The Year in Preview: A look at what’s to come in 2014
Take a look at our Best Bets for 2014 and the Black Swans that may be lurking around the corner
As former New York Yankees catcher, manager and idiot savant Yogi Berra once said, “It’s tough to make predictions, especially about the future.” But it’s also fun, which helps explain why so many people do it. Even Nassim Taleb, the statistician and author who has spent much of his career documenting the futility of making predictions – at least, ones based on traditional understandings of risk and probability – has fallen victim to its appeal from time to time.
And so, with that in mind, it’s our turn. Here are some of the best bets for 2014, along with a few black swans that we think might be lurking out there.
Once More Into the Breach
Every year, it’s a case of waiting until next year for the economic recovery. Growth is timid across the western world and developing economies like Brazil, India and China have slowed. One major shock, be it a politically manufactured act of economic suicide in the U.S. or another bond market crisis for the Eurozone, could tip the globe back into crisis. So which will it be – another step forward, or two steps back?
|The Smart Money: The American consumer may not be the engine of global growth it used to be, but it can still throw its weight around. With equity markets tracking higher, the housing recovery continuing and paid-down debt leaving room for pent-up spending, consumers will take the risks the U.S. economy needs to reach escape velocity.|
|The Black Swan: Emerging markets have been running substantial current account deficits for years, but those have largely been funded by inflows of foreign capital looking to escape near-zero rates in the developed world. But as the U.S. Federal Reserve starts to ease its bond-buying program and yields start to rise, that flow of capital will slow. That will trigger an exodus of capital like the one that ravaged Asian economies in 1997. The domino effect could be disastrous.|
Central banks have been pumping trillions of dollars’ worth of liquidity into the global economy. And while that may have helped prevent the global recession from turning into a depression, it also means there’s a mountain of money out there that could swamp markets and trigger inflation. “It is crucial for all central banks to withdraw from their extraordinary measures at the right time to prevent the generous liquidity provisions from leading to inflationary pressure,” said German finance minister Wolfgang Schaeuble in October 2012. But that was more than a year ago, and while the liquidity continues to flow, the inflation that is supposed to follow in its wake has yet to materialize. Will 2014 be the year it shows up?
|The Smart Money: Inflation will remain below the levels targeted by central banks, in large part due to a decision by the U.S. Federal Reserve in 2008 to begin paying interest on so-called “excess reserves” that banks can park in lieu of lending it to businesses and consumers to generate a return. They’ve been more than happy to oblige, as the volume of such reserves shot up from $2 billion in 2008 to nearly $2 trillion today. That’s not likely to change in 2014.|
|The Black Swan: Political tensions in the Middle East are as high as they’ve ever been, and if something sets the region truly alight, it could send oil prices as high as $150 a barrel. That would push inflation past the central-bank targets, and once inflation gets going, it’s hard to stop.|
All in the Family
It’s been an impressive run for Prime Minister Stephen Harper, who formed a minority government in 2006, added to it in 2008 and turned it into a majority in 2011. In the process, he’s transformed himself from a Western Canadian ideologue with as much sizzle as a three-day-old steak into one of the most successful politicians of his time. But in politics you’re only as good as your next day on the job. With his party faltering in the polls, and Canadians growing weary of him, could 2014 mark the end of the line for Calgary’s favourite son?
|The Smart Money: In a word? No. In three? Don’t be silly. Remember, Michael Ignatieff once enjoyed a lead in the polls. Besides, Harper became a Conservative because of what Justin Trudeau’s father did to Albertans with the NEP. Do you think he’s going to pass up a chance to vanquish a Trudeau?|
|The Black Swan: Political coups don’t tend to come with long preambles. Power corrupts, after all, and Harper’s colleagues might throw him overboard, particularly after the Senate scandal, if it means keeping the ship afloat.|
The Limits to Growth
While other provinces struggle with stagnant or shrinking populations, Alberta’s has grown at a healthy clip. However, that influx of people has placed strain on the province’s social and physical infrastructure.
Finding a palatable way to raise money for that infrastructure will be at the top of the Premier Alison Redford’s to-do list.
|The Smart Money: The Redford government sticks to incremental, politically safe changes, like the introduction of toll roads and user fees. The P3 model has already been used to build Alberta schools, and it is also being proposed (again) for courthouses.|
|The Black Swan: Think the privatization of public assets, like the Alberta Government Telephones Commission in 1990 and the Alberta Liquor Board in 1993, was a thing of the past? You ain’t seen nothing yet. In 2014, Alberta will privatize ATB Financial.|
Activist investors from south of the border have been making a name for themselves recently in Alberta. In 2012, it was Bill Ackman and CP Rail. In 2013, it was Carl Icahn and Talisman Energy. Will 2014 see another billionaire head north with a plan to turn around an Albertan company?
|The Smart Money: Given the profits that Ackman reaped from his dalliance with CP, it stands to reason that others will do the same. The target, meanwhile, will have some of the characteristics that made CP an inviting target – a large market cap, a history of underperformance, a frustrated shareholder base and a ready-made point of comparison for how things could be better. That could be any number of natural gas players – Bonavista Energy, perhaps, or even Encana.|
|The Black Swan: Forget wounded animals, and forget just taking a bite – someone will set their sights on the pride of the herd. Crescent Point Energy, a company with a decade’s worth of drilling inventory, some promising enhanced recovery techniques and a production profile that features more than 100,000 barrels per day worth of light sweet crude, could be a name to watch.|
Enbridge continues to insist that Northern Gateway will be built before the end of the decade. Likewise, environmental and aboriginal leaders remain steadfast in their opposition. But they’re not the only parties in this contest of wills. CN Rail and Natural Resources Canada have discussed railing oil to Kitimat. CN could run seven trains per day –
enough to match the capacity of Northern Gateway.
|The Safe Money: B.C. Premier Christy Clark has shown herself to be more open to the pipeline idea than she was when running for re-election, and she and Redford have a framework agreement for B.C.’s support of Northern Gateway in place. The introduction of an oil-by-rail alternative gives pipeline proponents another card to play. Aboriginal groups along the proposed line will have to cut a deal or face the risk of being sidelined entirely.|
|The Black Swan:
Never underestimate the resolve and diplomatic skills, of aboriginal leaders in B.C. Their land was never the subject of a treaty and their title cannot be extinguished by government fiat or commercial activity. The federal government faces a choice: watch Northern Gateway die on the vine as it spends the next two decades in court or engage in a good-faith effort to reach land claim agreements in the parts of B.C. where none currently exist.