Like Diogenes with his lantern, I am, again in 2021, a cynic looking for truth (and an honest investor) - as I engage in my annual assault on the consensus and "Group Stink."
The politics of 2020 initially set the stage for the markets and the global economies but it was Covid-19 (and the policy responses) - a Black Swan and virus that no one expected - that framed the markets throughout the year. NO ONE expected the magnitude and swiftness of the recovery of the capital markets to all-time highs in December, 2020 as multiples reset higher based on the confidence in a hockey stick rebound to both domestic economic growth and in S&P profits in 2021.
However, in 2021 we may return to fundamentals and a year of the vanishing Fed (and global central banker) put coupled with some mean reversion (lower) in valuations. This year might mark the return of the hibernating "bond vigilantes" as inflation and interest rates also mean revert as a general recognition of the risks associated with untamed deficits and large debt loads lead to general market instability later in the year.
Remember, my Surprise List is not a set of forecasts. Rather, the List represents events that the consensus views as having a low probability of happening (25% or less) but, in my judgment, have a better than 50% chance of occurrence. In betting parlance this is called an "overlay."
Here are my 15 Surprise for 2021:
Surprise #1 Tesla's Stock Declines By Two Thirds - Elon Musk loses his liberal audience. Tesla's mistreatment of customers, suppliers, employees, subsidy providers and safety regulators and the general population hits a wall. A movement to kick Tesla out of ESG Indices gains steam, as proponents give Tesla the lowest possible rating in S and G. The Chinese retaliate over Musk's racist comments, where he blames Chinese drivers for a series of accidents. A high profile celebrity or athlete dies while using autopilot. Under new leadership, the National Highway Safety Administration (HTSA) orders recalls for suspension problems, computer screen failures, battery fires, sudden acceleration. Regulators put a stop to so called Full Self Driving due to predictable abuse. Tesla announces it will be transitioning its Fremont, California manufacturing to Austin, Texas in 2022, but after years of union busting, Austin workers vote to join the UAW. Meanwhile, Tesla's market share collapses under an avalanche of new entrants. Rivian and GM (GM) beat the cybertruck to market with better products. VW (VLKAF) becomes the leading global manufacturer of electric cars. GM, Waymo and Zoox become the leaders in self-driving. Toyota (TM) demonstrates a solid state battery making them the leader in batteries. Tesla stock falls by almost -70% -- Greenlight's David Einhorn jokes that "it's like an unannounced stock split." John Bogle rolls over in his grave as "passive" investors lose most of their "investment" in Tesla. Congress conducts an investigation into Tesla's inclusion in the S&P Index.
Surprise #2 Political Normalcy Is Not Obsolete and Biden is The Calm After the Storm - Biden breaks the party deadlock in Washington and governs with a centrist coalition of key Senators and Congressmen - to the frustration of the far left. There are several Republicans like Romney, Murkowski, Collins, Ernst, Perdue and Tillis that realize they have a ton of power (and control of the Senate) to support a centrist agenda. They join Democrat centrists including Warner, Bennet, Carper and Shaheen to drive a bipartisan agenda. There will be no bold Green New Deal (though a more moderate deal is delivered), confiscatory tax law changes, defunded police, mass forgiveness of student loans or single payor health. There will not be two new states or Supreme Court packing - even if the senate goes 50-50. There will be an infrastructure bill (with Green energy emphasized), changes to taxes on foreign corporate earnings, police reform, immigration reform and other attempts to reduce institutional racism, limited forbearance on hardship student debt, and fixes to Obamacare.
Surprise #3 Former President Trump No Longer Remains A Dominant Political Force in the U.S. - The Republican party comes to the realization that Trump is a liability at the same time the Democrats realize that the far left hurts their party. Trump proceeds with "Trump TV" (he is in "pre-production" already!). Launched in the spring, he recruits Sean Hannity, Roger Stone, Mike Flynn and Joe Kernen to become the enterprise's primary commentators. By year-end it is clear that this is but another one of Trump's multiple business failures and "Trump TV" closes almost before it started. Facing numerous lawsuits and a sweeping State of New York indictment, Donald Trump declares personal bankruptcy by year-end. There is no cliffhanger this time and, disgraced, Trump sells Mar A Lago and liquidates several of his other properties.
Surprise #4 Stocks Experience Their Least Volatility Ever in the First Half of 2021 and the Most Volatility Ever in the Second Half of 2021 - The S&P Index is tightly range bound between 3600-3800 over the first six months of the year - but, under the weight of regulatory assault of technology, and higher inflation and interest rates, falls to under 3300 later in 2021.
Surprise #5 Bottlenecks Multiply and Inflation Surges - There are bottlenecks everywhere in 2021 and inflation in places beyond financial assets. As the economy reopens, there are shortages of almost everything. Commodities boom, but so do service prices. It seems that prices of everything from shipping to manicures are on the rise. The infrastructure bill sends construction material prices through the proverbial roof. Pent up savings are unleashed in robust consumer demand. Concerts, sporting events reopen with limited capacity and tickets are in hot demand. Residential real estate (single and multi family) soar in price, as people put stimulus, the recovery and stock market winnings into real estate. By mid-year, even the badly manipulated CPI is running up +4%.
Surprise #6 Inflation and Interest Rates Rip Higher Leading to A Valuation Reset (Lower) For Equities in 2021 - At first, the bond market reacts "normally" to rising inflation. The 10 year yield breaks 2% (to the upside). The stock market has a late spring/early summer wobble in response to rising rates and the possibility that target inflation will force higher rates. A mid-year Treasury auction goes poorly. The Federal Reserve, faced with the dilemma of choosing between a lower stock market and higher inflation, chooses to accept higher inflation. The Fed announces a cap on the 10 year yield at 1.5% and expresses its willingness to do whatever it takes to enforce it. In effect, the Fed becomes the Treasury buyer of first resort. This sends stocks, commodities and most everything briefly higher (towards the upper end of the 3600-3800 S&P trading range) - except the dollar, which falls 10%-15%. Though temporarily ignored by infinite liquidity and easing financial conditions at all costs, it grows clear that Covid-19 spurred a dangerous leveraging up in the global economy that has been almost constantly in place since The Great Decession of 2008-09. Higher inflation and interest rates bring the "bond vigilantes" out of their long hibernation. Stocks fall by -15% over the last six months of the year as price earnings multiples contract in the face of the highest level of corporate defaults in over a decade (led by companies in the retail space and others that were already struggling prior to the virus). Credit spreads (now at record lows), widen dramatically, the CLO market collapses and private equity companies are among the worst market performers of the year.
Surprise #7 A Decline in the U.S. Dollar Spurs an Advance In Gold (to $3,000/oz) and a Ramp of +50% in Bitcoin (to $40,000) - But Silver Is The Big Winner As It Doubles to Over $50/oz - Over easy policy, excessive liquidity, higher inflation and a rapid rollout in the Covid-19 vaccine powers the prices of cryptocurrencies and precious metals higher. Silver, however, is the league leader as the rapidly rising demand for silver in industrial applications creates a supply crunch late in the year. Another challenge on the supply side for silver is that more than half of mined silver supply is a by-product of zinc, lead and copper mining, making it tough for miners to meet the surging excess proportional demand for silver. Precious metals and crypto currency prices peak in the third quarter.
Surprise #8 Congress Acts On the SALT Deduction - Congress either repeals the SALT deduction limit or raises the cap from $10,000 to $25,000. Centrist Ray McGuire wins the June Democratic primary for New York City Mayor and, upon his election in November initiates bold moves to revitalize NYC. Residents move back and housing activity and prices fall in the suburbs under the weight of those initiatives and stretched home affordability.
Surprise #9 The Fallout From Brexit Causes Trade and Other Chaos in Europe - Badly Shaking the UK and European Economies
Surprise #10 France's Economy Approaches The Financial Brink - Weighed down by one of the worst debt to GDP ratios in Europe and sub zero interest rates, two of the country's largest banks fail. In a desperate position, in which France actually faces systemic risk, the country begs for assistance from Germany in order to get the ECB to print enough currency to posture a bailout of France's banking system. President Emmanuel Micron steps down.
Surprise #11 Broad Regulatory Actions Against Big Tech Results In A More Rapid Pivot From Growth to Value - FANG Becomes GATFAT! - Antitrust actions against Facebook (FB) , Alphabet (GOOGL) and Amazon (AMZN) become a genuine worry. In response to Derek Chauvin being acquitted in the George Floyd case, rioting ensues and the social media platforms are blamed for fanning the literal flames as Minneapolis is all but burned to the ground. The Rule 230 exemption is repealed. Meanwhile Europe begins imposing punitive taxes on U.S. internet giants. Finally, China retaliates to Biden continuing Trumps policy of going after Chinese companies with its own claims about Apple (AAPL) (illegal monopoly) and Tesla (TSLA) (unsafe cars). Google, Apple, Twitter (TWTR) , Facebook, Amazon and Tesla get redubbed GATFAT, as the impact of their prior overblown markets caps on portfolios is broadly felt by the Indexers and other investors.
Surprise #12 China's Economy Sputters Under Massive Debts and Crackdown on Tech Giants - Leading To Some Moderation In Xi's Policies
Surprise #13 Despite Strong 4Q2020 Performance, Bank Stocks Lead the Market in The First Half of the Year - As tech falters under the weight of an existential antitrust threat, financials prosper. Citigroup (C) trades at $75, Wells Fargo (WFC) and Bank of America (BAC) trade at $35 and JP Morgan's (JPM) price approaches $140/share by the early summer.
Surprise #14 Goldman Sachs Goes Private In 2Q2021 - The announcement marks a high-water mark for equities in 2Q2021.
Surprise #15 Trump Is Barred From Twitter - Within one week after President-Elect Biden's inauguration, Twitter suspends former President Trump's Twitter account for tweeting false claims about the "stolen" Presidential election. Upon the news of the Twitter suspension announcement, Twitter's shares fall by over -$7 to $8/share (or by about -15%) in one day. (The shares bottom in the high $30s, where I load up!)
(This commentary originally appeared on Real Money Pro on Dec. 28. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)