It’s a 35-year tradition: Byron R. Wien’s “10 Surprises” list of economic, market and political investable events he thinks have a higher than 50% probability of occurring during the year but which the average investor would give merely a one-in-three chance of happening.
And every year Wien, vice chairman of Blackstone’s private wealth solutions group, puts his money where his mouth is by investing $1 million of his own money in a portfolio based on his 10 predictions.
If 2020’s results are anything like last year’s, the veteran strategist, 87, will be pretty happy: His 2019 Surprises portfolio was up 28%, he tells ThinkAdvisor in an interview.
Wien launched the “10 Surprises” list in 1986, when he was Morgan Stanley’s chief U.S. investment strategist. After 21 years with firm and a stint as chief strategist at Pequot Capital, he joined Blackstone in 2009.
In the interview, he shed light on the reasoning behind his carefully researched 2020 calls.
For the last two years, Joe Zidle, chief investment strategist in Blackstone’s private wealth solutions group, has joined Wien in developing the list.
For 2020, the forecasts range from how the U.S. economy will fare to what’s in store for top-tier tech stocks to market corrections to the November Senate elections to America’s fraught relationship with China, plus much more.
In our conversation, Wien also discussed other cogent predictions he’s made for this year but which he opted to leave off the list. He explains why.
ThinkAdvisor held a phone interview with Wien, based in New York City, on Feb. 13. Citing analysts’ perpetually too-optimistic earnings forecasts at the top of every year, he commented wryly: “The investment business is a wonderful business: You can earn a living by being wrong all the time!” With his “10 Surprises” list, he always tries not to be.
Here are excerpts from our interview:
THINKADVISOR: Do you arrive at your surprises using computer modeling, or are they solely based on your own knowledge and logic?
BYRON WIEN: I have all kinds of sources. Each surprise is derived in a different way. I interview a lot of people; I do a lot of reading. There’s some computer modeling, but this is an impressionistic list. It’s not derived statistically or with any scientific method.
You’ve also indicated a few other surprises, which didn’t make the “10 Surprises” list because you don’t consider them as “relevant” or “probable,” you say. One is: “Anarchy and disharmony spread throughout the world creating turbulence in financial markets everywhere.” Please elaborate.
I definitely think that’s happening. But it’s hard to trade on that one. It wasn’t as actionable as some of the ones I picked.
Actionable by whom — investors?
I didn’t think it was investable. Every year I take $1 million of my own money and invest it in the “10 Surprises” because I want my money to be where my mouth is. I have a stockbroker at Morgan Stanley who creates a “10 Surprises” portfolio for me. [Blackstone] doesn’t allow me to buy individual stocks, so I have to do it by investing in ETFs.
How did last year’s portfolio of surprises perform?
It was up 28%.
That’s impressive! How do your “Surprises” portfolios usually fare?
They’re usually up — but not as much as that.
One of your 10 Surprises for this year is: “The economy disappoints the consensus forecast, but a recession is avoided.” On what do you base that?
I was convinced there were enough signs in terms of the labor force: the low unemployment rate was either going to produce higher wages, or people would have trouble hiring employees. But, obviously, I didn’t know about the coronavirus. That alone could explain why the economy would be weaker.
Why won’t there be a recession?
The kinds of things that contribute to a recession just aren’t in place. Recessions are [born] out of excess. Market or speculative excesses may be evident, but we don’t have a buildup of inventory. We don’t have the Fed raising rates. We don’t have the kinds of things that ordinarily appear at the end of a business cycle.
Why do you predict “several market corrections greater than 5%” throughout the year?
There’s going to be more volatility. We’re setting ourselves up for [a correction] right now. [investors are] verging on euphoria, [but] there are a lot of bad things happening [politically and economically].
Part of your Surprise concerning corrections is that earnings will increase by 5%, the consensus being 10%. Why do you forecast only 5%?
It’s consistent with the idea that the economy will slow. Growth in China is going to slow from 6% to 5%, and the impact of that will ripple across the world. In the U.S., it means that our growth will probably be below 2% — and that will be reflected in earnings. I have history on my side.
Usually whatever the analysts forecast at the start of the year erodes as we go through the year. If they call for 10%, which they were, it ends up being 5%.
Analysts always seem to be overly optimistic, but everybody knows they are.
One thing everybody knows is that regardless of whether the market was up 20% or down 20% in any given year, the consensus for the following year is almost invariably that the market will be up 10%. But the market is almost never up 10% — it’s up 20% or down 5%. It never hits 10% — yet that’s what people forecast over and over again. The investment business is a wonderful business: You can earn a living being wrong all the time!
You’re forecasting that the Democrats will take the Senate in November. What are the implications to the economy and market?
If Bernie Sanders were able to defeat Donald Trump [for president], that would have significant market implications. But I don’t think that’s the way it will turn out. It’s more likely that Donald Trump will get a second term. If I’m right about the Senate, then anything that comes out of the House [if the Democrats keep it] from the Senate would be vetoed by him.
But if the Democrats take all three branches of government, that would mean higher taxes. Your thoughts?
Yes. Look, I think the country is drifting left, and that means higher taxes.
In the technology sector, you predict that certain FAANG stocks [Facebook, Amazon, Apple, Netflix and Google] will underperform and that “a proposal to break up the largest social media platforms and increase regulation and government oversight [will] gain popularity.” Please explain.
They’ll be more regulated than they have been in the past. The public is concerned that their privacy is being invaded, that Facebook and others will sell their information — that the use of the internet is revealing too much personal information that will be used in a pernicious way by social media companies and that the government will get involved.
The “bond bubble starts to leak,” is another of your Surprises. What will prompt that to occur?
We’re going to be issuing more bonds than we ever have before. There are four big buyers: the Social Security Administration, Federal Reserve, China and Japan. Social Security will definitely do some buying. But the Fed may not because they’re trying to shrink their balance sheet. China and Japan are both upset with our trade policy and have already shown little enthusiasm at bond auctions. If they’re even less enthusiastic, who’s going to buy these bonds? It’s a lack of buyers that causes rates to rise – not inflation, economic activity or any other factor.
“U.S. economic co-dependence with China erodes,”; that is, there’ll be “a gradual decoupling of the U.S. with China.” Please explain.
We’ve had Phase One of the China deal, but there’s no provision [for] surveillance and enforcement. We’re not limiting China’s ability to support state-owned enterprises. Those two things were left out. So I think it was an imperfect agreement. It took two years to get it. It probably will take at least two years to get a Phase Two agreement. I think China did what it needed to do to prevent us from raising tariffs on Dec. 15, and that’s what went through.
“Iran steps up acts of hostility against Israel and Saudi Arabia. The Strait of Hormuz will close, and the price of oil soars to over $70 [WTI] a barrel.” That will be another Surprise, you say. Please comment.
We took out the second most-important person in Iran, and the Iranians weren’t going to let that stand. Right after that, they downed a Ukrainian airliner flying out of Tehran, and I think they put retaliation [against the U.S.] on hold. But I don’t think they’re done. What they’ll do to retaliate further is unclear. But one of the things could be closing the Strait of Hormuz. That would be the most powerful thing, and it would cause the price of oil to go up 40%.
As of Jan. 31, the U.K. officially left the European Union. You’re forecasting that it will be “the winner in its divorce: It benefits from a long transition period, and growth exceeds 2%, as foreign direct investment resumes.” So you’re clearly upbeat about the U.K.
I feel good about that one. It looks like it’s working. The pound is strengthening, and the market’s doing better. People are making capital investments.
You forecast that the problems with Boeing’s 737 Max planes will be fixed and that deliveries will begin this year. Consequently, airlines will “operate more efficiently and increase profits,” [making] their stocks “market leaders,” you say. Comment?
The plane is very fuel-efficient. All the airlines were buying it, and they were really optimistic about it. If they can fix [all] the software problems, get the planes [back] in the air and make passengers feel they could fly in them safely, it would improve the profitability of the airlines.
The “prospect of a self-driving car is going to be pushed further into the future” because “a series of accidents with experimental vehicles will cause a major manufacturer or technology company to [announce that] it’s no longer developing self-driving technology.” So you forecast. Do you know which one?
Oh, no! I’m just saying it’s going to be later rather than soon.
Let’s talk about a few surprises that didn’t make the list. For example: “In spite of serious differences, China and Russia appear prepared to face off against Europe and the U.S,” you say.
That’s happening. There are important differences, obviously, that we have with Russia and China and important views that we have in common with Europe. I think [President Vladimir] Putin is weak because his economy isn’t in great shape. He needs an ally to strengthen his position in the world arena. China is most sympathetic with his objective.
You predict that “North Korea agrees to suspend its nuclear development program after another meeting with Trump but doesn’t give up its existing stockpile.” What are the implications?
A lot of countries have nuclear weapons. We don’t feel comfortable with them [North Korea] having nuclear weapons and having long-range missiles. If Trump could negotiate the suspension of long-range missiles-development on the part of North Korea, that would be an important achievement.
Concerning artificial intelligence, you predict: It “begins to be viewed as a paper tiger. The AI jobs apocalypse fails to materialize.” That would be a big surprise since so many sectors of the economy are using it or are planning to do so.
[What I’m forecasting] is already occurring. Artificial intelligence isn’t something that just happened. It’s been around for three years — and we still have unemployment at a 50-year low.
But won’t AI be used extensively in manufacturing, medicine, biotechnology and many more sectors of the economy?
I think artificial intelligence is a win-win. [Still], it isn’t going to put too many people out of work. Already, our labor force is being strained. So a little relief on that front may be a good thing.
You didn’t mention gold at all. Why?
I’m bullish on gold. But I never use any one [event] two years in a row. Last year I said gold would go down, and it went up. That was one of the things I got wrong in 2019.
Why will gold continue to go up this year?
Because there’s so much geopolitical turbulence.
Has it been harder to make predictions in the last few years because, perhaps, the world has become more complex?
I’ve been doing these for 35 years, and I can’t remember an easy year. I start the process in October, and I work on it for three months. It always seems hard. My marriage almost broke up over it.
When I was taking the job at Blackstone, my wife said to me: “I hope they don’t want you to do the “10 Surprises.” I said, “I don’t know — we haven’t talked about it in the interview process. Why?” She said, “I’d sure like to get Christmas back. For the last two weeks of the year, while all our friends are in Palm Beach, the Caribbean, Vail and Aspen, we’re huddled up in New York because you’re working on those goddamn “10 Surprises” — and you don’t know I’m alive!”
How did you respond to that?
I said, “I’m sorry, but it’s very important that I get these right.” She said, “I know. That’s why I don’t want you to do them anymore.” So that was 10 years ago. I’m still doing them — and my marriage didn’t break up.
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