The word for 2014 is definitely optimism – big time! Every summary I have read proclaims either further advances for Europe, a return to above core growth in the US, the UK as one of the fastest growing economies in the world, a renaissance in emerging markets through the newer guys on the block such as Mexico, Indonesia and Turkey, more stock market gains etc.etc….wow; to paraphrase Harold Macmillan we couldn`t ever have had it so good!
Now I`m not going to pour cold water on, or do a `bah humbug` number about the general outlook, it does look …. very optimistic, but we all know that when things look too good to be true, then they probably are. The `known knowns` of potential global disruption have gradually eased over the course of last year, but of course geopolitical developments in the middle east, Japan/China or North Korea could always upset the status quo – but these `known unknowns` just can never be factored in to a risk framework simply because their potential to disrupt is tiny – until they do, and then it is suddenly huge!
If I have to pick one of the rosy forecasts itemised in the first paragraph and hold it up as a candidate for disappointment – it would have to be Europe. To me, the rebalancing of global reserve portfolios in favour of euros, and the stock market gains that we experienced last year, were more an expression of relief about the long term viability of the single currency project rather than any vote of confidence in the economic performance of the bloc over the coming months. I think we may well have misinterpreted the renaissance in `things euro` last year – that doesn`t make it any less real of course, and the contributing factors mentioned earlier probably have some juice left in them. I just have a cautious approach to something when I see the sources of demand probably 75% full, and the interpretation of that demand tweaked to suggest something more fundamental (anticipation of a decent European recovery) when that is not, and in my view, never was the reason! There are also other reasons for caution:
Whilst the austerity programme continues to eat away at demand in much of southern Europe, and the focus of the ECB is still on Germanic anti-inflation watch, so the threat of deflation grows. I am concerned that further signs of disinflation over the coming months would unfortunately be of greater concern to those outside Frankfurt than within – they could still be looking the wrong way!
The European elections in May I think have the potential to scare the market – and the ECB. I believe there is an opportunity here for the people of southern Europe to register their dissatisfaction with the way they have been used as political pawns, and made to suffer for the sake of a political objective. The number of votes recorded for non mainstream nationalist parties as a protest could just push the core of European economic policy into a less austere stance. This may be good for the population of southern Europe, but less so for the euro.
If I had to pick – again from the list we started with – the forecast that I most agree with, it would be the probable outperformance of the US economy, for reasons I have already put forward on these pages. Putting these two together, I personally find it difficult to see euro/dollar at 1.50, but easy to envisage 1.25.
And finally, after all the analysis, the truth: `The pessimist complains about the wind, the optimist expects it to change; the realist adjusts the sails`. Couldn`t have put it better…..or as Mike says, just trade what you see!
