The prediction for the returns of different asset classes in the next couple of years.

Sorry for the absence from this blog for a long while. Was very occupied with many things, including investing. It was also because I have been using Wechat moment posts to broadcast my view on global macro in China as the fund that I am advising has mostly Chinese clientele. Time constraints means I was not to translate those views to English and post here. Below is a prediction piece that I wrote on February 21, 2016 about the returns of different asset classes in the next couple of years. As it is more important, I put the Chinese and English versions here in public view. Let’s see if I can be as accurate as I have been in the past 15 years. Here is the message:

On Thursday, February 18, 2016, I saw some pattern of market on the verge of another leg down. But as it was just after three days of a big relief rally, I was not sure if we can have another leg down so quickly given that it seems that although US markets have reached the full extent of allowed bounce, the other markets may not. I posted on Wechat moments about my suspicion of another leg down but I need more evidence. Friday’s market movement convinced me that this is the case. So I post on my Wechat moments that all friends should be very careful. When I check on Saturday, I find that all global markets have stayed around the technical support points. So it is possible that the downward adjustment next week is just a small one, and we could even have a bounce up, continuing the rally. This is important as my kind reminder may make some friend worried for nothing, I look through all the markets and asset classes carefully. I realize that most of the markets, not just the US markets, have bounced to close or at the full extent. So next week, we can have some bigger leg down, including Chinese A shares, and the leg down can start from Asian trading hours, which is different from the last two trading sessions when we have the leg down after US markets open.

Much more important than this short term movement is that all asset classes in all global markets are at a crucial point from a long term point of view. If markets keep jumping like what we had in the last year, most likely all markets will experience a big bear market. Whether we will also have economic recession is not a sure thing yet, but the volatility of markets can feed back into economy. At the same time, governments are not paying enough attention (US Fed even keep talking about rate hikes), or are occupied by other issues (European immigration issue and the crazy austerity straightjacket). This serious tightening of financial condition can lead to a global economic recession, which will in turn make the bear market even more severe. Although the momentum is not completely irreversible at this point, this possibility is bigger and bigger, flashing red light already. This economic recession may not be as scary as 2008, but will still be quite scary. After all, global markets have not experienced real bear markets, and global economy has not experience global recession for eight years. Note that a large part of the severity of the 2008 crisis is due to the monumental tightening of financial conditions after Lehman Brothers crash.

If we continue on this torturing path in global markets, SP500 will drop from the current 1915 level to at least 1600, Nasdaq from 4160 to 3000, Hong Kong Hang Seng from 19300 to 11000, Japan Nikkei from 15900 to 11000, German Dax from 9400 to 7500. At the same time, Japanese Yen will increase from 113 to 60, and Euro from 1.10 to 1.80, per USD. Yen, Euro, Hang Seng may need a few years to reach the price target. The rest will likely be realized in the next year.

So it would be foolish for investors to bet on bounce up or bull markets. They should put all money into cash or longest term developed government bonds. Gold may be a good bet in the next few months or a year, and should increase from 1200 to 1400 an ounce. I am not sure about its longer term future yet.

Markets are an evolving process. So I can be wrong in the end. But without preemptive, huge scale government actions soon, and just reacting after the risks already become fruition, or even creating uncertainty and tightening financial condition like the crazy US Fed (especially Fischer), I think it is a likelihood the above risks will explore in our face. Even government take huge actions now, it may only be effective in the short term, and is only ineffective in the long term, at least from market point of view. I still have some unsure hope for the effectiveness of government actions for the economy but even that is wearing thin. What if we will never get back to prior trend growth rate we experience in the last six decades? Also, the governments are barking on the wrong tree unless they focus on increasing final demand instead of focusing on productivity, reform, infrastructure, competitiveness, and other sounds good but useless or even harmful things.