Are you a bear or a bull for 2014? On the bear side are those who think that after a 20 per cent rise in equities through 2013, the end must be nigh even if interest rates stay low and the US and UK continue with economic growth.
On the down side, the eurozone continues to splutter, liquidity tapering by the Federal Reserve should do for the developing economies, and China (assuming it does not start an accidental war with Japan) is still trying to tame its insane credit boom.
In the pessimistic scenario, the only thing headed upwards is likely to be the value of the dollar, especially if bond yields start to rise.
Apart from speculating in the buck (rarely a big risk, it must be said) the other place bears might like to put their cash, aside from under the bed, is in defence shares.
The Dow Aerospace and Defense index rose 60 per cent last year, compared with 29 per cent for the S&P 500. With China and Japan in the middle of an arms race that makes 1914 look peaceable, and the Middle East religious civil war deepening, hi-tech armaments will sell like hot cakes.
Bears lay their biggest worries on China, where the domestic credit bubble has mushroomed from some £5.6 trillion to £15tn since 2008. Loan growth has jumped the equivalent of 100 per cent of GDP in five years. That’s what I call a bubble.
The only way out is to drive down the value of the yuan and export like there’s no tomorrow. Just think what that does for global deflation and currency wars.
Here in the UK, we’ve enjoyed Christmas and the New Year spending like there’s going to be no 2014. OK, the retailers have done well, but that doesn’t fool the bears. They know this mini boom is being fuelled by running down savings.
When the savings have gone, what then?
Enter the bulls. They know why consumers are spending: with zero interest rates, saving isn’t rational. Bulls also point to the fact that the US economy was growing at a blistering 4.1 per cent in the final months of 2013.
With the Fed promising to keep rates at rock bottom more or less indefinitely, the economic express train should keep running through 2014. If so, there’s no reason why equities should slow.
OK, bond yields are on the up, too. But the notion that equities must lose if bonds yields rise is often disproved in reality. A boom economy lifts all financial boats.
The bulls also dispute claims that the so-called commodities “super cycle” is over. Despite fracking, US domestic oil prices have risen every year for the past five, and 8 per cent in 2013. The continuing political crisis in the Middle East ensures predictions that benchmark Brent crude will drop to $80 a barrel this year are bonkers.
As for gold, which had a bad year in 2013, it is now either too cheap or equities are too dear.
The UK is prime bull territory, if the new year headlines are to be believed. The consensus growth forecast for this year is 2.4 per cent – a whisker off the average trend rate.
Scotland should do well from the added bonus of the Commonwealth Games, Ryder Cup and Homecoming. There’s no sign of any referendum denting business confidence.
Where do I come down? I’m bullish for 2014, because I think economies are like bicycles. They are both inherently unstable but they don’t actually fall over if you pedal fast enough.
However, there are some pretty big hills on the economic road after 2015.