If anyone has detected a teeny bit of concern in my emails last week – on oil, on Greece, on global demand – it is because history tells me we are at the end of a business cycle that will end with a 50 percent fall in US equities and a US recession in 2016.
This piece assumes a slow slide to around 1,750 over the course of 2015 before a final plunge to 1,100 by March 2016, as is normal -7-8 years after a mega crash like 1837, 1929, 1973 etc.
This crash scenario is consistent with the message we have sent out in our January emails of 2011, 2012, 2013 and 2014 (all are below). These emails have been better on the US, than in working out what these trends would mean for Russia.
Consensus assumes Greece has no contagion risk for the Eurozone – and ECB QE will alleviate or cure many ills. Consensus assumes the US will benefit from lower oil prices and grow at 3 percent in 2015—16.
Consensus assumes China will not blow up
Consensus assumes that if markets weaken, QE will again come to the rescue. Consensus assumes oil will remain around $110 because the Saudis can control the oil price. Ah no, that was last year’s consensus view.
For most of the business cycle, optimism is justified. At the end, consensus is proven wrong. Eg QE has already failed to create enough Greek or Spanish jobs – meaning that hard-left parties like Syriza and Podemos now lead in Greek and Spanish opinion polls. Spain’s finance minister yesterday said that Podemos policies would see Spain leave the Eurozone after Spain’s elections in December 2015.
We don’t see this as particularly credible and at least as unlikely as Brent prices falling from over $100 last year to sub-$50 today. We cite it as only as an example of how QE could fail to prevent a crisis.
For investors who must remain EEMEA equities, we think Poland (commodity importer, Fed supported, EU member) will be seen as the safest haven. Turkey too may get benefits given its low (2 percent budget deficit) or falling (4 percent of GDP current account deficit in 2015) financing needs.
We assume that the US recession will suppress energy demand and keep commodity prices low for the next few years – similar to what we saw in the 1980s – which implies an oil price of around $50. The counter arguments include Chinese / Indian car demand.
EM inflation has been plunging for 20 years. It could be driven towards zero via this scenario.
Note – we are not making this scenario our base case for our macro and equity target prices – because our numbers would be so outlandish compared to consensus. We do recognise the high risk that the low oil price pushes out this scenario by at least a year, or that QE mitigates the potential fall.
CONCLUSION: We see early 2016 as the buying opportunity of the decade. We wonder if the EM dis-inflation trade could be the trade of the next decade, benefiting local currency bonds, real estates and equities.
Robertson is the global chief economist, at Renaissance Capital.
Charlie Robertson
