Byron R. Wien, Vice Chairman, Blackstone Advisory Partners, today issued his list of Ten Surprises for 2015. This is the 30th year Byron has given his views on a number of economic, financial market and political surprises for the coming year. Byron defines a “surprise” as an event 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% likelihood of happening.
Byron started the tradition in 1986 when he was the Chief U.S. Investment Strategist at Morgan Stanley. Byron joined Blackstone in September 2009 as a Senior Advisor to both the firm and its clients in analyzing economic, political, market and social trends.
Byron’s Ten Surprises for 2015 are as follows:
1.
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The Federal Reserve finally raises short-term interest rates, well
before the middle of the year, encouraged by the improving
employment data and strong Gross Domestic Product growth. The timing
proves faulty, however, as the momentum of the economy has begun to
flag and a short-term slowdown has started. The end of monetary
accommodation and rising rates precipitate a correction in equities.
Long-term Treasury rates stay where they started and the yield curve
flattens.
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2.
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Our luck runs out on cyber terrorism. Hackers invade the personal
and corporate accounts of a major money center bank and the Federal
Reserve orders the institution to suspend transactions for five
business days while the accuracy of its balances is verified.
Various government departments and agencies are mobilized to deal
with the problem caused by the hackers having proved to be more
skillful than our corporate cyber security efforts.
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3.
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The year-end 2014 rally in United States equities continues as the
market rises for a strong performance in 2015. A growing economy,
fueled by housing and capital spending and favorable earnings,
enables the Standard & Poor’s 500 to increase 15% during the year,
outperforming equities in most major industrialized countries
throughout the world.
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4.
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Mario Draghi finally begins to expand the balance sheet of the
European Central Bank aggressively by buying sovereign debt,
mortgages and corporate bonds. In spite of this expansion, Europe
falls back into a serious recession. Germany is particularly weak as
reduced demand from various trading partners has a major impact on
its exports. The European policy makers fail to embrace the one
option, fiscal spending, that could turn the economy around, and
European stocks decline. Politically, Europe moves dangerously
toward the right.
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5.
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Shock and awe no longer works in Japan. The recession which began in
the third quarter of 2014 continues throughout 2015 in spite of
further fiscal and monetary stimulus and the suspension of the
second planned sales tax increase. The Nikkei 225 is flat for the
year in yen and down in dollars.
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6.
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China reports that it is no longer growing at 7% and that more
fiscal and monetary stimulus is needed to grow at even 5% and to
prevent a hard landing. It also acknowledges that it must rebalance
the economy toward the consumer and away from credit-based investing
in state-owned enterprises and infrastructure. What money is spent
on infrastructure is focused on air, water and ground pollution, not
roads and housing. A lower rate of job creation leads to protests
but they are contained without excessive violence.
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7.
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The drop in the price of oil finally has an impact on Iran. The
country was dependent on its sale of crude to offset the impact of
sanctions. The economic weakness resulting from the unexpected
decline in oil finally forces a conciliatory attitude on the part of
its nuclear negotiators. Pressure to cease nuclear weapons
development comes from the Iranian people as well, as they seek more
economic opportunity. An agreement to roll back its weapons program
is greeted positively throughout the region and world equity markets
rally briefly on the news.
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8.
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Brent slips into the $40s. The low price of crude oil, which
continues throughout the first part of the year, has a major impact
on Russia. A peace settlement with Ukraine is signed, giving Eastern
Ukraine substantial autonomy but guaranteeing the sovereignty of the
rest of the country. President Putin seems to be trying to win back
the respect of the international community as the country reels from
its economic problems, but the Russian citizenry finally turns on
him. His approval rating plummets and he resigns by year-end. During
the second half of the year, West Texas Intermediate and Brent crude
are both above $70, as emerging market demand continues to increase.
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9.
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The year-end 2014 meltdown in the high yield market, as a result of
the collapse in the price of oil, creates a huge buying opportunity.
The spread between high yield and Treasurys is cut in half, and high
yield becomes the best performer of the various asset classes as the
U.S. economy continues to grow with no recession in sight.
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10.
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The Republicans decide to position the party as the one that can get
something done in Washington. They argue that President Obama was
ineffective in his first six years, but when they got control of
both the Senate and the House, legislation was passed. The Keystone
pipeline finally is approved, as well as minor tax code revisions
and even some changes in immigration policy. The Republicans are
determined to strengthen their position with Hispanics in 2016. They
want desperately to hold the nation’s highest office and they see
Jeb Bush as a winner for them.
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Added Mr. Wien, “Every year there are always a few Surprises that do not
make the Ten either because I do not think they are as relevant as those
on the basic list or I am not comfortable with the idea that they are
‘probable.’”
Also rans:
11.
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Water becomes the central environmental issue of 2015, eclipsing
carbon-caused air pollution. While a shortage of water has always
been a potential problem in the Western United States, it becomes a
source of considerable tension in India and China, where large parts
of the population do not have safe drinking water on a consistent
basis.
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12.
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Internet commerce runs into trouble. Established hotels push
legislators to make Airbnb pay the same taxes and fees that they are
required to charge customers. Uber is asked by local authorities to
prove that its drivers have commercial insurance to protect
passengers. The stocks affected decline sharply.
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13.
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Brazil provides an emerging market favorable surprise. President
Dilma Rousseff abandons some of her long-held socialist ideas and
moves to the center. She introduces a number of business-friendly
policies and the economy improves. It is helped more than it is hurt
by the drop in the oil price. Brazil becomes a favorite of emerging
market investors once again.
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14.
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I liked this one, but I didn’t have more than 50% conviction about
it. Hillary Clinton decides not to run for President. She fears that
Jeb Bush would siphon off some of the votes of Hispanics, who
substantially voted for Obama. Many liberals are disenchanted with
Clinton and may not vote for her. She wants to be the first woman
President but she doesn’t want to lose.
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