December 23, 2020

5 Surprises in 2021

Last year, I was encouraged to come up with a list of predictions for 2020. The results of that exercise were hilarious. (Exhibit A: 2020.)

This year, I am being encouraged to come up with a list of surprises for 2021. This is actually harder than coming up with a list of predictions, because it forces you to think outside the box.

I crowdsourced this on Twitter and got some help. There were some interesting geopolitical ones that people proposed, like regime change in Iran and China taking over Taiwan.

Those would definitely make markets more exciting next year. But I am most interested in opportunities that US investors can easily take advantage of.

Without further ado, here are my five surprises for 2021:

Surprise No. 1: There Will Be No Surprises

That’s it. That’s the surprise—there will be no surprises! 2021 will be a boring year.

Stocks will go up a boring amount, bonds will drop a boring amount, and there won’t be any crashes or any melt-ups. Maybe volatility will be low and stable. Maybe there will be nothing interesting out of the Fed. Maybe it will just be a profoundly boring year.

Of course, we still have to get the vaccine distributed, and there will be some hiccups along the way. We also have a major transition of power and some different legislative priorities. But maybe the market just takes it all in stride, and 2021 is a one-way ticket to Dullsville.

Surprise No. 2: We Will Have Higher-Than-Expected Inflation

Of course, this wouldn’t be a surprise to any of my newsletter readers, since I have been carping on the higher inflation theme for some time. But I think it would be a surprise to the man on the street.

The theory here is that we get an increase in money velocity from the fiscal side—all the PPP loans, enhanced unemployment benefits, and stimulus checks have added to household savings. And more stimulus appears to be on the way. Then, when the vaccine is distributed, that stored savings will be released into the economy with explosive effect.

More money chasing the same amount of goods. That is the theory.

What level of inflation would be a surprise next year? We’re at about 2%. So, 4% wouldn't just be a surprise… 4% would be some sticker shock that might get the Fed moving a bit earlier than anticipated.

Surprise No. 3: The Great Moderation

We had 12 years of relentless political polarization, and now the process is starting to run in reverse. Politics will become less polarized, and people will move toward the middle.

You probably saw that AOC and other progressives have been shut out of key committees by the moderate Democrats in Congress. This is part of the moderation.

You’ve seen celebrities like Matthew McConaughey describe themselves as aggressive centrists, calling out the polarization on both sides. McConaughey, by the way, has a lot of influence and has kept his reputation intact by mostly staying apolitical.

We’ve reached peak polarization, and now we’re going to start to move toward the middle. Social media still feeds polarization, but perhaps we’ll see social media has less influence in the years to come.

The election, by the way, was the product of our subconscious desires—faced with two seemingly polarized choices, voters unwittingly went down the middle, which is where we’ll stay for a while.

As I’ve said before, moderation is good for asset prices—look at the 1950s and 1990s.

Surprise No. 4: Oil Prices Could Go Up a Lot

If you’re paying $2.50 for gas, it could be $3.25 at the end of next year. Again, not a surprise if you’re a faithful reader, but this will also be a surprise to the man on the street.

A lot of supply—a lot—has been taken offline, and demand is about to skyrocket once the vaccine has been distributed. Everyone I know is talking about traveling.

Andrew Sullivan, who used to write for New York Magazine, recently said this in his Substack:

"Next year is going to be epic. It will be a year of rapid economic growth, extraordinary medical triumph, huge psychological relief, mind-numbing political normalcy, and pent-up social liberation. It will be lit. The summer will be remembered as the most hedonistic since the 1980s. There will be parties; there will be orgies; we will drink and do drugs; we will travel in unprecedented numbers; and after a grim year of withdrawal, fear, anxiety, and solitude, we will become human again."

Can’t agree more.

Surprise No. 5: The Fed Starts Moving in a Hawkish Direction Prematurely

Currently, the market is pricing in the first Fed hike in 2024. I tend to think we will get it sooner than that. If that’s true, there will be some great trades to put on.

Maybe it’s because of inflation, or maybe it’s because of asset markets heating up.

How will the Fed tighten? Well, it could stop buying junk bond ETFs. Or scale back corporate bond or mortgage-backed security (MBS) purchases.

Maybe it stops QE altogether. This would certainly be a surprise!

Of course, it is unlikely, but that’s the definition of a surprise. It’s unlikely because the Fed has explicitly said that it is willing to tolerate higher inflation, but maybe its reaction function changes.

Keep in mind that even the slightest slowdown in monetary easing is going to spook the market—and then we won’t have a boring year anymore.

Those are my five surprises for 2021. Technically, these aren’t predictions, but we’ll come back in a year and see how these “surprises” turned out.

Happy Holidays

Happy holidays to you and your family. We'll be on hiatus until Thursday, January 7. Here’s some music to listen to over the break—hands down, the best mix I have ever recorded. It will transport you to another place. When you get a moment, please listen to Seduction.

Jared Dillian

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