What a year we just completed! Slow growth and widening inequality spurred populist uprisings around the world. Globalization is in retreat. Europe continued to crumble and the U.S. dollar strengthened, dampening the price of gold and other commodities. Bitcoin rose as the global scramble for non-printable currencies accelerated. And of course, it’s impossible to talk about 2016 without discussing the unprecedented U.S. election. On the back of Donald Trump’s ascension as the 45th president of the United States, pundits now describe a “post-fact” world in which every possible idea, no matter how preposterous, can find validation somewhere.
Radical uncertainty abounds, conflicting realities are everywhere and seemingly structural trends appear to have reversed on a dime. How can we possibly navigate this chaotic world? As I mentioned in last year’s version of this post, some use a Magic 8 ball, while others turn to Ouija boards. I strive to be more self-reliant. Despite the inherent uncertainty, I believe that if one considers scenarios on a five-year view, it is easier to accurately predict change. Analyzing structural signals offers hope. In January 2015, I made 15 Predictions for 2015-2020. And in January 2016, I made 16 Predictions for 2016-2021. It’s too early to tell how these predictions have fared. But as noted by the late Yogi Berra, “The future ain’t what it used to be!” So although I’ve kept a handful of my predictions from the last two years, I’ve also updated some and added others.
1. As inequality increases, the global wealthy voluntarily adopt massive redistribution policies (socialism lite) in a quest to keep capitalism alive. Labor markets remain stubbornly stagnant in the face of continued technological progress, leading to discussion of when and how to implement basic income schemes. After years of retreating, globalization returns with a vengeance as citizens everywhere learn it’s hard to lift one’s boat when the tide is going out.
2. The Fed continues to raise rates, driving the U.S. dollar to disruptive heights and tipping the U.S. economy into a recession. (That’s because higher rates draw more investors to put their money into dollar-denominated assets like U.S. bonds and stocks.) The recession ends when the Trump-promised infrastructure boom takes hold in the United States, funded by global capital. But as capital heads to America, it leaves several emerging market in crises and lowers global growth. U.S. multinationals report disappointing earnings and profitability sputters, revealing overly optimistic stock market valuations. European financial systems are tested.
8. In the face of persistently anemic economic growth, governments everywhere begin relying on fiscal stimulus to drive their economies. Debt levels skyrocket, leading to increasingly unsustainable debt levels. The fiscal gap in the United States rises above $215 trillion. Ratings agencies downgrade the United States, paradoxically leading to buying binge of U.S. treasuries as investors scramble for “safe” assets.
10. Currency wars intensify, leading to a global investor stampede for nonprintable currencies like gold and Bitcoin, both of which surge to all-time highs. The Chinese yuan plunges against the dollar, while the Japanese yen steadily depreciates. Italy reintroduces the lira.
12. Technological innovation accelerates. The sharing economy vertically integrates as Uber builds a fleet of driverless cars, Facebook begins producing content and AirBNB buys buildings. Drones become commonplace. Virtual and augmented reality, led by Florida startup Magic Leap, enters the mainstream, destroying demand for physical goods. As a result of cyber security concerns, the Internet of Things grows more slowly than expected.
14. Superbugs are acknowledged as the single most serious threat to global health, representing a $100 trillion risk. Public health officials mandate doctors to explore treatments other than antibiotics (including diligent monitoring) before prescribing them. Consumers begin demanding livestock be raised without the use of antibiotics.
15. Rapidly rising populations in Africa andIndia threaten to derail per capita economic gains. Despite widespread beliefs that a democratic nation would never do so, India implements demographic constraints (a one-child policy?) to contain its runaway population, while some African governments mandate family planning education in elementary schools. The rapidly shrinking population of Japan, however, enables the rapid adoption of automation without displacing workers.
17. The meteoric rise of passive investing strategies continues to unsustainable heights. Passively managed assets under management exceed those that are actively managed. Asset prices move in lockstep with fund flows, negating the very price mechanism upon which passive strategies rely. Passive investing begins losing its appeal as active managers take advantage of these distortions to outperform indices.
A final word of caution, however: Every time I make predictions, I recall the prescient words of John Kenneth Galbraith: “There are two types of forecasters: those who don’t know and those who don’t know they don’t know.” I’ll let you decide which I am, but if nothing else, I do hope the very act of considering possibilities helps generate thought.
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