2014 - The Year in Review for Investors

As we close out 2014 and look forward to 2015, let's review events nobody forecast in January 2014.  This process keeps us humble, but also helps us think about opportunities for 2015.

Russia squanders Sochi goodwill by invading Crimea - sanctions collapse their economy.  Russia was the worst performing market in 2014 - down 45% in dollars.  As we learned, Putin's support of Russian rebels in the Ukraine is not a sign of strength but of weakness - the need to distract average Russians from the kleptocracy in charge of the Kremlin.  Combined with a poor demographic situation (falling birth rates, falling marriage rates, increased emigration) Russia is sprinting from Second World to Third World status.

Europe enters 6th year of recession, made worse by Russia situation.  Unemployment rates in much of Europe (e.g. Spain 24%, Ireland 11%, Italy 13%, Greece 26%) remain at Great Depression levels, but there is no political will to address the underlying problems - rigid labor markets, uncompetitive export skills, over-emphasis on "austerity."  The final straw was the collapse in the Russian Ruble, which caused Eurozone exports to Russia to fall 15% in 2014.  We don't know what can be done to turn this situation around. 

The US Dollar soared 12.4% - most international returns negative as a result.   For 40 years, the long term trend of the US dollar was down - which we would expect given persistent trade deficits and artificially low interest rates.  There are two previous occasions where the dollar rallied - 1981-1984 as the Federal Reserve drove rates high to kill off inflation, and 1999-2002 following the introduction of the Euro in an environment of poor growth in Europe.  The first scenario is not applicable, but the second scenario - Europe in recession - seems like a reasonable model.  If so, the dollar could gain another 30% against the Euro over the next three years.

Read the entire commentary here.