We were greeted in the office this morning by Dan Denning telling us that the best performing commodity in 2012 was…wait for it…lead. That’s right, good old lead. And the best performing equity index last year? Venezuela.
Have a think about that when you read all the expert investment predictions for 2013 over the next few weeks.
The truth is no one has any clue or special insight into which investment class will make money this year. That’s especially true in a global environment characterised by constant central bank intervention and the resultant currency wars.
As far as investment predictions go, we’ll stick our neck out and say that 2013 will either be a very good year, or a very bad one. We don’t mean to be facetious in saying that. The point is, the global credit bubble will either go on expanding, encouraging speculation and leading to the outperformance of risk assets (a ‘very good’ year) or it will collapse (a ‘very bad’ year).
You’re basically investing in a world now that will deliver those two outcomes…one first, the other later. It’s just that no one knows when, and in what form, the ‘later’ part will come. The credit bubble first popped in 2008. Then policymakers took unprecedented action to blow it back up again.
Here we are over four years and tens of trillions of dollars/pounds/euros/yen later and what has really happened? The money created to ‘fix’ the problems (reinflate the credit bubble) was government debt. So we have trillions more debt outstanding but economic growth remains lacklustre.
In other words, we’re adding trillions to the stock of debt but the flow of income resulting from it is actually quite weak. That means the global economy is not increasing its productiveness (measured by economic growth) enough to compensate for the large increase in debt .
But in a world where all the major central banks continue to monetise their debts and thus provide fuel for speculative stock market rallies, the vast majority of investors tend to ignore the weakening of the underlying economic structure.
But it’s virtually certain that the structure will break down at some point. 2008 was the warning sign. The world ignored it, and went about reinflating the flawed structure, which is what led to the problems in the first place.
It’s just that nobody knows when the second break down will occur… 2013, 2014, 2015… Or even further down the track?
Judging by the amount of sanguine and bullish predictions for 2013, it could be closer than many people think. A headline in the Financial Times says:
‘S&P 500 poised for new highs in 2013. Investors favour cyclical sectors such as industrials’
The Australian Financial Review says:
‘If investors take on risk it could be a good year’
There’s renewed bullishness about China and iron ore. The iron ore price has staged an incredible rebound since bottoming in September. It’s now trading around US$145 a tonne, breathing life into the majors – BHP and Rio Tinto.
The price rise is largely thanks to another surge in Chinese credit growth, which got underway in the third the quarter. According to Fitch Ratings Agency, the pick-up in credit growth puts Chinese broad credit on track to surpass US$2.7 trillion in 2012.
It will be the fourth consecutive year that China’s credit growth exceeds one-third of its GDP. Now that is a credit bubble.
So take the iron ore price surge for what it is…the result of an economy completely addicted to credit growth and infrastructure spending. How long the credit expansion can go on is impossible to know. But it can’t go on for ever.
CSLA commodities analyst Ian Roper reckons it will end this year sometime. Today’s AFR reports Roper as saying 2013 is a ‘transition year and the last time you will see a three-digit iron ore price.’
So there’s another prediction for you for 2013.
If you really wanted to go for a contrarian investment prediction for this year, you’d put your money on cash. With central banks engaging in a multi-front currency war and interest rates set to hit historic lows in Australia, the reasons to be out of cash and into something more risky are compelling.
After all, only an idiot would kept their money in cash when all the world’s central banks have ganged up to push investors into riskier investments.
While the logic of getting out of cash is certainly compelling, it’s the same logic that pushed investors into buying a home in the US in 2006, or commodities in early 2008. When it comes to the stock market, the logic of doing something is at its most dangerous when it seems to make the most sense.
That’s why we’ve got a soft spot for cash in 2013. It makes no sense to hold it. It’s not something you’d brag about at a dinner party. But you could’ve made the same argument about lead at the start of 2012.
As we head into 2013, keep in mind that anything can happen this year…and it probably will.
Editor, Sound Money.Sound Investments