Byron Wien: 10 Predictions About the World Economy in 2014
Byron Wien is one those economic, financial, and political thinkers who looks like a mad genius on a good day and simply like a mad man on a bad day. Currently vice chair at Blackstone Advisory Partners (NYSE:BX), Wien served for 21 years as a U.S. investment strategist at Morgan Stanley and has repeatedly been named one of the most influential people on Wall Street.
What he may be most widely known for, though, are his annual “list of surprises.” Beginning in 1986, Wien began announcing predictions for economic and political events that “the average investor would only assign a one out of three chance of taking place but which Byron believes is ‘probable,’ having a better than 50 percent likelihood of happening.”
Not much from his prediction list in 2013 panned out. Among his predictions was a sub-1,300 S&P 500 and gold at $1,900 an ounce — neither of which came close to happening, as the S&P 500 soared and gold floundered. He did accurately predict that the Japanese yen decline to 100 against the dollar and that the Nikkei trades above 12,000 despite the economy remaining weak. The list for 2014 is packed with equally interesting predictions. Here are Wien’s 10 surprises for 2014.
1. “We experience a Dickensian market with the best of times and the worst of times. The worst comes first as geopolitical problems coupled with euphoric extremes lead to a sharp correction of more than 10 percent. The best then follows with a move to new highs as the Standard & Poor’s 500 approaches a 20 percent total return by year end.”
Wien isn’t alone in his prediction that the markets will suffer a correction in 2014. Nuveen Asset Management chief equity strategist Bob Doll told CNBC that he expects a 10 percent correction, while Global Financial chief investment officer Chris Bertelsen is looking for a correction of between 10 and 12 percent.
“This has been one of the most hated bull markets in a while because people can’t believe that it’s continuing to go up,” Bertelsen told Fox Business. “Who’s left to buy? There’s just nobody left to buy. Some event is going to set people off and when it does, plenty of investors will be hitting the register.” Despite the feared correction, though Wien — and many others — are still optimistic about the broader economic picture.
2. “The U.S. economy finally breaks out of its doldrums. Growth exceeds 3 percent and the unemployment rate moves toward 6 percent. Fed tapering proves to be a non-event.”
Once again, Wien isn’t the only one with a similar forecast. In December, the U.S. Federal Reserve released the economic projections of Fed Board Members and Reserve Bank Presidents, and the central tendency of their projections falls approximately in line with Wien’s. The Fed projects real GDP to grow in a range between 2.8 and 3.2 percent, and unemployment to fall to a range between 6.3 and 6.6 percent. To date, Fed tapering has also been a non-event. Far from throwing a tantrum, equities actually advanced when the news was announced in December, and interest rates have avoided dramatic changes.
3. “The strength of the U.S. economy relative to Europe and Japan allows the dollar to strengthen. It trades below $1.25 against the euro and buys 120 yen.”
If you trust the economic projections of the Organization for Economic Cooperation and Development (or, OECD), then this prediction is likely to pan out — at least in spirit. The OECD expects 3+ percent real GDP growth in the United States throughout 2014 and 2015 (another tip of the hat to Wien’s previous prediction).
In the euro area, GDP growth won’t exceed 2 percent until after 2015, and in Japan growth is volatile, accelerating in early 2014 before, apparently, contracting in the second-quarter and remaining below 2 percent until at least after 2015. At the time of writing, the dollar was trading at $1.3617 against the euro and could buy 104.52 yen.
4. “Shinzo Abe is the only world leader who understands that Dick Cheney was right when he said that deficits don’t matter. He continues his aggressive fiscal and monetary expansion and the Nikkei 225 rises to 18,000 early in the year, but the increase in the sales tax, the aging population and declining work force finally begin to take their toll and the market suffers a sharp (20 percent) correction in the second half.”
Given the OECD projection that real GDP contracts in the second-quarter in Japan, this prediction doesn’t seem totally arbitrary. Japan is engaged in massive and ongoing monetary stimulus whose success to date has been somewhat dubious, and at the time of writing, the Nikkei was already at 15,800, up nearly 48 percent on the year. It doesn’t seem entirely unreasonable that the Nikkei could suffer a correction following a monetary policy-induced rally.
5. “China’s Third Plenum policies to rebalance the economy toward the consumer and away from a dependence on investment spending slow the growth rate to 6 percent in 2014. Chinese mainland traded equities have another disappointing year. The new leaders emphasize that their program is best for the country in the long run.”
The OECD begs to disagree with this projection. The organization forecasts 2014 GDP growth in China to be 8.2 percent, and the World Bank is expecting 7.7 percent GDP growth. The Conference Board is also looking for Chinese economic growth closer to 7 percent.
6. “Emerging market investing continues to prove treacherous. Strong leadership and growth policies in Mexico and South Korea result in significant appreciation in their equities, but other emerging markets fail to follow their performance.”
Unless there is a change in the current trend, this prediction appears to have some merit. Major developing economies like India, Russia, and Brazil are facing headwinds, while countries like Egypt, Thailand, and Turkey are just a couple of stone throws away from crisis. What’s more, as the taper progresses and interest rates in the U.S. rise, investment capital could be pulled from emerging markets. Emerging markets suffered heavily during the taper tantrums earlier in the year.
7. “In spite of increased U.S. production the price of West Texas Intermediate crude exceeds $110. Demand from developing economies continues to outweigh conservation and reduced consumption in the developed world.”
The U.S. Energy Information Administration does not necessarily agree with this projection. Oil prices can be expected to be volatile, but the EIA sees the prices of WTI crude oil falling to about $93.33 in 2014. Demand from developing economies is expected to increase, though. Saudi Oil Minister Ali Al-Naimi said he is “optimistic the market will stay balanced and stable next year.”
8. “The rising standard of living and the shift to more consumer-oriented economies in the emerging markets result in a reversal of the decline in agricultural commodity prices. Corn goes to $5.25 a bushel, wheat to $7.50 and soybeans to $16.00.”
Rabobank, a multinational bank focusing in food and agriculture financing, reported in December that it expects commodity markets to remain stable in 2014, contrasting the volatility of the early 2000s. Rabobank expects corn and wheat specifically to remain neutral, and the firm is bearish on soybeans. As of writing, corn was $411.50 per bushel, wheat was $6.02 per bushel, and soybeans were $11.63 per bushel.
9. “The strength in the U.S. economy coupled with somewhat higher inflation causes the yield on the 10-year U.S. Treasury to rise to 4 percent. Short-term rates stay near zero, but the increase in intermediate-term yields has a negative impact on housing and a positive effect on the dollar.”
That medium-term interest rates will rise seems inevitable. At the time of writing, the yield on the 10-year Treasury note was 2.937 percent, up from 2.65 percent three months ago. Many market watchers are looking for an increase of between half a percentage point and a full percentage point in 2014 as the economy improves and the taper progresses.
10. “The Affordable Care Act has a remarkable turnaround. The computer access problems are significantly diminished and younger people begin signing up. Obama’s approval rating rises and in the November elections the Democrats not only retain control of the Senate but even gain seats in the House.”
This seems like the most normative projection Wien has to offer — and if it came true, it would certainly be a surprise.