As we move closer to the end of the year, the usual process for any money manager is to develop the themes for 2014. It is unlikely that many will be held accountable for these predictions, but they are made every year. Unfortunately, 2014 is going to be very difficult to predict not because there is currently excessive volatility, but the fact that we have so little agreement on what state of the world we are actually in at this time.
I have given up trying to make close predictions on what may happen to the economy. I try to focus on two simple questions. What is the currency state of the world and what direction are we headed? Get me the place and direction and I will be able to form a good portfolio. I do not have to have too much precision.
So what are the key themes that have to be addressed?
- Is the economy getting better or worse? We do not have agreement.
- There seems to be two camps concerning the current economy. There is the rosy school which says that labor and hosting are getting better. Consumer balance sheets have improved and we are ready for stronger growth. The gloom schools says that the headline numbers are false. Labor is in bad shape and there is not the basis for strong demand. Asset markets are in a bubble and not to be believed.
- Do we have set of policies that we think will work? There is no agreement.
- Monetary policy through quantitative easing is not working. We need to rely on a forward guidance view that seems vacuous. The solution is to keep real rates negative and drive inflation expectations higher. Fiscal policy as a tool is not being effectively used. The austerity school makes some good point but is not going to serve short-term interests.
- Do we know what assets are cheap? Not clear
- More are believing that we have a bubble in financial markets and are willing to accept this as necessary driving growth higher. How can investors buy into this story?
The theme of uncertainty seems to represent 2014.