated by the latter and approved by the NCPCC, as is the case with Private corporations.

As is the case with western corporations, the CEO is not elected by the clients – the people in western democracies -, but by the Board of directors and he is not kicked out after two terms if he is doing a good job.

In any case, who in the west would invest in a company where the CEO is elected by the clients for four years? and who in the west would invest in a company where the CEO has strictly NO experience at managing public affairs? Although this is exactly what is happening in. western democracies.

Our Western democracies were born in 1776 out of revolutions against the tyranny of the then only model of Governance; Monarchies and Empires where the ruler owned the land, the only productive economic asset.

Putting the sovereignty of the People on top was the priority, hence “We the people” and the full democracy model.

However, it has not been an absolute success in terms of economic efficiency, contrary to the Private corporations and the Chinese – and Singaporean – model of governance.

It is clearly not politically correct today to state that the Chinese political and social eco-system is superior to the one of the west, but the facts and the economic and social track record are there.

The rise of China creates tensions

The 2018 US-China Trade War is the best illustration that the world is evolving towards the dangerous Thucydides trap where the dominant power becomes scared by the rise of the emerging power and where avoiding confrontation becomes extremely difficult.

Contrary to the US where the infrastructure is a century-old and Japan and Europe where it was rebuilt 70 years ago, China’s infrastructure is new and built with the most advanced technologies of the time. As was the case with America in the 1920’s when it was challenging the then leading power of the time, the British Empire, this infrastructure gives it an embedded productivity edge.

China’s society is more collective and egalitarian than the US society and therefore creates fewer inequalities and above all less poverty. In 40 years, China has brought the percentage of people living under the threshold of poverty from 90 % to 1 % of the population. In the US 30 % of the population lives on the threshold of poverty.

America is withdrawing from the world while China is expanding economically through its Belt-and road initiative, pouring billions of US Dollars in infrastructure projects in countries as diverse as Myanmar, Ethiopia, Congo, Greece or Italy.

Finally, China is becoming more assertive militarily, particularly in the areas of direct interest to it such as the China seas, the Pacific Ocean, the Korean peninsula and the Indo-Asian peninsula.

One of the striking development of the past few years has been a significant rise in ANTI-CHINESE sentiment in the US, and for once, in this hugely polarized country, this seems to be a rare Bi-Partisan concern.

Donald Trump’s Trade War against China and the singling out of Companies such as Huawei on National security grounds are all testimonies of this dangerous drift towards a confrontation between powers competing for leadership that could ultimately lead to war as was the case in the first world war.

America should remember that over 5’000 years of history, China has had a very constant tendency to isolationism.

While the Silk Road figures prominently in the Western vision of the East, China effectively closed itself off to the outside world following the burning of Zheng He’s ships in the 16th century, preferring isolated imperial splendor to the cut and thrust of commerce.

In the words of emperor Qianlong to the English ambassador George Macartney in 1793, “I set no value on objects strange or ingenious, and have no use for your country’s manufactures.”

This, of course, did not work out so well for the emperors, who suffered imperialist invasions and the so-called “century of humiliation.” Nonetheless, this essentially isolationist tendency is still very prevalent in the Chinese political culture and its best illustration can be found in the very constant refusal of China to get involved in the political affairs of the rest of the world.

Even when dealing with Hong Kong, and its recent unrest, or Taiwan, territories that china considers historically as being part of the same Nation, China has shown immense restraint and avoided to use force or even to influence the local political scene.

The 2020s will be the decade of China

In exactly the way the roaring 1920s were the decade of a rising America and the 1980s the decade of a rising Japan the 2020s will be the decade of a rising China.

After four decades where economic development and investment in infrastructure were the priorities, China is now at the stage where its economy is maturing and its biggest challenge is to avoid what western economists call the Middle-Income development trap, referring to economies such as Brazil, South Africa, India or Indonesia.

In fact, China is already way past that pseudo “middle Income” trap with a GDP per Capita higher than 90 % of the countries of the world, but also and mainly because it is already the world’s largest consumer market, the world’s largest auto manufacturer, computer manufacturer, transportation market, aeronautical market, telecommunication market, banking and insurance markets, pharmaceutical market, the largest market for mobile phones, computers and mobile payments and the largest consumer and producer of energy in the world.

China has already taken the lead in some crucial technologies such as 5G, Artificial intelligence, voice and facial recognition, mobile payments, online commerce, genetics, solar power and electric vehicles.

Now that the uncertainties of the US-China Trade war have receded and that China has completed the opening up of its financial markets by allowing foreign financial firms to operate freely in its domestic markets, China is ready for the next phase of its development :

The blossoming of the Chinese Consumer

Indeed the transition from an export-led economy to a consumer-led economy is well advanced:

As recently as 2008, China’s net trade surplus accounted for 8% of GDP.

By 2018, that figure was only about 1.3%—less than either Germany or South Korea, where net trade surpluses generate between 5% and 8% of GDP.

Instead, China’s economy today is driven by domestic consumption. In 11 of the 16 quarters since 2015, consumption has contributed more than 60% of GDP growth.

China’s private consumption growth has outpaced all the other major economies, despite its extremely high starting base and absolute numbers.

In addition to becoming the world’s biggest market for online retail, the country now represents more than 30% of the global market in luxury goods, automotive, consumer appliances, mobile phones, and spirits.

China’s working-age individuals today also have higher disposable incomes than their parents. They are so numerous and their incomes rising so rapidly that they have the potential to reshape global consumption as the baby boomer generation did in the West—the richest generation in history.

Chinese urban consumers are devoting a greater share of their income to discretionary spendings, such as transportation and communication, education, and health care. Spending on food declined from 50% of total household consumption in 2000 to 25% in 2017. This is already similar to urban consumers in developed countries today—Japan at 26%, South Korea at 29%, and the United States at 17%.

Make the Chinese Wealthier

At this stage of its development, China’s priority is no longer to create tens of millions of low added value jobs but to make the Chinese wealthier !

China’s unemployment has been collapsing to extremely low levels and the big migration from the countryside to the cities is now over.

Another reason why this is the decade during which the Chinese must become wealthy, in demographics :

China’s demographic profile differs significantly from other emerging countries.
After decades of significant population growth, China’s population growth has slowed down to
a meagre 0.2%, substantially below the 1.4% of Less Developed countries (ex. China).

As of 2025, the growth rate will drop below that of more developed countries and the population will even shrink from 2030 onwards. China’s working-age population (age 15 – 64) is already shrinking.

In absolute terms, China’s population will increase slightly from 1.397 bn to 1.442 bn in 2029 and then shrink to 1.021 bn in 2100, according to UN projections.

In contrast, the population of Less Developed regions (ex. China) will explode from 4.7 bn to 8.8 bn in 2100. By then, India will be the most populated country (1.5 bn) and China will only rank second.

The population pyramid also deviates substantially. For instance, 9.7% of China’s population is aged 65+ compared to 5.4% for other developing regions. And that percentage will triple by 2050. So, China’s population is aging, and its growth rate is slowing.

It is therefore paramount to make the Chinese wealthier NOW, so as to ensure enough savings to support an aging and declining population

The fastest way to Make the Chinese Wealthier is a currency appreciation

At this stage, the fastest way to make the Chinese wealthier and to boost consumption is to engineer a secular increase in the value of the Chinese currency.

In doing so, Chinese individuals and corporations will see their purchasing power increase relative to the rest of the world, import prices from food to energy to chips will come down, and a steady increase in the value of the Yuan will trigger international portfolio flows into Chinese equities, increasing the wealth and the consumption of the Chinese through the wealth effect.

Moreover, as we are about to sign the Phase-1 agreement on the Trade deal, the ONLY way to solve the Chinese trade surplus with the US is the let the Yuan appreciate, changing the terms of the Trade equation.

As we argued many times in the past, China cannot continue to generate current account and Trade surpluses at the rates of 500 to 600 Billon per annum and NOT recycle them in their national currency.

China will gradually have less and less need for Foreign exchange reserves at the current US$ 3 trillion-mark and they will gradually reduce them and recycle them into their own currency.

Finally, the looming debt and budgetary crises in America will reduce the appeal and the role of the US Dollar as a reserve currency and it is highly likely that now that capital restrictions have been lifted in China, the Chinese Yuan will take a more important role in international and commodity trade.

Obviously and as always, the Chinese will proceed gradually and cautiously, but we expect the Chinese Yuan to embark on a steady and multi-year path of appreciation starting now, with an objective of 6.50 to 6.30 in 2020.

Chinese Equities on a multi-year appreciation path

Another way to make the Chinese wealthier and to boost domestic consumption is to allow equity markets to rise.

After the sharp correction of 2018, triggered by the launch of Donald Trump’s Trade war, Chinese equities recouped the lost ground in 2019 and are now trading marginally lower than at the beginning of 2018.

Valuations are cheap and the chart below shows the evolution of the main equity index, the CSI 300 Index with the evolution of the Chinese GDP in Yellow.

Chinese equities are trading at the same level they were in 2007 while the Chinese GDP has been multiplied by 6x.

The opening up of China’s financial markets, the development of its insurance and pension industries and a steady appreciation of the Yuan will trigger significant portfolio flows in favor of Chinese equities.

As we have seen higher up, China is the second-largest economy of the world with a GDP of US$ 13.8 Trillion in nominal terms and the first economy of the world with a GDP of 29.7 Trillion US Dollar equivalent in PPP terms.

By opposition, its equity markets represent barely 5 % of the allocation of the world global portfolio and, at US$ 5.1 Trillion Market Capitalisation, they trade at a hefty discount to its GDP.

Index providers MSCI and FTSE both classify markets into Developed Markets (DM), Emerging Markets (EM) and Frontier Markets (FM). The classification is based on a range of criteria, including economic development, the size and liquidity of the equity market, market accessibility and the regulatory environment.

Currently, both index providers still classify China as an Emerging Market.

China’s weight in the MSCI EM index has risen from 0% in 1996 to 33% in March 2019 (and to 34.6% in the FTSE EM index) as both index providers added more Chinese stocks to the index.
As a result, China is currently the largest country in the Emerging Market index, roughly equal to the combined weight of Korea, Taiwan, and India.

While dominating EM indices, Chinese equities are still relatively small from a global perspective.

The weight of China in the MSCI ACWI index (including 23 DM countries and 24 EM countries) is just 3.9%, ranking fourth between France and the UK, and being overshadowed by the US equity market (55% weight).

For the time being, MSCI and FTSE still classify China as an ‘Emerging Market’.

An interesting question is when will China qualify as ‘Developed’ based on economic development criteria, now that market accessibility has been solved and disregarding regulatory environment criteria.

Both MSCI and FTSE use the World Bank high income Gross National Income (GNI) per capita threshold. The cut off points between the income groups are fixed in real terms. They are measured in USD and adjusted in line with price inflation. Hence, over time, the number of countries in the low- and mid-income groups declines while the number of high-income countries increases over time.

The 2017 high-income threshold was USD 12,235 per capita, significantly higher than the average GNI per capita in China of USD 8,690 at that time.

MSCI even requires countries to have a GNI per capita of 25% above the World Bank high-income threshold for 3 consecutive years, which would amount to USD 15,294 per capita.

Considering a growth rate at 6 %, the fact that China GNI passed the US$ 10’000 threshold in 2019, and a currency appreciation of 25 % at least over the next four years, the threshold of inclusion will be passed in 4 years.

Besides income, FTSE also requires an investment-grade rating for government bonds in order to qualify as a Developed Market, but China has already passed this threshold, having been given an A rating by Moody’s, S&P as well as Fitch.

What the above really means is that, in the coming decade, China will graduate from an emerging market to developed market status.

As a consequence, the proportion of Chinese equities in global portfolios will rise from 5 % to a minimum of 25 % and could even rise to 40 % surpassing the US allocation.

This represents between 5 times and 8 times more money chasing the same number of shares and therefore a phase of significant valuation expansion.

The same phenomenon happened in Japan between 1982 and 1989 taking the Nikkei 225 from 4000 to 39’800 over the period.

How about 2020 ?

The Chinese economy is clearly pulling out of the mild slowdown caused by the Trade war.

The PBOC started stimulating growth through the Reserve Requirement ratio in January 2019 and that has the effect of boosting equities up + 35 % in 2019.

Economic numbers are delivering positive surprises, with the latest being today’s surprisingly good trade numbers. China’s total exports expanded in 2019 while trade with the U.S. dropped as the trade war hit relations between the two biggest economies.

In December, both import and export growth exceeded expectations, rebounding from a weak month previous. In December, both import and export growth exceeded expectations, rebounding from a weak month previous.

Exports from China rose 7.6% YoY in December 2019, easily beating market estimates of 3.2%, shifting from a 1.3% drop in November. This was the first yearly rise in overseas sales since July, and the biggest in nine months, amid strengthening global demand.

Exports actually increased by 0.5% in 2019 from a year earlier, while imports declined 2.8% in dollar terms. That left the trade surplus at $421.5 billion for the year while the Trade with the U.S. declined almost 11% in the year in yuan terms. Europe remained the largest trading partner of China.

This is extremely good news as exports were really the black spot in our global economic scenario for China’s GDP in 2020.

China’s GDP growth has moderated to around 6.1% y/y this year, weighed down by weaker investment and net exports amid the Sino-US trade dispute.

We expect the government to set the growth target lower in 2020 to “around 6%” from “6%–6.5%” in 2019. Actual full-year growth in 2020 could fall even further, to 5.8%–6%, if Sino-US trade tensions linger, however, we doubt that this will be the case and our target is closer to 6 %.

The key upcoming events to watch will be the National People’s Congress (NPC) in March, where the government will reveal its growth targets, policy priorities, reform agenda and budget plan for the year ahead.

Property Fixed Asset Investment growth has been relatively resilient at 9%–10% this year, though growth should moderate next year given the delayed effects from decelerating land sales amid credit tightening for developers and mortgages.

Retail sales growth has slowed to around 8% in 2019 from 9% in 2018, dragged down by slumping auto sales – the largest component (around 10%) of the retail segment – due to both structural and cyclical headwinds.

On the other hand, sales of consumer staples, such as food and beverages and cosmetics, have grown by high-single-digit to low-teen percentages this year. We expect retail sales to strengthen marginally next year on the back of an improving auto market and targetted tax incentives.

China’s consumer price index (CPI) surged to a near seven-year high of 3.8% in October and averaged 2.4% from January to October. The index has been driven up by rocketing pork prices since March due to hog supply shortages caused by African swine fever. Pork inflation is likely to push the CPI up even further and peak in Q1 20 before declining sharply in the rest of the year.

Monetary policy will remain broadly accommodative.

The PBoC vowed to improve the monetary policy transmission to guide corporate funding costs lower. The PBoC conducted several mild interest rate cuts in November, including 5bps cuts to both the 1-year medium-term lending facility (MLF) rate and 7-day reverse repo rate. Also, the 1-year loan prime rate (LPR) fixing for new loans has fallen by 15bps to 4.15% since the new pricing mechanism was introduced in August.

But the main measure was to cut the reserve requirement ratio (RRR) by 150bps in October, releasing about CNY 2.4trn in liquidity.

We expect another 100 to 200 bps cut in the RRR in 2020

Fiscal support will focus more on spending to support infrastructure investments. The local government bond issuance quota will be lifted to about CNY 4trn in 2020 from CNY 3.1trn in 2019. Additional tax incentives are expected to support the automobile market and electric vehicles in particular.

All this to say that the macroeconomic and liquidity environments are favorable for equities and we expect a recovery in industrial profits’ growth in 2020

Technically

The three main Chinese indexes show positive configurations for 2020 with major breakouts

Conclusion

The Chinese decade will see the Yuan and Chinese equities embark on a secular bull market that may ultimately take them to highly overvalued territories if history is any guide.

It will be fueled by higher economic efficiency and massive inflows of liquidity as global investors re-position their portfolios out of the US and into China.

As always, it will not be without risks and volatility, but investors should not wait for before positioning themselves seriously into Chinese assets

Key Call # 5: BULLISH PRECIOUS METALS

Gold, Silver, Platinum are a strange breed in the commodity space because they are both usable commodities and act as a reserve of value and a hedge against inflation.

As such, their prices fluctuate as a function of demand and supply for jewelry and industrial uses, but also a function of fears of dislocations in the FIAT financial markets and the prospects for inflation.

The current macro-economic environment is very favorable for Precious Metals for three reasons :

1. With NEGATIVE REAL INTEREST RATES, precious metals offer a great substitute to cash and short term bonds as a reserve of value.
   This is true for individuals but also for Central Banks and countries like Russia, Brazil or Turkey have kept very large amounts of their reserves – if not all of them – in Gold
2. With INFLATION rising as we expect, demand for Precious metals as a hedge against inflation is high and should go even higher.
3. Finally, with global equity markets in the last phase of their secular bull market and bond markets having peaked already, the coming bear phase market will boost demand for Precious metals as an alternative to cash, bonds, and equities.

As the Logarithmic charts below show, Precious metals were in a strong bull market from 2001 till 2007 as growth boosted demand for jewelry and industrial demand while inflation was creeping up.

The 2008 crisis first fueled deflationary fears and then fueled another leg of the rally until 2011 as investors were fearing the consequences of the financial crisis.

When it became clear in 2011 that the system would survive and deflation took hold, Precious metals lost 40 % of their value in a classical bear market that ended in 2015.

2019 was really the year where precious metals confirmed the change of trend and started a new secular bull market of which we have only seen the first leg for now.

It is interesting to note that the three precious metals tend to have different time frames and price frames with Silver lagging Gold and Platinum lagging the two others.

It is also worth noting that in bull phases, Silver tends to outperform Gold significantly, and this should remain true in the coming bull market.

Gold

Silver

Platinum

The bull market in precious metals has just started. Investors should remain exposed with a strong preference for Silver.

Key Call # 6: A NEW COMMODITY CYCLE

Secular bear markets in commodities tend to last between 8 and 16 years and this one started in 2011. In Q1 2016, Oil and metals made a cyclical bottom within this secular bear market and the bear market rally lasted until September 2018, as investors expected a return of coincident growth and inflation.

Unfortunately, they were disappointed as the US-China Trade war choked off the coincident recovery that had started in 2016.

The reflationary liquidity impulse of 2019, negative real interest rates, rising inflation and an easing of the US-China tensions allowing China to stabilize are all tailwinds that should ignite a global commodities bull market in 2020.

In fact,

. the bull market has already started in SOFT Commodities.
Soft commodities go through bear phases where lower prices entice farmers to reduce their planted acreages until prices bottom out by dearth of supply and we have reached this stage.
In addition, Climate Change is starting to have a significant disruptive impact on output quantities and reliability, which makes us extremely bullish soft commodities.

. The bull market is about to start in industrial metals.
Reflation and the easing of tensions in the US-China War will have an impact on manufacturing in 2020 and therefore on Copper and the industrial commodities complex at large. We also expect the automobile sector to improve in 2020.

. The one exception is oil prices.
Now that the Aramco floatation is out if the way, oil prices should revert to the fundamentals of supply and demand. And these are structurally negative for oil prices.
2020 will be the year of peak oil demand and at current prices, shale oil supply is bound to explode upwards which is why Russia is no longer prepared to reduce its output.

In 2020, investors should stay very long soft commodities, start accumulating copper and short Oil and oil stocks.

The technical picture of the various commodities sends clear signals

CRB Commodity Index

Copper

Soft Commodity Index

Soybeans

Wheat

Corn

Sugar

Coffee

Key Call # 7: POLITICAL RISKS

No strategic vision would be complete without an assessment of the foreseeable political risks on the horizon for 2020.

. The most important US Presidential elections for America and the rest of the world

Since the election of President Donald Trump in 2016, our era has become unusually chaotic.

With his unique confrontational and twitter-driven style, Donald Trump, the leader of the dominant political and military nation of our world has shaken the foundations of a well-established international order and managed to polarized America to the extreme.

From pulling out of multilateralism and international organizations to negating economic globalization and the logic of globalized supply chains, Donald Trump has re-shuffled the international political and economic cards and created a lot of uncertainties.

His unique management style and personal life experience led to an unusually high turnover in his team and a dearth of stable advisers around him.

His short term objective of boosting the US economy through a counter-cyclical tax cut has saddled America with a major long term problem of budget deficits,

His questioning of the independence of the FED and his public interventions on Monetary Policies have shaken one of the pillars of the US economic organization,

His approach to world affairs has created an important wedge between him and his opposite numbers around the world, including with the most traditional allies of America,

His Trade war with China has led the Eastern giant to decide to go it alone and take the long route of technological and strategic independence,

His unilateral handling of North Korea and Iran has heightened geopolitical tensions in the Gulf and the Pacific,

His pulling-out of the Nuclear Non-Proliferation Treaty and his questioning of NATO have made the world suddenly a much more dangerous place,

And finally, his transactional approach to International affairs and lack of experience in Government and legality made him confuse domestic and international issues and abuse the dominant position of the United States of America in the pursuit of a personal political benefit, which, in turn, led to his impeachment by the House of Representatives in December 2019.

At the end of the day, it is not the causes or the objectives pursued by Donald Trump themselves that are being questioned, BUT RATHER THE DAMAGE CAUSED BY HIS PERSONAL STYLE AND LACK OF EXPERIENCE IN HANDLING PUBLIC AFFAIRS.

Donald Trump may ultimately right on Iran, North Korea, China, Biden or the FED, but the real issues are the collateral damages and the long term consequences of his sometimes impulsive actions.

Could Donald Trump be removed from office by the Senate?

The unanimous consensus is that the Republican senate will NOT Convict Donald Trump.
However, the problem that is facing the GOP senators is that they will have to privilege politics against the Law in a country where the Rule of Law is the essence of the Society.
This is an uncomfortable position to be in particularly at a time where the public opinion seems to be shifting with 55 % of Americans approving of his Impeachment and 46 % wanting Trump to be removed from office. In July 1974, 11 days before Richard Nixon’s resignation, a Gallup poll showed that 46 % of Americans were in favor of his removal from office.

In a trial, everything can happen and the current debate on the testimony of John Bolton is crucial as it could shed a lot of light on the way Donald Trump Governs the country and turn a number of Republican Senator against him. 66 % of Americans want to see John Bolton testifying.

We would not take the clearing of Donald Trump as an automatic foregone conclusion.
We think there is a probability that he could be convicted in the Senate or that he would resign from office before if it became a real possibility.

Could Donald Trump lose the 2020 elections?

Assuming he remains in office, the general polls currently show that Donald Trump would lose in almost every configuration apart from Elizabeth Warren as a Democrat nominee.

However, the margin is extremely small and as we all remember, the polls were utterly wrong in the 2016 elections right up to the day before the elections.

More importantly, in other polls, 76 % of Investors believe that Donald Trump will win and only 4 % that he will lose. This is a record positioning and it illustrates the well-being factor of Wall Street after Donald Trump’s short term policies. It is merely a reflection of soaring asset prices, high bonuses, and low rates, but the budgetary problem has not yet come back home to roost.

Moreover, it is highly probable that these numbers would be very different if we suddenly experienced a market crash or the beginning of a bear market in bonds and equities before the year-end as we expect.

Finally, Donald Trump’s surprise victory in 2016 hinged on three states that unexpectedly yielded his way.

One thing is for sure, and that is that America is extremely polarized with 44 % of Americans loving Trump whatever he does and 54 % of Americans hating him.

The other thing that is for sure is that a victory in these States is all but assured as the anti-trump camp may mobilize much more than the pro-Trump camp that has already got all the backing possible in 2016.

Finally, the last element in the equation is who will be the Democratic nominee. Assuming Elizabeth Warren is eliminated, two candidates stand out in the polls, one is Joe Biden who is getting old and tired and the other one is Michael Bloomberg who is looking younger, more business-friendly, has all the successes of having run New York City, has been both democrat and Republican and has plenty of funding for his Presidential campaign.

Betting on the US Presidential elections is a very hazardous thing, but if we had to make a call, we would see Michael Bloomberg as having the highest chances of becoming America’s 46^th President.

2020 is an election year and common market wisdom has it that election years are positive for equity markets.

This is statistically true SAVE FOR 2008 and 2000 that saw the worst US equity bear markets of the past four decades, and 2020 does resemble 2007 and 2000 in many respects when it comes to valuations, excessive speculation, massive indebtedness and, rising inflation.

There again, although liquidity should support asset prices going into the summer, we would not base our investment policy on the assumption that 2020 will be an assured positive year.

. The Fall of Iran

Predicting the fall of a regime is always very risky and anyone, including ourselves, who predicted that the Chavez/Maduro regime in Venezuela would fall got it terribly wrong for the past five years.

However, the situation in Iran is getting more difficult by the day and growing popular unrest in Iran itself and its satellites Iraq and Lebanon testifies of the increasing rejection of the local populations of a regime that has brought only wars and misery to its people.

Economic conditions in Iran, Iraq, and Lebanon have become unbearable with Lebanon experiencing a major banking and currency crisis.

Moreover, the Iranian Mullahs’ regime is starting to show cracks internally and we interpret the downing of the Ukraine International Airlines flight on January 8^th 2020 as a sign that the Revolutionary Guards have acted on their own without the agreement or coordination of the Supreme Guide.

Our analysis is that Iran’s regime is highly destabilized and that there will be nothing to make things better economically in the near future. Popular discontent is set to rise in both Iran and Lebanon and neither Israel nor America are ready to let Iran pursue its nuclear developments.

The risks of an escalation are real and they may either take the form of a major conflagration in the straits of Hormuz or the form of more indirect attacks on American or western interests through cyberattacks on the financial system, the power grids, the States themselves or even the internet.

Another possibility is a conflagration in Lebanon that leads to a military intervention by Israel and America there with probable military consequences in Iran.

Investors should not kid themselves.

Neither America nor Israel will ever send troops to Iran.
However, aerial attacks to destroy Iran’s Army, Navy, and Aviation, as well as all the Revolutionary Guards facilities and all the nuclear facilities are a real possibility.

Likewise, military intervention in Lebanon is a real possibility as the enemy there will be Hezbollah and only a ground operation similar to the one of the 1982 Israeli invasion will be able to clear the situation, but it is doubtful that it will be carried out by Israeli troops and more likely by American troops.

Any hint of conflict in the Middle East will send oil prices sky-rocketing, bond yields sharply higher and equity markets sharply lower.

. Could Kim Jong Un do something stupid?

In our Article titled “BEWARE OF THE HERMIT”, we highlighted the discrepancy between North Korea’s perception of its own reality as a Nuclear power and the rest of the world’s perception that it needs to de-nuclearize.

Western sanctions on North Korea are having very little effect and will not have any for as long as China offers North Korea an economic output.  However, North Korea knows that it needs to open up and start developing its own economy with the rest of the world and with South Korea, but it views its Nuclear arsenal as the only guarantee of survival of its unique regime.

Kim Jung Un is now in a position where he wants to force Donald Trump and the rest of the world to recognize its nuclear status while lifting economic sanctions.

In 2019 it threatened America with a nasty Christmas Present that did not materialize and in January 2020 he promised the world to come up with a new and terrifying weapon.

Wait and see …

15th January 2020