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The Biggest Macro Trends of 2014

Keep watch on bonds, Europe, energy prices

   

Macro trends are, by definition, “big picture” themes that often take years to fully play out. Some of my favorite investable trends in Macro Trend Investor — such as the rise of Africa’s middle class and America’s domestic energy revolution — are potentially multiple decades in duration.

Some trends, however, have much shorter time horizons, and that is what I want to discuss today. I’ve created a list of what I consider to be the most significant macro trends or events for the first half of 2014.

Tapering Will Be a Nonfactor

I’ll start with interest rates. When the history books are written, 2013 will likely be remembered as “the year of the taper tantrum.” Starting in May, the market began the painful process of preparing to wean itself off of the Fed’s unprecedented stimulus.

So, what should we expect in 2014?

Well, it finally happened: The Fed announced it will start tapering its massive “QE Infinity” bond-buying program.

My prediction is that once the Fed begins to taper its bond buying, yields will actually moderate or fall. I realize this is a highly counterintuitive statement. The Fed, through its quantitative easing programs, has been absorbing a shocking amount of Treasury and agency debt at $85 billion per month. At various points in late 2012 and early 2013, the Fed bought in excess of 90% of new bonds being issued.

Yet we should keep a level head and try to look at this objectively. “Taper” does not mean “quit.” It means “slowly reduce” over a period of months or years. And Ben Bernanke and Janet Yellen have made it very clear that tapering is not irreversible. If the economy starts to backslide — or if deflation rears its ugly head — they can ramp up quantitative easing again at any time.

The bond market, not sure what to expect, had priced in the worst. Prior to Bernanke’s announcement in his final meeting as Fed chairman, the yield on the 10-year Treasury was bumping against 3% again. But, as Warren Buffett has famously reminded us over the years, we should be greedy when others are fearful. Now that the veil of uncertainty has been lifted, the bond market can get back to normal, and the dumping of “bond-like” assets such as dividend-paying stocks and REITs that started in May 2013 should be over.

And the Fed is not the only story here. Foreign investors — led by Japanese institutional investors — are aggressively buying U.S. Treasuries. Japanese purchases last quarter were the second-highest on record since at least the year 2000.

So, overall bond demand is likely to remain high even while the growth in new supply continues to shrink. The U.S. budget deficit, while still too high, has been shrinking for over a year.

Bottom line, if you are in or near retirement and looking to secure an income stream, the beginning of 2014 should be a great opportunity to load up your portfolio with high-quality dividend-paying — and dividend-raising — stocks, REITs, and MLPs.

The Euro Will Sink … and European Stocks Will Outperform

The next major theme I see gaining steam in early 2014 is the decline of the euro relative to the dollar.

Remember, the Fed has seen the high-water-mark for its unconventional stimulus for the foreseeable future. I expect tapering to be slow and gradual, but the fact is that we shouldn’t expect any major new stimulus.

That is not at all the case in Europe. In fact, ECB President Mario Draghi is concerned enough about the potential for the Fed’s tapering to spill over into eurozone deflation that he is openly considering a “QE Infinity” of his own.

He may or may not have to act. You might recall that his now-famous resolution in 2012 to do “whatever it takes” to save the euro was never actually put to the test. Still, whether or not we see a major quantitative easing program from Mr. Draghi, his willingness to consider it should be enough to make the euro sag relative to the dollar.

A weaker euro will help to boost exports, which are critical to getting the eurozone economy moving again. With unemployment still above 12% across the eurozone — and with many Southern European households still coping with austerity and falling home prices — we can’t expect much from European consumers.

But while consumers are still struggling, the eurozone recovery is slowly gathering steam. Ireland has now completed its bailout and is now standing on its own two feet again. It still might be a while before Greece, Portugal or Cyprus join Ireland on the other side, but Ireland at least proves that there is life after bailout.

Meanwhile, as I wrote recently, European stocks are vastly cheaper than their American peers and poised to deliver much better returns. With the exception of the German market, which is actually quite overpriced at the moment, every major European market — including non-euro countries such as the U.K. — are priced to deliver superior returns.

Energy Prices Will Stay Low

Finally, I expect energy — and particularly natural gas — prices to drift lower in the first half of 2014, even as demand for natural gas rises.

The Wall Street Journal ran an article that got my attention. Companies with large heavy-duty truck fleets are finally doing what I long expected them to do: They are converting all or parts of their fleets to trucks running natural gas or compressed natural gas.

Lowe’s (LOW), the home improvement and hardware store, will shift all of its fleet to natural gas by 2017, and FedEx (FDX) expects to have 30% of its massive delivery fleet running on natural gas over the next decade, the WSJ reports.

About 1% of heavy-duty trucks sold in 2013 have natural gas engines. That’s expected to be 5% in 2014, and the percentage is only expected to grow. (The numbers for smaller trucks are more impressive; about 60% of all new garbage trucks purchased in 2013 were natural gas-powered, for example).

How do we profit from this trend?

By buying investments that profit from the volume of natural gas produced rather than the price and by investing in natural gas infrastructure.

Charles Lewis Sizemore may hold some of the aforementioned securities in his Macro Trend Investor portfolio.

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