Tuesday, January 05, 2016

Happy New Year (sort of)...

After limping into the finish line at the end of the year, stocks opened yesterday in full panic mode.  While there were vague attempts to blame the same old suspects - a China slowdown, oil, conflicts in the Middle East - the reality is this was just more sellers than buyers.

Countless strategists have flooded the airways over the past week telling us all how the US stock market will end 2016 up about 8% but none of them could see what might happen on the first trading day of the year?  This should give all of us pause when considering the validity of their "forecasts".

There were two large mysterious buyers in the market yesterday that really turned the tide and a late day program trade saved the markets from being off even more.  China intervened substantially in their markets overnight to little effect but I believe this will be a major theme in 2016.

In no particular order here are the things I'll keep my eye on in 2016:

* China - Their economy is in trouble. I'd call it a growth recession coupled with a pending financial crisis and I don't think they have the policy tools to manage the problem.  There is a 50% chance of a currency crisis/credit crunch/banking collapse (ala 2008 in the US) in China which could severely damage the world's 2nd largest economy.  There are geopolitical impacts from this forecast as China may be tempted to do something rash (just google "senkaku islands" for an idea).

* Oil - This is one of those issues that is too complex to summarize in just one paragraph but I'll try.  The global effort to spur investment at any cost (unusually low interest rates in the US and around the world for 6 years) did just that - it caused a massive over investment in every part of the commodity complex including oil.

When one company over invests, this it isn't a problem, but when every part of the oil chain over invests you create the glut that we have today.  On the demand side, I think we will see further weakness in 2016 while production remains high.  The impact on the US is probably a small negative because many US producers may go bankrupt if the market continues like this in 2016.  Globally, low oil prices might spur some wild actions (see the latest Iran v. Saudi Arabia dust up) and that remains a wild card.

* The Fed - the Fed has painted itself into a corner.  The Fed is still operating like it is 1950 and they can control the US economy with a single interest rate.  The reality is that in today's global economy the Fed can no longer spur investment and job creation with a simple policy.  We are world awash in excess supply and countless Janet Yellen speeches will not change this.  I believe there is a 50-60% chance that  the US economy to hit a stall speed or even dip into recession in 2016 and the Fed will have no ability to respond to this move.  Once the global markets discover this fact it will be very interesting to watch.

I'll add some more observations and thoughts in the coming weeks, but in general I believe 2016 is shaping up to be very similar to 2000 or 2008.


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