This is the
translation of a post that I put on my Chinese blog on December 28, 2016. I
also uploaded the translation of the post on my Chinese blog before this blog,
which is referred at beginning of this blog.
Since the
last post in September in which we were positive on shale tight oil stocks, US
stocks, and negative on gold, these assets have behaved exactly per our
expectations. Many of the shale tight oil stocks have doubled, gold has dropped
by about 20%, and US stocks have gone up.
At this
juncture of a new year, I try to make predictions about the investment
opportunities in the next few months to next couple years.
US dollar
index will most likely increase to at least 120 in the next couple years. However,
there should be an adjustment for USD index dropping from the current 103.5 to
97 in the next three months before this coming big surge. A drop of about 20%
for RMB against USD is only natural.
Copper may
bounce from the current 2.4 to 2.5 USD per pound to 3.0 to 3.2 in very wide
swings over the next few quarters. Then it should drop a lot in the next couple
years, with the possibility to drop below 1 dollar per pound. Although China’s
economic deterioration may diminish the length and extent of this short term
bounce, for the time being this short term bounce is still the most probable
outcome.
Gold should
drop to 960 to 980 dollars per ounce after a weak bounce in the next few
months, and then has another big bounce from slightly below 1000 dollars to
about 1200 dollars per ounce. After that, the long term trend is still down.
But gold stocks may not drop much beyond the lows they reached in early 2015
and in the coming drop to 960 to 980 dollars per ounce.
Global
interest rates should have a little retreat first (e.g., US 10 year T bond
futures bounce to 126 from 123) and then increase again substantially (e.g., US
10 year T bond futures drop from 126 to between 115 and 118). After that
interest rate will have a long term large retreat. Chinese long term T bond
will bounce first and then drop a lot like US T bonds. In 2014, I told many
investors that the best and surest
investment in China then was to buy Chinese 30 year T bond. A few months
ago, some of those investors asked my advice to start investing in Chinese 30
year T bonds after they saw it returning more than 40% over the last two years.
At the time, I told the investors that the best investment opportunity then was
to short long term debt (one can do it through 10 year T bond futures) and buy
oil related stocks. 10 year T bond rate should jump from 2.6% to 3.5% (of
course I did not imagine it will reach 3.5% in such a short few months from
2.6%). Then the 30 year T bond would be the best investments. Looking back, all
predictions are right, except that we are probably looking for 4.5% as the top
end of 10 year T bond rate, instead of 3.5%, before the yield finally drops to
1%. That means a return of about 50% over two or three years.
Although
inflation and interest rates will both increase, they should be controllable in
most situations. One uncontrollable situation is that Trump influences the Fed
governors so as not to hike rates when he can get enough fiscal stimulus which
subsequently lead to higher inflation. His influence can be great as he has the
opportunity to nominate more than half of the Feb governors in the next couple
years. In that case, inflation can jump a lot. As Krugman said, to increase
inflation, we should credibly promise to be irresponsible. As Trump is a
natural in this regard, he is likely to be able to achieve it if he sets his
eyes on this target.
US and
European stocks should still have a big bull run in 2017, especially the stocks
in southern European countries and banks globally. The only thing uncertain is
whether there will be a correction of more than 10% before this bull run. If
there is a correction, it is likely to be in the next three months. After this
bull run, the US and the world are very close to economic recession. Whatever
stimulus by Trump can only delay the recession to some extent. Unless Chinese
government needs another bubble for certain purpose, Shanghai index will at
best go up to 3600 in the coming bull run. So the upside in Chinese stocks is
limited.
China’s
biggest risk, or investment opportunity, and also the biggest risk of China to
the worlds, is that the current leader won’t need to keep doing the vanity
project of keeping GDP growth around 6.5% and will use the more and more
limited resources on the core issue of securing employment and stability, once
he has full control at every level of government after the 19th party
congress in November 2017. GDP growth rate can quickly drop to 3%, and
eventually to 0% as population growth become negative within at most 10 years.
This means Chinese long term government bonds can appreciate a lot under
certain situation.
From the
time that I came back to Asia five and half years ago, I have told every class
I taught the following. They should leave Asia to the US if they can. They
should do it as soon as possible to get used to life in America, and should not
ever come back permanently. If they have money, they should exchange their
currency to USD and buy US stocks. There are many reasons why I say this, and I
think by now all should have first hand personal experience of these various
reasons. For those who did not heed my advice, it is still not too late.
Another
reason that I mentioned from 5.5 years ago is worth mentioning again because
many still may not have realized it by now. Human history is littered with
frequent war, blood, abuse, and mass killing in all countries or regions. The
last sixty years, especially the last 35 years, we have an unprecedented period
of peace in the whole world, especially Asia, due to the sole hegemony of the
US. This situation is abnormal and fragile. The rivalry between China and US,
or the rivalry among Asian countries if the US retreat from Asia, means that
this situation cannot last. American elite and common people have come to clear
recognition to contain and preempt China’s rise. Trump’s ascendance means that
the rivalry between China and the US will become more apparent. The US become
even unlikely to retreat from Asia, and Trump unlikely to make a deal with
China. This means that Asia will become the hotspot globally.
Although it
is not impossible to avoid accidental conflicts leading to regional
conventional war, the possibility of very bad outcomes, e.g., a full scale
conventional war, will drop sharply, if they do not happen in the next 5-10
years. This is due to the coming sharp economic slowdown in China. Once Chinese
total population start to drop in less than 10 years, Chinese economic growth
could drop to 0%. As long as the US can keep some growth, US can grow faster
than China. In that case, China’s share of global GDP will peak and shrink,
just like Japan after 1990s. China’s economic power will never catch the US,
and there is no need for US to contain and preempt China’s rise.
Further, if
global warming deteriorates further, the glacier in Tibet (and Xinjiang) will
recede much quickly. As most of the fresh water in Asia comes from those place,
and almost all major Asian countries are extremely polluted, the disappearance
of glacier would increase the chance of war due to the distribution of water,
unless alternative energy becomes so cheap that we can easily convert sea water
to fresh water. Note that China is building dams in almost every river flowing
from these regions to other countries.
The natural
endowment of the US, with wide oceans on both coasts and weak neighbors in the
Americas, means that it will be the least impacted by any war. But if conflicts
really break out between China and the US, Chinese Americans need to be
prepared to be negatively affected significantly. For Greencard holders, they
could even be forced out of the US.
The great
opportunities in real estate is still quite some time away wherever one looks
in the world. China may have another bubble run in housing price in 2017, but
that may be the last chance to cash out handsomely and is certainly the worst
time to jump on board. Chinese housing market is likely to be on a slow bear
market trend for decades with wide swings from there. US residential rentals
are still a good investment opportunity, especially for the short and long
term. They could have a very good run in the next couple years and are good
investment in the long term. In the medium term, during the next US recession,
there can be a drop after the very good run in the next couple years. However,
that also provides a good entry point. But if one still waits for an
opportunity as in 2009 and 2011, one may not ever see it in this lifetime.
Further, the
country that can eventually catch up with the US may be India. But it still has
lots of baggage that prevent its takeoff.
