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In my perusal of the macro landscape that I perform at the beginning of each year, I always attempt to find a shared thread, a common denominator that strings together macro themes and financial markets' prevailing consensus thinking. This is the age-old financial calculus of comparing perception against reality, and trying to figure out how to make a buck in the spaces that can exist between the two. Sometimes that distance between reality and perception is a small gap that gets arbitraged away in a relative instant. Sometimes that gap is yawning and persistent. And from my looking around, it seems that now is one of those times when yawning and persistent are potentially more apt adjectives than small and instant.

Consider the following important financial market gauges:

The US dollar
Interest rates

The prevailing consensus assumptions are remarkably unanimous toward the trends in each of these important markets, in some cases near or exceeding records of consensus unanimity that stretch back many years. Those assumptions are thus (with given reasons in parentheses):

The US Dollar will continue to fall (US CAD, domestic GDP growth)
Gold will continue to rise in dollar terms (US CAD, excessive monetary reflation)
Equities will continue to advance smartly (US profits recovery, bond-to-stock allocation)
Interest rates are set to rise (profits recovery, inflation, foreign capital flight)
Inflation is set to rise substantially (excess reflation, US profits recovery)
Commodity prices will get more expensive (China, US profits recovery)

I need not detail the remarkable level of confidence that the Street has in each of these trends, whether one looks at consensus measures, commitment of traders data, Barron's and Wall Street Journal roundtables, etc. There are few, if any, asset allocators, PMs, economists, or traders that believe the above trends won't become more entrenched in 2004.

One doesn't have to be committed to the contrarian style of investing to feel awfully nervous when so much of the Street is standing on one side of the boat. You already know that "obvious" trends can persist longer than a rational mind might presume. But having said that, I think a mental exercise of trying to find that common denominator among these prevailing views is an exercise worth undertaking.

As Brian and John have pointed out frequently, different financial markets often have times when they lack any real correlation: the price of gold, the price of important commodities, or stock prices can act in ways that have no clear macroeconomic relationship. Sometimes stocks go up with bonds, sometimes they go down when bonds go up. And finding a common thread among all six of the markets above is even more difficult and rare.

Interestingly, there is, in fact, one thing that could make each of the well-understood assumptions in each of those markets wrong; one thing that would cause the greatest amount of money to be lost by the most number of participants. There is one thing that could make the price of gold go down, the US dollar go up, inflation go down, bonds go up, stocks go down, and commodities go down.

Another recession in the US.

You already know that the world's economy is US-centric, so as the US goes, so goes the world. A recession in the US would dampen demand for industrial commodities (China is buying commodities more to make export goods sold to US consumers than to create strategic stockpiles or to satisfy domestic goods demand), lowering their price. Declining world economic growth would impact foreign economies more than the US, so gold prices could fall and the US dollar could rise as any monetary crisis would be averted and the US$ would remain the global reserve currency. A US recession would also cause disinflation, cause bond prices to rise, and send US stocks falling on slower economic growth.

None of these things have to happen, of course; these markets could follow diverse paths in 2004 not impacted by any common macro event. But the fact that one macro event, a US recession that literally no one (see the WSJ economists poll) is predicting, could make the prevailing consensus thinking wrong in each important financial market, is interesting indeed. And at least worth noting.
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