Most investors would be happy if they knew what was going to happen in the next 10 days. Nick Colas, chief market strategist at BNY ConvergEx, thinks he’s got it licked for the next 10 years.
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Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois.
In a note released Wednesday, he calls it the “New Abnormal.”
So give the man credit for a nice play on words that stands Pimco’s “New Normal” forecast, and much of its underlying principles, on its head.
“There is a well-worn aphorism among stock market strategists: if you want to forecast the long term, be sure to do it frequently,” Colas writes. “That’s sound advice, especially in the current and unique environment of central-bank driven liquidity and high asset price correlations. It is hard enough to figure out next quarter, let alone next year or into the next decade.
Yet Colas draws some common-sense conclusions based on all the inflation likely to be pumped into the system and the higher tax rates that will be needed to pay for the trillions in sovereign debt floating out there and coming to maturity in the next decade.
Viewed through that prism, a 10-year forecast doesn’t sound so silly after all.
“I don’t think you can crush the US housing market and global banking sector, replace it with central bank liquidity on an unprecedented scale, see historically high and sticky unemployment, and witness rolling mini-crises of sovereign debt concerns without thinking that the landscape is going to be very different for a long time,” he writes.
He breaks down the investment challenges into four categories:
1) Tax-Efficient Investing: Colas says investors will need to find “chinks in the taxman’s armor” amid the tax increases needed to pay off sovereign debt.
2) Beating Inflation: Despite all the chattering about deflationary threats, a long-term view of the financial markets has to include the very real inflation threat as the dollar is destroyed and liquidity overwhelms the economy.”I think it is a pretty easy forecast to say that the next bull market on Wall Street will be in instruments that benefit from inflationary pressures. Think the popularity of the gold exchange traded funds is impressive? You ain’t seen nothing yet.”
3) Search for Non-Correlated Alpha: Investors looking for hedging and diversification tools are hard-pressed in a market where everything moves together. Finding low correlation will be key.
4) Investing in a Rising Rate Environment: Zero-interest-rate policy cannot prevail forever. Investors will need to find tools that will grow faster than rates or face negative real returns.
“We may well be at Dow 20,000 in 2020,” Colas points out. “But would you feel happy about that if inflation were 10% a year between now and then? Or gold were at $5,000? Or your house was worth half of what it is today? The next 10 years will have to see major reversals in trends that … investors have grown comfortable with over 20-30 years. That’s the real ‘New Normal.’”
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