A Five-Year Global Financial Forecast: Tsunami Warning
By John Mauldin
Jan 12, 2015
It is the time of the year for forecasts; but rather than do an annual forecast, which is as much a guessing game as anything else (and I am bad at guessing games), I’m going to do a five-year forecast to take us to the end of the decade, which I think may be useful for longer-term investors. We will focus on events and trends that I think have a high probability, and I’ll state what I think the probabilities are for my forecasts to actually happen. While I could provide several dozen items, I think there are seven major trends that are going to sweep over the globe and that as an investor you need to have on your radar screen. You will need to approach these trends with caution, but they will also provide significant opportunities.
Well over 90% of government debt is owned by the Japanese themselves, and that number too keeps rising. Nominal GDP is roughly where it was 25 years ago. Growth has been nonexistent. Their massive Keynesian experiment has been a failure, at least as regards its the ability to create growth.
Right now their plan is to have a balanced budget by 2020. Any time a politician tells you that the plan is to balance the budget in six years, what he’s really saying is, “I don’t want to take any more heat than I’m already taking today.” In Abe’s defense, he did raise taxes last year, which caused an immediate recession; but he went ahead with the taxes, although he has postponed the next increase until 2017. But QE, Japanese-style, will not end until the Japanese have their budget under control and can allow interest rates to rise. Point: they might stop QE short-term for the purposes of scre wing around with the currency markets, but they will be forced to resume.
The reforms being proposed in France are simply tinkering around the margins. The absolute best the country can hope for this year is about 1% GDP growth, but it seems more likely that it will slip back into a triple-dip recession. Without a credible ECB quantitative easing program to help keep interest rates low, when French interest rates begin to rise, they may do so slowly at first; and then they may do so all at once. Then France will indeed look like Greece. Will Germany then finally allow a QE program to shore up their most necessary partner in the European Union? Can they do so without requiring some kind of fiscal union? This all suggests to me a period of great volatility a nd slow growth.