Skip to main content

Is There Really a Free Lunch Out There – Part II

Last week as the opening piece for the New Year I wrote Part I of this piece.  In it I focused upon the observation that despite a lot of uncertainty and cause for concern, despite the massive amount of central bank intervention, absence of political leadership, and presence of geopolitical volatility the financial markets seem to be very strong.  I asked the question as to whether there might just be a free lunch out there after all.  I also invited all of you to share your predictions for how a variety of benchmarks would end the year 2014, and promised to share the results as well as my own forecast.

Well, it seems that you’re all pretty optimistic about 2014!  The results from you all are as follows, and I appreciate the broad response:

S&P 500:  2100
10-Year UST:  3.30%
Case Schiller 10 city home price index:  195
10-Year Spanish Bonds:  3.75%
Nikkei 225:  1,700
1 Euro = 1.275 USD
1 USD = 1.025 Yen
Gold (oz.):  1,140

Before I offer my guesstimates I must couch them with the following qualification.  I see the world as being very uncertain and so intensely dependent upon government (and central banker) ability to suspend reality.  Thus, I find that any prediction on the financial market is necessarily a forecast upon government’s ability and willingness to continue to intervene.  I do believe that the U.S. government will continue to do so, and that this will manifest itself in more asset price appreciation.

In fact, I see the U.S. in a relatively enviable spot in the world.  I think that Europe will see some volatility because the common Euro currency creates conflicts that simply cannot be resolved, and the large European banks have become instruments of their nation’s governments.  I think that China will also experience economic volatility, and that capital throughout the world will seek the U.S. as a perceived (relative) safe haven.  I also think that central bankers throughout the world will continue to be committed to easy money policies.  So, with that in mind, I would say that the free lunch of 2013 will likely continue for investors in the U.S. in 2014, although, like Granny, I cannot believe that they’ll last forever without a price being paid.

My forecasts for year-end 2014 are as follows:

S&P 500:  2200
10-Year UST:  2.60%
Case Schiller 10 city home price index:  185
10-Year Spanish Bonds:  4.25%
Nikkei 225:  1,950
1 Euro = 1.45 USD
1 USD = 1.15 Yen
Gold (oz.):  1,375

Popular posts from this blog

Greed & Laziness

In this most contentious and fascinating of election cycles, when nearly each conversation leads to politics, and when polarization runs so high, I ask myself - what is the essence of the debate between left and right?  What does it really mean to be a Conservative or a Liberal?

Why Rates Must Remain Low

There is an old bond trader joke that I first heard in the 1980’s when I traded mortgage-backed securities at Drexel Burnham Lambert.  It went like this:  “Upon dying, Albert Einstein finds himself in what he is told is heaven.  He encounters another individual there and asks him what his IQ is.  When he is told that it is 175 he is overjoyed, knowing that he’s found an intellectual peer with whom he can share much.  Upon meeting another, he discovers that person’s IQ is 140 and is pleased to have met another highly intelligent person with whom he can enjoy chess and other pursuits.  He is feeling pretty good about heaven, when he comes across a person who tells him that his IQ is a mere 90, and he is flummoxed.  What, he wonders, is this guy doing in my heaven and what can I even say to this person?  Then it comes to him.  ‘Where,’ he asks, ‘do you think interest rates are heading?’”

CMBS In Flux

The CMBS market has been in a period of upheaval, with dramatic spread widening on bonds and a resulting much more expensive cost of capital for real estate borrowers who depend upon this channel for their debt financing.Market participants today wonder whether we’ve entered a period like the summer of 2011, when spreads on bonds last widened this dramatically and then snapped back within a year to provide tremendous returns for those who were courageous enough to purchase bonds at the time when there was panic selling.Or, people wonder, is this recent downturn a prelude to a structural or systemic problem, like what was experienced in 2007, when spreads widened and sucked investors in, only to punish those early responders with a much more dramatic price collapse in the next 24 months.