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Credit Photo Austin Neill –

The worst December since 1931 capped the worst year since the 2008 financial crisis.

Last year we closed a bumper year in equities by predicting that the exceptional liquidity environment that had propelled most asset classes to record highs would end in 2018.

We predicted that inflation would come back with a vengeance and that interest rates would rise in the US, sending bond markets roiling and the US dollar higher.

We predicted that equity markets would roll over and end the year in negative territory, despite record earnings, as the extremes of valuation reached would not be sustainable.

We also warned that the lead of technology stocks would end and that the reversal would be extremely sharp considering the extremes of overvaluation and portfolio concentration reached.

Indeed, monetary policy normalization took place in the USA and the Federal reserve raised rates four times, bringing them from 1.5 % to 2.5 % over the year, nothing really to write home about considering the fact that over the same period, core inflation rose form 1.6 to 2.2 % before falling back towards 1.9 % at the end of the year.

Monetary policies remain extremely accommodative in Japan, Europe and even China and corporate earnings should record another bumper 4th quarter, both supporting equity prices in theory.

So the reasons for the 20 % global fall in equities must be found elsewhere and they have much more to do with politics than with the macro-economic environment that we have been living in in 2018.

The financial markets hate uncertainty and Donald Trump’s ways of governing has sent shivers to the world and to the world of investors.

We had certainly not envisaged Donald Trumps’ trade war with China and its extremely negative impact on investments worldwide, his inability to maintain a credible team within his administration, his constant confrontation of his best international allies and his amazing ability to create stress on almost every issue instead of rallying his allies or even his Republican political friends. 

Never would we have imagined a US President publicly threatening to remove a FED chairman that he had nominated himself.

Never would we have imagined that 90 % of the highly credible and respected people who joined his administration in 2017 would have left less than two years in the job, leaving a massive vacuum around an internally and international isolated President.

Never would we have imagined a US President meeting with a Chinese President for dinner at a G20 meeting while giving instructions to get Canada to arrest a high-profile Chinese executive at the same time.

The bullying and “Rapport de Force” tactics that may have made Donald Trump’s fortunes in New York real estate do not work on the international scene where diplomacy, consensus-building and building bridges are the only way to get things done.

And the world cannot relate to a US President that does not embrace his roles as the leader of the free world and the guarantor of freedom and democracy but restricts his agenda to pleasing a small section of the US electorate that has gotten him in power.

Never would we have imagined a US President capable of shutting down the entire US Government to fulfill one of his most controversial electoral promise of building a wall at the southern border of America.

84 % of the people of Europe trusted the US President to do the right things in 2015 according to a Gallup poll. Only 16 % of the same polled population trust him now.

Where does the world stability goes when the very US Secretary of State for Defense leaves warning that the USA cannot go it alone, against its own traditional allies ?

Donald Trump will be remembered as the President that wiped out US$ 5 trillion of wealth in the US equity market, and about the same amount globally for no real reason but his stubborn refusal to deal with Government realities.

The world economy was on a sound footing and momentum was accelerating. Donald Trump’s Trade Wars stopped that momentum on its tracks and now investors are fearing a recession.

China, one of the engines of growth of the world was engineering a delicate transition form an export-led economy to a consumer-led economy. Donald Trump Trade Wars accelerated the decline of China’s industrial sector as testified by the latest batch of number showing a mild contraction of the industrial sector and an expansion of the consumer sector.

But Chinese imports of US made goods have collapsed brutally in the past few months and it will take a lot of time for that confidence to be rebuilt.

Will the 2018 tremors in financial markets be a sufficient wake-up call for Donald Trump or will he stubbornly dig in and continue to deal with public affairs the same way in 2019 ?

If one judges from the traditional metrics of sentiment and valuation, all the elements are in place for a significant rebound in the first quarter of 2019 and maybe even the second quarter.

However, Donald Trump is highly unpredictable and the average experience of the team surrounding him has gone down significantly in the past two months. 

Moreover, with Democrats taking over the House of Representatives, the political attacks and legal enquiries into his affairs and tax situation are likely to increase, further destabilizing the US Presidency.

At the end of the day, Donald Trump will be judged by the American People and by his own electorate on his economic track record.

Can he really afford a continuation of the sell-off and be blamed for having caused a recession in the US ?  

We doubt it !  


This is what we were writing about equities in our December 2018 post titled OUR SEVEN INVESTMENT CALLS FOR 2018


We expect stretched valuations and rising bond yields to limit equity index performances in 2018 and the prospect of a potential US economic slowdown in 2020 to further cramp returns in 2019.

The S&P 500 has already surpassed our target for the end of this cycle and is now entering expensive territory.

Indeed, on all the metrics, US equities are trading at levels only seen during the late – 90s bubble. Since Trump’s election, the US equity market has risen 24%, but only half of this came from earnings growth. The other half has been driven by P/E expansion.

The US equity market is already pricing in potential tax reform. The rise in bond yields and Fed repricing should be headwinds against further US equity rerating.

Technology stocks are particularly expensive and we would rather stick to defensive, mining and cyclical stocks.

Technically, we see a short but sharp correction in December 2017, a last rally but not much higher than current levels in the first quarter of 2018 before a much more severe end to the bull phase later in the year.

Indeed, 2018 proved to be the worst year in equity markets since the 2008 financial crisis and December was the worst month of December ever recorded since 1931.

Global equity markets peaked on January 24th 2018, a month only after we wrote our piece and US equities peaked on September 20th 2018, just a few days before we warned investors about the possibility of an extremely serious correction.

Since then almost every equity markets fell by 20% or more leaving each and every equity market in negative territory for 2018 apart from Brazil.

U.S. stocks ended the worst year since the financial crisis and the worst December rout for the S&P 500 since 1931 down 9 percent. That monthly rout capped a 6.75 percent slide in the year, the biggest of the record 2009 -2018 bull market.

Stocks around the world limped into the end of a dismal year that’s seen bear markets in equities from Japan to Germany. China’s main index fell 25 %, Japan’s Topix index ended the year down -17 % and Europe’s main stock gauge fell 14 percent in the year — the biggest yearly drop for all of them since 2008. 

While there is a glimmer of hope on the trade front the markets are sensing plenty of event risks for the next 12 months, from the U.K.’s exit from the European Union to U.S.-China trade talks and the continuing showdown between President Trump and Congress over the budget. 

The good news though is that valuations have come down sharply, oil prices have fallen sharply, inflation will probably fall with it and interest rates and bond yields should reman subdued.


As we had been expecting, and contrary to the consensus view at the beginning fo 2018, the US dollar rose by 10 % against the EUR between April and October 2018 as interest rate differentials took center stage. 

The US dollar also rose by 14 % against the Canadian Dollar and almost 10 % against the Australian Dollar.

The last bout of panic in the financial markets took the Japanese Yen sharply higher making it end 2018 4.4 % higher than at the beginning of the year, but a lot of the appreciation runs against the fundamentals of Japan and should be reversed soon.

The launch of the US trade war against China sent the Chinese Yuan sharply lower making it lose 5.5 % of its value over the year while BREXIT’s uncertainties weighed on the British Pound.

The year was also characterized by a mini emerging currencies crisis, there again triggered by Donald Trump’s sanctions against Turkey and Russia, with the Turkish Lira losing 28 % of its value and the Russian ruble 17 %.

With increasing worries about economic growth, we expect the US Dollar to weaken against the EUR and most major currencies next year, the exception being the Japanese Yen that we see resuming its depreciating trend.

A more friendly climate on the US Trade War should benefit the Chinese Yuan next year.


In commodities, crude oil went through a roller coaster year with black gold rising 30 % to a a four-year high in September only to slump to its first annual loss since 2015, completing a reversal that saw it drop 22 % for the year. 

Natural gas futures slid on Friday below $3 for the first time since September, giving the front-month contract its worst December since 1991. 

Gold barreled into 2019 near a six-month high on haven demand, but still negative for the year.

Overall, 2018 was a terrible year for commodities where political uncertainties and Trade Wars compounded anxiety for the operators. 

Metals had their worst year in a decade and seem to indicate that economic growth will be subdued next year.

Soft commodities have also been hit with Coffee and Sugar falling by 28 and 23 % respectively.


In our SEVEN INVESTMENT CALLS for 2018 we recommended investors to stay away from binds and expected yields to shoot up quite significantly.

2018 was also the year where the FED reversed its bond buying program and started offloading bonds, reducing its holdings by US$ 50 Billion a month.

And indeed they bond yields shot up, particularly in the USA where 10-year bond yield jumped from 2.35 to 3.23 % before settling back down to 2.72 %. 

Between January and October, the 20 year US Government ETF lost 13 % of its value before rebounding sharply in November and December.

Panic took hold in the corporate bond universe with long dated triple B rated bond yields shooting up to 8 % while junk bond yields reached 12 % in October 2018. 

The year was not a good year for bond investors overall but great buying opportunities emerged as we highlighted in our post time-to-lock-in-high-yields-in-corporate-bonds/ dated November 25th 2018.

In Europe and Japan, the bond markets remained stable as the ECB and the BOJ maintained their highly accommodative monetary policies. Italian Government bonds suffered from the political confrontation between the EU and the Italian populist Government.

2018 was neither a good year for emerging market bond investors. Turkish and Russian Bonds fell extremely sharply following the US sanctions imposed in August and most Latin American bond yields shot up drastically over the period. In Asia, Indonesian bonds fell but the rest of the market remained stable overall.

We see no value in Government Bonds globally at current levels but see calm returning to the corporate bond markets. 

Inflation should remain subdued in the first half of 2019 but could re-appear by the second half of the year as Chinese, European and Japanese Monetary policies re-ignite economic growth.


What a difference a year makes. At the end of 2017, investors were willing to pay almost double the underlying value to buy a stake in Bitcoin’s lone U.S. investment trust. 

Now the premium is almost nonexistent in the wake of the roughly 83 percent plunge by the biggest cryptocurrency.

All over 2017 we were analyzing the stratospheric rise of Bitcoins from 6’000 to the high of 19’511 reached on December 22nd 2017, and were coming back to the conclusion that crypto-currencies lacked all the elements needed to be a currency.

In fact it was a speculative bubble based on rarity with several equivalents in the past such as the Dutch Tulip craze in the 16th century, a psychological mass infatuation with no fundamental grounds apart from greed.

People investing in Bitcoins thought they would make a fortune by owning bits of code that have no actual use for them and cost a lot of money to mine and maintain.

We shorted them at 19’000 on December 19th 2017, the very day the future contract started to trade in Chicago.

Since then they fell to 3’500 where we finally covered our short position after having traded it actively during the year.

The mania among individuals investors and speculators was not the only demand to cool in 2018. 

Funding from so-called initial coin offerings has also dried up sharply since midyear. 

Many of the startups that have succeeded in raising money in this manner
have felt the sting of the digital asset market’s collapse, and are cutting staff and shuttering operations.

Profitability of so-called miners, whose servers support Bitcoin network’s operations, collapsed as well. Many have left the business altogether, or took some of their servers offline.

The amount of computing power supporting Bitcoin’s network has dropped as a result, impacting the network’s security and capacity.

The end of all these troubles appears to be nowhere insight. 

Nowadays, few pundits are bold enough to call a bottom, as Bitcoin rebounded from 3’500, a level seen as a break-even point for many miners.

Indeed, it’s become harder to make the case for Bitcoin as the ultimate alternative investment even after the 1,400 percent surge in 2017. 

The token that was touted as “digital gold” has underperformed just about everything in 2018 and, frankly, we see nothing in the fundamentals that would support their price at any level…. 

Bitcoins are probably heading towards ZERO and will be remembered as one of those crazy speculative bubbles that pops up form time to time, or to be more precise from generation to generation.

Crypto-currencies will have been the bubble of the Millenium generation.