Every year, Mark Yusko, CEO and CIO of Morgan Creek Capital Management, offers his 10 predictions for the year ahead. This year, he reserved the unveiling of his market insight to Inside ETFs.
In a word, his overarching message was grim, calling for recession in the U.S., credit market collapses globally, and continued weakness in commodities prices, particularly oil. Here are the 10 “surprises” 2016 might have in store:
1. Expect a U.S. recession
Despite massive central bank stimulus, economic growth continues to surprise to the downside. Global trade has collapsed, global exports are flat—conditions that historically lead to recession. According to him, we are looking at a 75% likelihood of recession this year. Yusko also noted that the secular low in interest rates won’t occur until 2020.
2. The Fed might have to backtrack
The Fed missed its cue to increase rates in 2013, and now may actually end up having to consider QE4. Yes, employment is good, but there’s no inflation, and inflation expectations are below where they were in both QEs 2 and 3, he says. Yet the Fed’s talking about raising rates, but there’s “no way they’ll do it.” The Fed should be lowering rates now: “Yellen will have to say she was wrong.”
3. Japan is a solid story
The BOJ has weakened the yen. “Abenomics is working in the sense that it has weakened yen, and started reform,” Yusko said. As he put it, Japan will be the best developed market over the next 10 years, and a much better deal than the U.S. And the good news is that the BOJ is committed to QE, the TOPIX is cheap and P/Es are attractive.
4. Don’t go long oil
Saudi Arabia is recommitted to maximizing oil production. The resumption of Iran trading also helped push the oil market into steep contango—we have excess oil, we have to pay a lot to store it. Oil fundamentals are poor, technical are worse. Don’t get long oil here, he says.
“Oil will go down into the low $20s,” Yusko said. “No chance of uptick in oil due to production in Saudi and Iraq; the futures curve is saying we’re not going above $40 this year. We might get around $40, but it’ll take a while.”
5. European banks—as in mega banks—could face massive losses, if not collapse
The bear market in commodities since 2011 has caused massive losses in European banks, and some are at the brink of insolvency. In other words, Europe holds the chance of being 2016’s black swan event. “European equities are going to continue to struggle. They’re breaking down—a lot of overhead supply to be liquidated [after rush last year], a lot of leverage in the system,” Yusko said.