The magical 2020

By | August 13, 2018

“Our firm forecast that the next downturn will happen around 2020”

“We expect this long bull market to last at least another 2-3 years till 2020”

“We expect next 12-24 months to be OK, and that puts the end of the bull run at 2020”

I never make predictions, especially about the future

  • Yogi Berra

I can’t recall that since when everyone’s crystal ball is pointing to the same year – 2020. I try to reverse engineer their methodology of the year of 2020 being the doom’s day. Remember the same group of people has been saying “2-3 years later will be the recession years” for the good part of the cycle. I think if I should be kind enough to give their prediction any predictability, maybe it is the interest rate that eventually break the back of this old bull. Today’s Fed Funds Rate is about 2%-2.25%. If Fed is hiking rates for another 2 years, which means maybe 6 more quarter point increases to Fed Funds rate, which will reach 3.5% to 3.75% in 2020. That could be problematic. However, historically Fed is only behind the curve, never led the curve and breaks the back of the economy from their action. (Imagine what the uproar will be if it was Fed, not crazy mortgage lenders and investors that created the 2008-2009-credit crunch. We probably won’t be talking about an institution called Federal Reserve by now).

There are pockets of economy looking very bubble-ish: Bitcoin; House prices in Silicon Valley; Multifamly Rents in major gateway cities (NY, SF, Seattle etc); Some technology companies’ valuation. However, there is no signs of a systematic leveraged bet has been placed that will create something similar to 2008-2009 credit crisis.

According to Standard and Poor, S&P 500 companies’ total sales as of 1Q 2018 was around $1.26 trillion. US Economy as of 1Q 2018 was around $19.97 trillion (according to BEA). Even all S&P 500 companies’ sales are domestic (which is not true and it strengthens our arguments), the S&P 500 Index onlyrepresents 6.32% of US Economy in terms of gross production.

Look what President Trump has done for US Economy: Tax Cut, Trade Rebalancing, De-regulation, and Future infrastructure investment. All these are less likely benefiting the big corporations in the benchmark index and more likely to benefit small and medium size businesses whose’ revenue and growth are all depending on everyday American rather than trading with global partners or some conglomerate that has resources to allocate their sales so they have best tax benefits. Wondering why US Economy did not grow 3% or more in the past decade? Because 70% of it (small and medium businesses are struggling with the issues with heavy taxation, heavy regulation and they are losing the competition to their bigger peers because their competitors have resources to find loopholes in those regulation or taxation laws and they don’t). We are very confident that the next phase of this bull cycle will have the following characteristics:

  1. S&P 500 or DOW indices won’t advance too much from here
  2. Small and Medium sized businesses, either public or private, will do well
  3. As a result, consumers will do well in general

Based on these 3 points, we should avoid over-priced big businessesand put lots of attention and effort in having exposure in small and medium sized businesses, either through public markets or through acquiring them directly. That’s the real American businesses and that’s the part of the equation that can produce a 3% or higher GDP growth number.

And we don’t know which year recession will hit. It almost certainly not the year that market pundits are predicting.

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