6 Provocative Predictions for 2013… and Beyond

Someday, someone will fund an academic study identifying the crevice in the human brain that craves year-end predictions for the coming 12 months. Wherever it resides, it is undeniably strong and far more prevalent among the populace than the craving for news about, say, the “fiscal cliff” or the New York Jets’ quarterback saga.

Within the finance sector, such predictions abound. “Macro surprises” from Morgan Stanley, “13 outliers for ’13” from Deutsche Bank, and the ever popular “outrageous predictions” from Denmark’s Saxo Bank. And you know what? These institutions are, umn, lily-white, every last one of them.

Saxo, for instance, describes its predictions as an “annual exercise in rooting out relatively extreme market and political events for which the probability is perhaps low, if still vastly underappreciated.” In other words, they’re “thought experiments.” They do a nice job of covering their backsides, however.

Then again, they have depositors and clients and shareholders to please. Actually predicting the German stock market will plunge 33% next year — the lead item on Saxo’s list — might discomfort one or more of those constituencies. So they’re obligated to couch their predictions in the abstract.

We, on the other hand, suffer no such conflicts of interest. We rise and fall, live and die on the trust you place in our research… a liberating state, especially given the amount of rope you’ve shown you’re willing to give us.

With that rope firmly in mind, we bring you the following six provocative predictions for 2013… and beyond.

These are not thought experiments to be touted in a late-December press release and posted on Zero Hedge, then quickly forgotten. These are themes that we fully expect to develop during the next 12 months. Let’s begin!

1. The “mother of all financial bubbles” will burst… but not before blowing up even bigger! Money manager and Vancouver Symposium favorite Barry Ritholtz recently bored himself silly with a spreadsheet: It showed a monthly survey of economists by Bloomberg going back to 2002, revealing their “expert” guesses about the 10-year Treasury yield over the following six months.

“In the history of finance,” Barry quips, “we cannot find a more one-sided opinion about a freely traded double-auction market.” Ninety-seven percent of the time a majority of economists predicted higher yields. On three occasions, including last May, the consensus was unanimous: The average forecast was for a yield of 2.4%. Oops… It turned out to be 1.7%. Just a little bit off.

The most recent survey? Ninety-four percent of economists surveyed expect higher rates by next May… and their average guess is 1.93%.

We’ll take the other side of that trade. Indeed, as we told the subscribers of Apogee Advisory last October, “We think the 30-year bull market has one more blowoff phase before the end. You need to act accordingly.”

Back then, the factor we cited was the pending demise of money market funds. We figured on a time horizon of three years. But now that we see such an overwhelming consensus for higher yields and lower prices, we’ll double down: We’ll see a Black Swan emerging early next year — another debt-ceiling crisis (even if the “fiscal cliff” issue is resolved) or more likely another euro-scare. Hot money will flood back into the “safety” of Treasuries. The 10-year yield will plunge below its 1.4% record set last July. It might even go all the way down to 1%.

But that would be the final blowoff that would signal the beginning of a major bear market in bonds. In other words, we think interest rates will rise substantially over the next few years…but not quite yet.

“At some point,” Barry says, “the bond bears are going to be right.” We’re confident that point will arrive before the end of the decade.

2. Boomers’ retirements are about to be crushed (again) in junk bonds and the wrong dividend stocks. First, they lost their shirts in the tech bust. Then they lost their pants in the housing bust. And in 2013, the baby boomer cohort is about to be stripped of its skivvies…thanks to the Fed’s zero-interest rate policy. Because intermediate-term Treasurys and CDs yield close to nothing, savers have been trying to get some yield on their savings wherever they can find it. In this context, junk bonds seem appealing. They offer yields that are at least greater than zero, which is why many investors have been flooding into the junk bond market.

Understand the Fed’s priorities: Saving and investing is their mortal enemy. “They want spending and speculating,” says our macro strategist Dan Amoss, “and are willing to risk the entire monetary system in the process.” Result: “Investors are taking foolish risks; they’ve bid up junk bonds and dividend stocks, pushing yields down in the process.”

If only investing were as simple as buying risky assets when interest rates are stuck at zero. Ask the average Japanese investor how that’s worked for them the last 20 years.

“The 2012 rallies in almost every stock and bond will not last,” declares Dan. “When investors bid up junk bonds and stocks in a zero interest rate environment, they are simply pulling future returns into the present.”

3. The World’s Fastest-Growing Economies in 2013: Forget the BRICs. If it’s emerging markets with explosive potential you’re looking for, the globe-trotting Chris Mayer has identified three. He’s visited all of them — the first two in 2012. Mongolia. “The story is very simple,” says Chris. “You have a tiny economy of just under 3 million people. And they are sitting on enormous reserves of natural resources. The top 10 deposits alone are worth an estimated $3 trillion. It’s a decade-long story. I think a good analogy is Kazakhstan, which is culturally similar — an old Soviet-style economy that opened up and created an enormous boom, thanks to resources. The stock exchange went up 2,400% in six years from 2002; apartment prices rose 800%-plus and land prices in Almaty rose 8,000%.”

Myanmar, or if you prefer, Burma. “If I could put all of my money in Myanmar, I would,” says globe-trotter and Asia bull Jim Rogers. “Another great story,” says Chris. “Fifty years of isolation and dictatorial rule and it is finally starting to thaw. There is no reason why Myanmar can’t approach the development of its neighbors such as Thailand, given time, investment and a commitment to freer markets. I think it will be one of the fastest-growing economies in Asia…” Hard to invest there, but a great story to watch.

United Arab Emirates. Chris concedes this one might come as a surprise. “The economy went through a giant bust, but its place as the money center for the Middle East is secure, thanks to low taxes, privacy protection and location. It has the region’s biggest marine port and airport and is home to the highest number of foreign businesses… Best of all, the market is cheap after an epic bubble, but the underlying economy is still growing rapidly.”

Check in tomorrow to see my final three provocative predictions! (Keep reading down the tread)

Six Provocative Predictions for 2013… and Beyond, Part II

By Addison Wiggin
01/11/13

In yesterday’s Daily Reckoning, we shared the first three of our “Six Provocative Predictions.” Today, we present our final three predictions…including our most provocative prediction of all! [If you missed yesterday’s issue, you can check it out here: 6 Provocative Predictions for 2013...and Beyond]

1. China sends gold on the next leg to $5,000. We stood up and took notice on April 24, 2009, when out of nowhere, the Chinese government announced it had grown its gold reserves to 1,054 metric tons. The previous announcement came in 2003, when the number was only 600 metric tons.

Assuming another six-year lag, China’s next announcement is due in 2015. Coincidentally, that’s the year the former governor of China’s central bank predicts his country will achieve full convertibility between the renminbi and other currencies. They can’t make that happen without a much larger gold stash.

But long before that happens, we expect China to propel the gold price — probably as soon as this coming March. That’s the time of year when metals-sector analysts and researchers issue many of their annual reviews and outlooks. We have every reason to believe they’ll uncover evidence of massive under-the-radar gold accumulation by China.

Some of that evidence already emerges in China’s gold imports via Hong Kong — which we note almost every month in our daily 5 Min. Forecast. They’ve been off the charts during 2011 and 2012.

“The Chinese buy gold hand over fist!” sums up our precious metals and energy expert Byron King.

But that’s not all they’re doing…

Domestic gold mining has propelled China to the No. 1 spot among world producers — bigger than longtime leader South Africa.

China’s gold miners — most of them state-owned — are on a global gold mine-buying spree, as well.
It is illegal to export gold from China. What’s mined in China stays in China… which means there’s ample gold for citizens to purchase, either directly or through ETFs (and the government encourages both).

“The Chinese government,” said the Chinese central bank’s research chief a year ago, “should not only be cautious of the imported risk caused by rising global inflation, but also further optimize its foreign exchange portfolio and purchase gold assets when the gold price shows a favorable fluctuation.”

That’s a mouthful… but the last part of the sentence gets the point across.

2. The world’s tiniest and most powerful storage medium. In 2012, scientists at Harvard’s Wyss Institute managed to store 700 terabytes of data in a single gram of DNA. For perspective, that’s equal to 700,000 printed copies of the Encyclopedia Britannica stuffed into a droplet that would fit on your pinky.

DNA, as it happens, is an outstanding storage medium. It’s very stable: “Where other leading-edge storage mediums need to be kept in subzero vacuums,” according to Extreme Tech, “DNA can survive for hundreds of thousands of years in a box in your garage.”

Reading the data from DNA is as simple as sequencing DNA, just like sequencing the human genome. In the 1990s, when our friend Juan Enriquez was backing the Human Genome Project, that process took years. Nowadays, it takes hours.

“Imagine that you had really cheap videorecorders everywhere,” says geneticist George Church, who headed up the research. “Just paint walls with videorecorders. And for the most part, they just record and no one ever goes to them. But if something really good or really bad happens, you want to go and scrape the wall and see what you got. So something that’s molecular is so much more energy-efficient and compact that you can consider applications that were impossible before.”

The most immediate application? Anti-counterfeiting. Think bar codes or RFID — taken to the nth degree. Microchips stamped with DNA can overcome the epidemic of counterfeit chips. No big surprise, the Pentagon is in line to become the biggest user of the technology, but our tech maven Patrick Cox points out, “It is also being adopted by banks, Martin Guitar and high-end goods producers like top wineries and fashion shops.

The potential applications are limitless, says Patrick, “Drugs, clothing, textiles, foods, metals and even air bags with potentially lethal flaws are counterfeited or stolen and resold with no way to track thefts.

“DNA-marking is still largely in the preview and testing phase,” he concludes. “But this breakthrough technology has tremendous appeal for a broad range of industries.”

3. And the most provocative prediction of all… we’ll call it “life after the dollar.” That’s the name we’re giving it, but credit for the idea goes to a Brit named Dominic Frisby — one of the most provocative young thinkers we’ve had the privilege of meeting this year.

“The monopoly that governments and banks hold on money gives them too much power,” he wrote this fall. “Whether through incompetence or worse, that power will inevitably be abused. The best way to stop the abuse of power is to spread it as widely and thinly as possible…

“In my Brave New World, there is no monopoly on money. We restore choice. We restore transparency. We use whatever money we like. We have independent money.

“What do you fancy using, sir? Gold, silver, Bitcoins, paper issued by a farmer against stocks of grain in his barn, Brixton pounds, Dominic Frisby’s currency (the ‘Dominus’ I think I’ll call it, since you ask), pounds, dollars? You name it, you can use it.

“Payment with these alternative currencies is as easy as clicking ‘pay’ on an app on your phone or on a website.”

A pipe dream? Hardly. For one thing, the notion of “competing currencies” is not new. Nobel Prize-winning economist Friedrich Hayek explored it in depth during his long and productive life. What is new, says Mr. Frisby, is that we’re on the edge of competing currencies becoming everyday reality — no matter what the Federal Reserve, Goldman Sachs and JPMorgan Chase might wish.

“Multiple currencies can work on a practical, day-to-day basis,” he says. “I’ve just come back from Istanbul. Traders in the Grand Bazaar will accept dollars, euros, Turkish lira, pounds, Russian rubles — anything, as long as it means trade for them.”

As you might imagine, getting from here to there is going to be a messy, and at times ugly, process — one that encompasses all of the other predictions we’ve shared above. But on the other side of that process lies a future of prosperity few people dare dream of. Not only is it “life after the dollar,” it’s Life After the State — the title of a book Mr. Frisby has in the works, which we hope to publish through our Laissez Faire Books in 2013. Stay tuned!

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