Feb 2017 Viewpoint Summary - Predictions 2017

We just published a new Viewpoint for Feb 2017 titled Predictions 2017. The article can be downloaded from www.mbsmantrallc.com/Viewpoints.shtml

It contains about 8 pages of analysis and graphs. Here is the predictions section.

My predictions for 2017:

1)     The rally in equities from November is highly optimistic, and appears to be have lost some velocity, but is still ongoing. While some US investors might take gains, leading to a slowdown in appreciation, I believe the both the European and Japanese Central Banking policies will continue to drive their citizen’s capital to the US. This will accelerate if the Fed raises rates, in which case the foreign capital will forget that that they already priced this in, and will drive up US stocks even more, along with the US Dollar. I would not be surprised by $1T to $2T more US market cap before year end even without any more Fed rate hikes.

2)     A reduction in corporate tax rates for the purpose of repatriating capital will result in further stock market appreciation, as buybacks and M&A activity will resume.

3)     Bond market inflation expectations will rise in the near term. However, in about a year, the market will realize that there is no economic stimulus from fiscal actions, and that the only rising inflation realized is asset inflation. Bond yields will thus rise some more in the near term and then decline later in 2017, resulting in a flattening of the curve.

4)     Hints of trade wars, or tariffs imposed, will also lead to flights to quality in USTs and also lead to curve flattening. EOY to mid 2018 UST 10yr – I’ll call 1.5%.

5)     Don’t forget that US Treasuries are high yielding compared to other Sovereigns: Looking at 10yrs - US at 2.47% vs Canada at 1.76%, Italy at 2.25%, Germany at 0.4%, UK at 1.35%, and Japan at 0.09%. It might take less than a year to get longer US yields to reverse course as central bank repression continues to impact foreign savings. Even if China dumps its USTs, Europe and Japan will buy them.

6)     I suspect investment consultants will rotate their clients out of fixed income, resulting in increased supply of secondary market bonds in the near term. If Dodd Frank is repealed or weakened by the Trump administration, and dealer balance sheets are allowed to expand, the dealers will have a field day prop trading in the bond markets. This will result in a transfer of wealth from the pension system whose fixed income managers will sell bonds at weakening yields to large dealers that have enough capital to do proprietary trading.

7)     The dollar will continue to strengthen, primarily due to expectations of Fed Fund hikes. This of course would result in limiting the US ability to export and thus manufacture.

Samir Shah, CEO/CIO MBS Mantra, LLC

2/3/2017

copyright, Samir Shah, MBS Mantra, LLC.

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