As we stand on the brink of a new year, there’s a mixture of hope and anticipation. With the arrival of 2015, many expect to achieve their aspirations and dreams. But beyond personal ambitions, what might the year hold for us all?
Today, we take a moment to gauge the landscape of the coming year, understanding that predicting the future is more art than science. It’s not a foolproof method, but it’s certainly more imaginative than simply extending old trends into new territory. Past performance doesn’t ensure future results.
This means blindly chasing last year’s high performers can lead to poor financial decisions. Often, investors buy after peaks and sell during dips, committing the cardinal sin of investing: buying high, selling low.
On the other hand, investing in undervalued companies facing tough times in their sectors can yield greater returns. These stocks often rebound beyond their average price, proving that purchasing when the market is down can be more advantageous.
Before moving forward with our projections for 2015, we should acknowledge one critical point…
“Those who have knowledge do not predict; those who predict do not have knowledge,” the ancient philosopher Lao Tzu remarked. While he certainly possesses wisdom beyond our own, we shall nonetheless proceed with our thoughts.
With a sharpened pencil and recognition of our limitations, we aim to provoke thought rather than deliver predictions. Here are several considerations for the year ahead, presented for your reflection and amusement.
Bread and Circuses, Shock and Awe
Dramatic geopolitical conflicts are simmering beneath the surface, and 2015 may herald their eruption. Long-standing disputes, especially the actions of Putin in Ukraine and Crimea, suggest that tensions are escalating, with more sanctions likely bolstering his defiance. Additionally, the ongoing battle against ISIS signifies further international clashes.
The most pressing conflict could emerge from the East China Sea, primarily the territorial dispute between Japan and China over the Senkaku-Diaoyu Islands. Last year saw China establish a significant Air Defense Identification Zone in the region, asserting its claims, while Japan remains firm that the islands are theirs without question.
What raises the stakes is the United States’ treaty obligation to defend Japan against any “armed attack” on these islands. A confrontation between the U.S. and China over this issue could escalate into a significant global conflict.
According to the IMF, China has become the largest economy in the world, and it is on course to develop the most formidable military. This longstanding territorial claim offers China the rationale to enhance its military presence and capabilities, which will likely be a recurrent theme throughout 2015.
Disaster and Other Estimations for 2015
In these uncertain times, it’s wise to hope for the best while bracing for the worst. The economy in 2015 could very well experience solid growth, maintaining a steady pace of around 3%, with inflation possibly reaching the Fed’s target of 2%. The bull market in stocks might endure for another year.
While these outcomes are plausible, we must not disregard the potential for disaster, which is also a possibility for 2015.
The stock market is currently at unprecedented highs and has remained there for an extended period. Markets naturally oscillate, and stocks can both rise and fall.
In this context, a significant trigger could cause the market to plunge by 20-40% before the year’s end. A potential catalyst for such a decline might be the collapse of junk bonds, reminiscent of events before the 2008 crash. The recent decline in oil prices has already begun affecting junk bonds, indicating that stocks might follow suit.
As we near the end of 2014, economic indicators paint a positive picture. The Bureau of Economic Analysis recently reported a GDP growth of 5.0 percent, while consumer confidence is at its highest since before the Great Recession.
However, these optimistic figures are unlikely to persist. Many of the high-paying jobs created in the U.S. in recent years have been tied to the fracking industry. With the drop in oil prices, those jobs are likely to vanish. Although consumers may benefit from lower gas prices, the loss of these well-paying jobs will weigh heavily on the economy, pushing it towards recession as the year unfolds.
Add to this the challenges posed by a robust dollar, which complicates the Fed’s objective of reaching the 2% inflation target. This could compel changes to the Fed’s strategy, which had previously set the stage for raising interest rates around mid-year. However, if the stock market falters amid deflationary pressures, the Fed might reverse course, prolonging its zero-interest policy while potentially initiating a new round of quantitative easing or other unconventional monetary measures.
Gold prices may remain stagnant or could even dip to around $1,000 per ounce. Savvy investors might seize this opportunity to convert some cash into gold, preparing for an eventual shift from deflation to inflation. As time goes on, investments in gold and farmland may serve as reliable stores of value.
Finally, the extensive reliance on debt and zero interest rates has left the U.S. and many other economies precariously balanced. Currently, deflation influences treasury yields, inflating a debt bubble that has built up over decades. Will 2015 mark the year this bubble bursts?
Though definitive answers remain elusive, it is evident that the Fed will strive to prevent a default on treasury obligations at all costs. They will attempt to shift from deflation to inflation to alleviate the government’s debt strain. They may not achieve this in 2015, but ultimately, they will. In short, it would be prudent to steer clear of bonds, including treasuries.
Wishing you a prosperous New Year!
Sincerely,
MN Gordon
for Economic Prism
Return from Disaster and Other Estimations for 2015 to Economic Prism
