Economic and Financial Predictions for 2016
Anyone who makes predictions about the stock market without admitting that they could be very wrong is either a liar or a fool. And anyone who listens to predictions about the stock market is hoping to get an easy solution to a very difficult problem; there is no such thing. I know a man who invested a year’s earnings (six figures) based on a conversation at Starbucks. My best guess is that he’s still down over 75% eight years later. Investing takes work and self-study (I don’t mean studying by yourself; I mean knowing yourself).
Having taught portfolio management, I could explain the theory about what you should do: allocate by asset class depending upon goals and horizons and risk tolerance. EVERY professional advisor will do precisely that with you, but not always for the right reasons.
I make these predictions because (as you know from the website) I am a movie fan and, as the saying goes, I have seen this movie before. I believe there is a pattern in the making and I am merely trying to describe how the pattern might fulfill itself, because people in groups create patterns over time. This tendency represents a very useful tool for those who try to outsmart the buy-and-hold strategy–the favorite “professional” strategy these days. [Warning: This is not an optimistic forecast. And the market may do just fine.]
One: There will be a wave of defaults in junk bonds. This refers largely to bonds of energy companies who borrowed for fracking and related ventures, and also bonds of countries which rely heavily on energy and resources for revenue. While the borrowing of the last several years was not on the scale of the sub-prime mortgage borrowing, it could trigger enough of a debt collapse to reduce available risk capital or send yields soaring for poorer borrowers. This would certainly affect the (global) economy and stocks in a negative way. The point is in the pattern: in the late ‘90s, telecom companies borrowed too much and contributed to the crash of 2001 and the capital-spending recession that followed. Then the sub-prime collapse resulted in “contagion” across the banking systems worldwide. The point: debt caused all the big problems of the last 20 years and yet we continue to rely on debt to revive our economies. Global debt levels increased 30% since 2008. It’s unsustainable as a practice and model.
Two: The Fed will probably not raise rates again, and if they do raise again, they will lower them by year end. Almost six years of market gains can be attributed to unprecedented stimuli from the world’s central banks. As long as they can, the central bank(s) will try to keep the markets from falling. The markets represent confidence and wealth. If the wealth pool diminishes, it changes confidence and spending patterns and the whole thing deteriorates from there until confidence is restored. Until the Fed loses credibility or their actions create unacceptable side-effects, they will stimulate. So will Europe, Japan, and China. The point is that the Fed stimulus is probably not over by any means. To me, this implies that precious metals (and related miners) will likely have a good year. Whether stocks can keep rallying on central bank stimulus is another question.
Three: Some kind of large-scale conflict will disrupt the global economy and markets. The global economy is weak and for resource exporters—it’s terrible. Between dangerous saber-rattling in the Spratly Islands, the expanding impact of the events in Syria; Turkey and Russia feuding, and heightened race, religious, and ethnic tensions everywhere, the world feels like a ticking timebomb.
Economic slowdowns lead to conflict. Because of global economic integration, the cost of war has increased. A few decades ago, formerly closed economies (e.g. China, Russia) were less threatened by wealth-effect losses than they are today. In fact, recent “wars” have been fought more or less tacitly on economic and financial fronts with currency manipulation and trade policy. I believe this will change in 2016. For centuries it’s been part of the playbook for world leaders to start wars to distract the populace from hardship at home. I predict that we see either an expansion of the Syrian conflict, a resumption of the Ukraine conflict, or some new outbreak of hostility—probably involving a major military power—in the next year. There will be immediate calls for ceasefire, though my cynical self believes this will be due to the enormous loss of global wealth, not to loss of life. Once again, bad for stocks, good for precious metals.
Four: I see at least one or more major US cities bring in the National Guard and impose curfews and travel restrictions. Domestic strife is looming in this country. We have fear dominating our headlines. Fear of immigrants, fear of Islam, fear of police, and fear of government. It seems that we are getting closer to the kind of widescale rioting we saw in the ‘sixties. But this time it would be about police shootings of innocent civilians (Black Lives Matter), or gun-control protests, or domestic or foreign terror outbreaks. The tension is palpable and it does not help that “crisis is the brand” of so many of today’s candidates. While markets do not tend to view isolated events as a threat to earnings, fear is not a healthy condition for any economy. The upshot: bad for markets maybe, but probably supports gold and safe haven investments.
While these predictions all represent pessimism, they can act as a catalyst for action and benefit. Most of the people I talk to on the subject of the stock market are complacent. I suppose that is natural enough because the Fed has responded to every threat with more stimulus, and investors (naturally) feel protected. And perhaps they are. But if the day dawns where the central banks can’t come to the rescue, the reckoning will be severe. My belief is that the Fed’s image as savior is badly damaged already.