We all have heroes. For my son in college, it's Ernest Hemingway. I'm waiting for the call that he is going to run with the bulls in Pamplona. One of my heroes in the world of finance is Byron Wien. While Warren Buffett and Carl Icahn may get the press, in the inner circle of investment strategists there are few more respected. In a world of 24 hour business news, there is no shortage of 'experts'. In my opinion, most of what we get is worthless pablum. There are a handful of smart individuals whose thoughts I take quite seriously, and over time I hope to introduce them to you in this forum. Mr.Wien is one of those individuals.
But it is the new Year, and that means it is time for Byron Wien's 2014 Annual Surprises. This is the 29th year Byron has given his views on a number of economic, financial market and political surprises for the coming year. Byron's definition of a "surprise" is any event which the public would only assign a one out of three chance of taking place but which Byron believes is "probable," that is having at least a 50/50 likelihood of actually occurring.
I eagerly await Bryon's list every year as I find it enjoyable, intellectually stimulating and quite often, very accurate. With that, I offer you his 2014 Surprises:
1. We experience a Dickensian market with the best of times and the worst of times. The worst comes first as geopolitical problems coupled with euphoric extremes lead to a sharp correction of more than 10%. The best then follows with a move to new highs as the Standard & Poor's 500 approaches a 20% total return by year end.
2. The U.S. economy finally breaks out of its doldrums. Growth exceeds 3% and the unemployment rate moves toward 6%. Fed tapering proves to be a non-event.
3. The strength of the U.S. economy relative to Europe and Japan allows the dollar to strengthen. It trades below $1.25 against the euro and buys 120 yen.
4. Shinzo Abe of Japan is the only world leader who understands that Dick Cheney was right when he said that deficits don't matter. He continues his aggressive fiscal and monetary expansion and the Nikkei 225 rises to 18,000 early in the year, but the increase in the sales tax, the aging population and declining work force finally begin to take their toll and the market suffers a sharp (20%) correction in the second half.
5. China's Third Plenum policies to rebalance the economy toward the consumer and away from a dependence on investment spending slow the growth rate to 6% in 2014. Chinese mainland traded equities have another disappointing year. The new leaders emphasize that their program is best for the country in the long run.
6. Emerging market investing continues to prove treacherous. Strong leadership and growth policies in Mexico and South Korea result in significant appreciation in their equities, but other emerging markets fail to follow their performance.
7. In spite of increased U.S. production the price of West Texas Intermediate crude exceeds $110. Demand from developing economies continues to outweigh conservation and reduced consumption in the developed world.
8. The rising standard of living and the shift to more consumer-oriented economies in the emerging markets result in a reversal of the decline in agricultural commodity prices. Corn goes to $5.25 a bushel, wheat to $7.50 and soybeans to $16.00.
9. The strength in the U.S. economy coupled with somewhat higher inflation causes the yield on the 10-year U.S. Treasury to rise to 4%. Short-term rates stay near zero, but the increase in intermediate-term yields has a negative impact on housing and a positive effect on the dollar.
10. The Affordable Care Act has a turnaround. The computer access problems are significantly diminished and younger people begin signing up.