Ever heard of Mark Yusko?
Neither had we until yesterday.
He’s the CEO of Morgan Creek Capital. We received an email containing part of his Q4 2014 Market Review & Outlook.
This looked at lessons an investor could learn from George Soros. Which, we’ll admit was quite interesting. Soros has out performed Warren Buffett over the 41 years from 1969 to 2009. Compounding at 26.3% versus Buffett’s 21.4% return. So there is no doubt something to be gleamed from his success.
However when we clicked through to his full report what really piqued our interest was his list of 10 possible surprises in the financial world for 2015.
Yusko’s definition of a surprise is:
“Definition: A Surprise is a variant perception (an idea that is materially different from consensus) that I believe has a better than 50% chance of occurring in the current year (the key is that it must be materially different).”
But he also states:
“One caveat is needed, however, as Surprises are a little different than actual forecasts (although probably about just as accurate…) as they are intentionally created to be non-consensus and have some reasonable probability of not occurring.”
Each of these are definitely contrarian. We’ve just pulled a short excerpt of each one and would recommend you visit the link below to read his full argument for each “surprise”.
They cover the whole gamut of the financial world. Greece, Japan, US Stocks, Interest rates, and oil just to name some of them.
Plus, he has a rather bold one for gold in surprise number 6 too.
2015 Financial Surprises
By Morgan Creek Capital CEO – Mark Yusko
Surprise #1: The Lula Pivot.
In a déjà vu experience harkening back to the 2002 Brazil elections, the radical Syriza Party wins the Greek Election (was still a potential surprise since wrote before election), but Alexis Tsipras turns out to not be as extreme to the left as expected (just like Lula) and the Greek equity market surges (just like Brazil did for next five years), turning out to be one of the best performing markets for 2015.
Surprise #2: Turning Japanese, I Really Think So.
Despite the BOJ and the ECB picking up the QE baton from the Fed and committing to purchase $80B and $65B of government bonds each month respectively, Deflation reemerges as the primary economic challenge in the developed world, GDP growth stalls and global interest rates continue to fall.
Surprise #3: Let’s Do Limbo Now.
Contrary to the Fed Dots (new, new thing), the preponderance of Economists’ predictions (just like in 2014) and the continually upward sloping Fed Funds futures curves (since 2009), the Fed does not raise rates in 2015 and long bond rates take out the 2012 lows in yield.
Surprise #4: Here’s to You, Mr. Kindleberger.
Confounding the conventional wisdom that the convergence of the 3rd year of a Presidential Cycle (average 21% return since WWII) and the 5th year of a decade (no down years since 1905) virtually guarantees a positive return for U.S. equities, the S&P 500 breaks the string of 6 consecutive up years and suffers its first losing year since 2008.
Surprise #5: TMI Writ Large.
Despite an ongoing military conflict in Ukraine, the impact of coordinated global economic sanctions, rapidly falling oil prices, reduced government tax revenues, a collapsing currency and a looming economic downturn and downgrades of their government debt and consensus that Russia is simply “un-investable”, Sir John Templeton turns out to be right that Bull Markets are born on Pessimism and Russian equities turn out to be one of the best global markets in 2015.
Surprise #6: All That Glitters.
The acceleration of the Global Currency War reignites the demand for the ultimate currency, Gold, and the Barbarous Relic surges to new highs in 2015, carrying the miners along for the ride.
Surprise #7: Water Finds Its Level.
Central Banks in the Emerging Markets are forced to stimulate their economies in response to the massive BOJ and ECB bond purchase programs and the resulting expansion of liquidity unlocks the extreme value in Emerging Market equities leading them to outperform the developed markets for the first time since 2012.
Surprise #8: No Fracking Around.
Contrary to the current consensus that Oil prices have bottomed and will rebound back to $70-$80 by year end, continuing liquidation of speculative long futures positions drives Oil down close to the 2008 lows ($30) and prices stay in the $40-$50 range much longer than expected as structural challenges in the U.S. and OPEC make it difficult for market participants to move supply/ demand back into balance.
Surprise #9: Only Way Out.
Kuroda-san and the BOJ pull out the bazooka again in 2015 taking aim at a USDJPY level of 140 in an attempt to stimulate profits of Japan Inc. so they will raise wages, triggering a virtuous circle to break deflation and achieve the 2% target inflation rate. Japanese equities tag along for the ride and the Nikkei reaches 22,000 by year-end.
Surprise #10: Goats Climb Mountains.
In spite of the cacophony of bad news about slowing GDP growth, an impending economic hard landing, a potential currency collapse, a looming banking crisis and a pervasive real estate bubble, coupled with fears that huge returns in the Shanghai market in 2014 have pushed equity markets too far, too fast, China official- ly enters a new Bull Market and equities (both Hong Kong and Shanghai) rally strongly again in 2015.
Bonus: Surprise #11: Little Luxuries Not Enough.
In contrast to the powerful narrative, the huge windfall for U.S. consumers from lower gasoline prices fails to materialize as some of the savings are applied to reduce debt and increase savings and the loss of jobs from the economic downturn in the Oil States counteracts the positive impact of the balance. U.S. Real GDP growth hovers around 2% (for the 6th consecutive year) and talk of QE4 begins in the fall.
You can read the full report at the link below- Well worth it as he gives a more detail explanation of each of his possible surprises:
(The 2015 Surprises begin on page 25.)
We like the sound of quite a number of these, as they may seem left field enough to mean they’ll actually come to pass. Obviously it would be great to see gold at record highs, although that seems a long way off at the moment.
His idea of record low interest rates certainly bucks the trend of most at the moment too. We reckon that could well be the case too.
What do think? Which surprise do you think is most likely to come to pass? Leave a comment below…