Wasn't there a 2023 Predictions thread? I can't seem to find it. I'd like to review that for kicks.
ChpBstrd's Probably Wrong Initial 2024 Predictions:
1) Inflation falls to near zero as the owner's imputed rent component catches up with this year's drop in house prices (statistical lag is about 15 months). Shelter is already the component keeping Core PCE above 2%. CPI minus shelter is currently 1.5% YoY and falling fast! With short-term rates and QT applying restrictive pressure, it would take a lot for inflation to come back. Something like an oil embargo paired with sudden creation of liquidity would be necessary.
2) Long-term Rates plummet as markets suddenly realize real interest rates are in the extremely restrictive +4-5% territory, and recession risk is higher than previously thought. Inflation is yesterday's news. E.g. if inflation is 1% and the FFR is 5.5%, that's a major disincentive for making purchases. The 10-year yield will fall below 4%. This will deepen the yield curve inversion in the short term. Meanwhile, the Fed starts the 6 month process of cautiously talking about rate cuts before making their first cut in the 2nd half, amid worsening unemployment, leading economic indicators, and bank liquidity. It is possible the Fed will leave QT on autopilot even as it makes the first cuts, because they clearly don't understand the scale of QT's impact on inflation through money supply.
3) Unemployment will rise above 4.5% by July. This is a continuation of the modest trend seen in recent months, and a probably-too-modest expectation after so many rate hikes.
4) Stocks will probably be flat or rise low-single-digits, helped by lower interest rates but harmed by rising unemployment. I don't care, because the bigger action will be in high-duration treasury bonds. ZROZ and EDV could gain over 20% next year, in either a soft landing or hard landing scenario.
5) The Bank Term Funding Program, which bailed out the banking system earlier this year and injected money supply into the system, will be extended in March. It is unclear whether this will be sufficient to keep inflation ex-shelter positive.
6) Housing Prices will continue going up modestly, as buyers increase their conviction that 5% 30y mortgage rates are just around the corner, and that the housing correction is in the rear view mirror. I've been predicting a further correction, but I'm not sure that makes sense anymore if I'm also predicting a fall in long-term rates.
7) A Recession has historically followed rate hiking campaigns 100% of the time when rates rose by more than about 3.75% within a couple of years. We just did 5.25% in 18 months! Similarly the yield curves have been predicting recession for a while now. We are currently within the typical/average timeframe for a recession to start, and the Conference Board's Leading Economic Indicators index continues to point down. A "soft landing" has literally never occurred after such a confluence of events. Still, it takes a lot to put the US economy in reverse, so I will assign only a 75% chance of recession in 2024. That probability is front-loaded, because if the recession doesn't hit within the first 6-8 months of 2024, we are likely out of the woods and on some new, never-before-seen growth trajectory. I can be agnostic about a recession because I think my long-duration bonds will benefit from lower long-term rates regardless of whether we get a recession or soft landing. Rates go down either way.
8) U.S. Elections will probably result in Donald Trump as president and a Republican controlled Senate and House. Whether or not the economy is actually bad, with sub-4% growth and GDP growth that probably exceeds China, people think the economy is bad, and the R's are successfully pinning blame for inflation on Biden. That perception has historically doomed the incumbent party. This is in line with an international trend shifting toward the right, as Western liberals continue de-organizing their grassroots operations and arguing on the internet, mostly about words. Plus Republicans will certainly have assistance from allies abroad, especially on the essentially un-moderated X, TikTok, and Telegram platforms where increasing numbers of voters get their fake news. Cultivating this support is the reason for Republican reluctance to support Ukraine. This electoral outcome will be a signal to pivot back into stocks, as it almost certainly means wealth transfers from the national account to corporate accounts (i.e. tax cuts that raise the national debt) as we saw after 2016.
I am not predicting a debt crisis or the US dollar losing its reserve status in 2024 because everywhere else remains a mess, so TINA. Falling rates in 2024 will trigger a frenzy to lock in yield, which will further suppress yield, supporting the US's debt load. Beyond 2024, however, we'll have to watch to see if China issues a digital currency and regulatory infrastructure for international trade. Xi does not seem particularly forward-thinking on this idea, but you never know. It might happen if sold to Xi in military/strategic terms. If that did happen, I'd become a lot more interested in gold because a digital yuan would imperil the US dollar, and with gold you can avoid being tied to the risks of either reserve currency.
1) Inflation: This prediction looked like it might happen until June 2024. After that point, annualized Core PCE flatlined and then started rising again, ending up at 2.8% in November. Interestingly, the Fed reduced the level of QT in May.
2) Long Term Rates: The 10-year treasury spent 2024 on a roller coaster, starting at 3.9% in January, rising to 4.7 in April, and then back down to 3.75% in September, only to bounce back to 4.6% this week. I wrote my prediction in November 2023, though, when rates had about 60bp left to fall until hitting bottom in early January 2024. I put most of my brokerage assets into long-duration treasuries in November and early December, and sold out near the bottom in January after rates hit my one-year target number. I pocketed $100k from that one-month trade, so I was wrong about the long-term trajectory of treasuries and yet still won the game because it was a good trade regardless of the timing.
3) Unemployment: The
unemployment rate hit 4.3% in July, a bit lower than my 4.5% prediction.
4) Stocks: I was dead wrong here. The S&P500 returned 23.95% in 2024, not "flat or single digits". Check your pessimism ChpBstrd!
5) The Bank Term Funding Program: This program ended on schedule, and nothing bad happened. In fact, liquidity measures like the NFCI improved throughout 2024. No CRE inspired banking crisis occurred.
6) Housing Prices: I was wrong here too!
Housing prices overall fell in 2024, and mortgage rates remained high.
7) A Recession: This call was a miss because I predicted a recession would probably occur. Instead we got fast economic growth. Again, check that pessimism.
8) U.S. Elections: I nailed this one, and for all the reasons I cited. Perhaps I'm a better political analyst than stock analyst.
I expressed a growing interest in gold that was spot-on. GLD actually outperformed the price return of the S&P500. I remain interested, but now I am afraid of buying a fundamentals-free asset after such a large run-up.
