2021 was a mad year that followed an unarguably madder one. As the second year of the pandemic raged on (at full speed), a number of pretty unusual and unprecedented things happened. From short squeezes (hello GameStop) to crypto crazes (like Shiba and Doge) not to mention debt-ridden (Evergrande) companies, fraudulent companies (Theranos) and defying-all-the-odds companies (Tesla). This very strange year ended with a big bang as Turkey faced a currency crisis while the Bank of England switched gears last minute by raising rates – just in time for Christmas. This is not withstanding all the times we were ill with Covid, busy (or bored) with covid and stuck inside with covid. But, we made it! By the skin of our teeth. We live to see another year.
And guess what? It’s that time of year when, despite all the sheer inaccuracy involved; analysists, bankers, economists any many, many more all have a go at predicting (more like guessing) what’s in store for Mr Market this year. After all, we’ve had a whopper year with the S&P500 rising by 28% – beating most (apart form 3) hedge funds. But, as the old adage reminds us: ‘past performance is not an indication to future performance’. What goes up, must come down. But in the long-term, markets go up. Average markets have returned in the region of 6-8% year-on-year. But in the short-term, rest assured that you can be sure of absolutely nothing.
I am acutely aware that predictions are mostly useless since no one knows what will actually end up happening in the end ‘cause if we did, we’d sure do things a little differently! And, as we’ve all realised, life has a funny way of surprising us all. When we’re least expecting it. Showing us that the unexpected can most certainly happen. Ahem, a global pandemic! And to tell you the truth, I find this humbling. So, rather than me sorrily attempting the tricky task of predictions I’ve simply brought you three areas that I think should warrant our attention. If they haven’t caught it already! Although I’ve cheekily sprinkled in one or two predictions. I just couldn’t help myself. Enjoy!
#1 Commodity craze
To kick it all off, looks like this year’s going to be another fantastic one for commodities. But un-fantastic for the poor consumers of all of it. Us lot! In the UK, household bills are set to rise by (at least) £1,200 this year! For many, this is the needle that might just break the camels’ back. Prices are rising left right and centre. And for many, this is going to become unaffordable. So, if there’s one tip I can offer for this year and pretty much every year but especially now(!) is to keep your spending as low as can be. No one (not even those super-smart economists) know where inflation is going. Try as they may. It could be lower or it could be way higher. The latter is definitely an option. Scroll down to #2 to see why central bankers might be okay with that scenario. So, best prepare yourselves for all eventualities. And the lower your expenses, the less you’ll feel the pinch. Now back to these pointers!
The reason why we’re seeing all these insanely high energy prices (with gasoline taking the price for #1 performer during 2021) is two-fold. It’s down to demand as much as supply which, by the way, has been a problem for years but covid only made matters worse. During which, demand for energy went way down. Factories across the world were forced to close and shipping was ground to a halt. But emerging from this period of lockdown, we found ourselves suddenly needing loads more of everything. And before you know it, demand was soon outstripping supply. Hence all these nasty price rises. But we’re also realising there’s not quite an infinite amount of this stuff (as we once thought/hoped) to go around.
It’s not just oil and gas that we’ve seen go up, though. It’s metals too. Speaking of metals; copper and aluminium (“green metals”) that are needed in everything from EVs to planes have all been rising in price. Take an electric car. Needed for the environment, yes. But while it may not be gas-guzzling it does swallows 4x the amount of copper as its non-EV mates! Now all this copper ain’t gonna fall from the sky. It’s got to be mined. But we’ve got ourselves a problem. For the last couple of years now, investment in mines, oilfields and the like, have all been dangerously low. Strained supply (that seems to be getting more strained by the minute) along with rising demand is a recipe for, you guessed it. Price hikes. So get ready for that. A lot more of it.
#2 Debt trap
We’re debt-ridden. We were already debt-ridden pre-covid never mind post-covid. But governments soon pulled out all the stops when it came to protecting their countries (and stock markets) from this beast called covid. During the pandemic the Fed alone printed $5 trillion. That means 1 in every 5 dollars roaming around have been created between 2020/21. Crazy stuff. Despite what they might wish (and hope), all this goes on their balance sheet. It’s not exactly free no-strings-attached money! And it will have consequences. And plenty of strings. But arguably, the consequence of sitting back and doing nothing would’ve been worse. Way worse.
All this government spending has left global debt at eye-watering levels. I’m not even going to type a figure here since it’s just too massive. 25 countries (including US and China) have total debt that is more than 3x their GDP. Ouch. All this money that central banks have printed has led to this: asset price inflation. Stocks, houses, art (physical and otherwise!), crypto and a whole bunch of other stuff have frothed in price.
But at some point, all this spending has got to stop. Or at least slow down (via tapering). But governments (especially the Fed) are worried to do so. Of course, they’re worried! I don’t blame them! But everything has become expensive. And there’s nowhere to hide. Price (and by extension valuations) almost seems to be a risk that no one is talking about. But overpaying for stocks is as much a risk as buying underperformers.
There’s a real possibility that central bankers are just going to let inflation run away without raising interest to combat this whopper debt pile. Precisely because of this whopper debt pile. Just as inflation erodes your savings, it’ll erode debt too. (read here what you can do to beat inflation) Every year that goes by, thanks to inflation, the debt will be worth less. And less. And with global debt this high, no one’s paying this one off anytime soon. So, letting inflation run wild (without higher rates) might be the only solution.
Warning: This sort of scenario (known as financial repression) will erode your savings, making it harder for you to protect your money other than by investing it. And here we have it, TINA (There Is No Alternative) is still your friend! I’ll certainly be sticking by her.
#3 Bubbles brewing
Let’s talk bubbles. While what we’re living through has been dubbed the ‘everything bubble’, there are a few places that show the classic bubble signs. Like prices doubling in (less than) a year as well as manic trading along with a solid helping of FOMO! These bubbles have spread across cryptos and parts of the stock market relating (but definitely not limited) to tech companies that have zero earnings as well as SPACs who, this past year, have already lost 35%! Bubble starting to pop now?
But bubbles (like the dotcom one) do tend to leave behind a few potentially huge and whopper survivors – like Amazon! But the slippery slope of bubbles popping will most likely have ripple effects for the folk who bought this stuff. And those who bought this stuff at the top. Which is usually the case for bubbles! People think these high returns will go on forever. That the euphoria will continue. So they pile in, and keep on doing so. Until they’re smacked in the face by a heavy dose of reality!
To prove this point further, retail investors ran into the 13th year of the global bull market. These late arrivals usually to point one thing – that the party is winding down. Millions of people from Europe to the US opened trading accounts for the very first time! But it didn’t stop here. Many borrowed money to buy stocks such as GameStop and AMC at such a frenzied pace. (read here what exactly went on with those stocks and what’s the lesson that in it for you!) Let’s hope this party continues, for their sake.
And, while these three pointers might seem a bit doom and gloom, they act as careful reminders that a) nothing lasts forever, b) anything can happen and c) the only way out is by diversifying. By spreading your money across many, many different areas and hoping for the best knowing that you’ve at least planned for the worst!
We’re living through really unchartered territories. I’m totally resisting the urge to use the word unprecedented, again. But I’m afraid there simply is no comparison which is why it’s got so many so spooked. The fact that debt levels are this high, the fact that asset prices are sky high and the fact that inflation is too high makes for some tough decision-making. I just feel for the guys that actually have to make them!
But luckily for you, the only decision you’ve gotta make is how soon you’re gonna get diversified! Get that sorted and the ride will hopefully be a lot, lot smoother.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.