We have mentioned that we expect a trade war to unfold between Trump’s America and China this year so how does that translate into the global markets?
Early in 2017 we created what we called the Arkent Scenario as the sequence in which we expected the markets to roll over into global economic trauma. The Arkent scenario was a road map to follow markets and prepare for the worst. It articulated the following signs in this specific order:
- Dollar declines: The first sign of that road map was that the dollar index would commence a decline to new lows over 2-3 years. This call was made in March 2017 when the index was at 104. It is now at 88.80. The new lows on the index would be sub 71. Additionally we called for sterling to be the strongest currency against the dollar during this phase and specifically the low in the region of 1.20 and we are now at 1.40. So the MOD needs to stop making excuses about defence procurement cost escalations with the US! Whilst the “remainders” will soon have to stop using sterling weakness to justify their position. We expect this dollar trend to continue over 2018 as the trade war scenario grows and the Trump administration encourage a weak dollar policy to revive their manufacturing base.
- G7 bond markets: The second sign was that the G7 bond markets broke their 20 plus year uptrend in March 2017 and we expected all bond markets to start a significant decline that would end in a western debt crisis before 2020. Since then price action has supported this scenario, but we could see a blow off high before a reversal as the issue of principal repayments becomes focus.
- UK property markets: lead by London since the rules about beneficial ownership came into place in 2016, meant that the money laundering that fuelled the London property bubble went into reverse. As money launders can accept 30 to 40 pence in the pound this means that there is a massive overhang of property for sale that will drive prices down as low as 40-50% of the peak prices. Last year this trend accelerated and we expect it to continue to do so spreading to all other areas of the UK.
- Commodities: We expected any rallies to be corrective, rather than the start of a new bull market. Whilst the upside moves have continued longer than expected in line with the US stock markets staying strong, the price action remains corrective and we would expect one more new low before a long term sustainable bull market unfolds from 2019-2025.
- Gold: We remain bullish as it is one of the few stores of value during the challenges ahead.However we are not convinced that a long term low is in place to if long remain cautious.
- Stock markets: Stock indices were always going to be the last to fall in the above sequence. Within the stock spectrum we viewed that the EU indices would be the weakest and the US the strongest. Indeed this has come to pass with Euro Stoxx failing to exceed its highs three times since the start of 2018. Whilst the US stock market under Trumps presidency has behaved bullishly in what can only be described as an excessive blow off top. Such blow offs are always reversed as fast as they go up, just like the bit coin price action. What did catch our attention was that Trump in his interview with Pier Morgan, claimed that he had been a great success based on the stock markets performance! This was a very risky statement that was full of market hubris. We would give quite high odds that this interview marked the high of the stock market rally. As such, although 2019 started very well we expect it to be all downhill in stock land for the rest of the year. Ultimately over the next 18 months we consider it very probable that we visit the 2008 lows in the US and below that in Europe.
In summary we expect the global economy to shrink dramatically in the next eighteen months before it re-inflates again after 2020/21