In this piece, I will recap my 2013 predictions that I summarized Monday on Real Money Pro, when I covered the Daily Diary for Doug "Orson Welles" Kass. My key investment positions in 2013 are extensions of the themes I have been espousing for the last few months, so they should not be overly surprising. I hope they fall under the category of "insightful" and, to some extent, "common sense."
1. The federal budget battle continues unabated. This month's machinations are a non-solution. The U.S. still faces a trillion-dollar deficit, and the negotiations will be rehashed several times in 2013. In fact, by Valentine's Day the past month's discussions will be repeated with even more vitriol. The bill passed by the Senate defers the sequestration for two months, meaning the real battle over spending is yet to come. Even worse, although this bill "balances" $41 in tax increases for every $1 in spending cuts, President Obama has already vowed that any spending cuts will need to be accompanied by even more tax increases. No matter which side you are on, the reality is that this will create a higher-than-usual volatility in equity markets -- an argument to get long the CBOE Volatility Index (VIX).
2. So tax revenue does not even begin to cover the deficit, and we're not dealing with the prospect of no meaningful spending cuts. (Does the GOP really have the leverage to force anything through, other than by using the debt ceiling?) Given this, and given that the Federal Reserve is the only entity able to fund the deficit, we can rest assured that the central bank will continue quantitative easing -- i.e., money-printing -- if not accelerate it. This will flow into inflation, and I expect to see an accelerating rate of such during the year. Buy more gold and inflation-resistant equities.
3. The "helicopter" corollary: Interest rates will stay low, although they cannot really go much lower. Bonds offer all risk and little return. Avoid fixed income!
4. Despite the spin that taxes are only increasing on incomes above $400,000 per year, the reality is that taxes are going up for the working class. This will impact consumer spending and cause a slowdown in the economy, if not outright recession, in the first half. Avoid consumer cyclicals for now.
5. The cliff has kept Europe out of the headlines for a while but, as the old saying goes, "This too shall change." The math doesn't work in the U.S., but we can print money. The math really doesn't work in Europe, but they can print money, too. The European Central Bank will continue to run the presses at full speed, so the euro will also depreciate against most currencies. Greece will finally default, and it's highly likely that Spain will, too, although perhaps not in 2013. European equities are to be avoided as well.
As you digest my forecasts, keep this in mind: the buy side is not all that enamored of outlooks. The CFA Institute Financial NewsBrief polled its readers on the value of year-end forecasts, and found that only 8% find them useful for formulating the coming year's investment strategy. (I hope those 8% are Real Money readers!)
The CFA Institute Newsbrief has pointed out the following:
"What is Wall Street's track record when it comes to picking stocks? A 1995 study by Hemang Desai and Prem Jain examined the performance of stock recommendations at Barron's Roundtable from 1968 to 1991 and found the excess return to be essentially zero. Despite their limited utility, annual forecasts are probably here to stay because they've proved themselves to be effective marketing tools and they appeal to the herding instinct of investors. Of course, annual forecasts also can occasionally include a winning idea or two."