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Musings Report #40 10-3-15 What's Ahead: 2016
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
What's Ahead: 2016
Longtime correspondent Cheryl A. asked me to elaborate on a recent statement made in the Musings:
In Musings #37 you wrote: "Anything else is illusion. I also think this will become evident to all within the next decade, when all the 'sure things' melt into thin air, along with the global financial system." Would you consider writing a post that describes the type of things you expect to see."
I'm going to answer in two parts: one to discuss what seems likely to unfold in 2016, and then a second part to discuss the 2021-25 system-reset era.
Here are the primary influences going into 2016:
1. China's insatiable demand for commodities and capital has pulled the global economy's cart for seven long years. Now China's unsustainable consumption and expansion has ground to a halt.
There is no substitute for this demand. No even remotely equivalent economic/financial engine of demand exists.
2. Income for the bottom 90% in the developed world is stagnant/declining. The most basic assumption of the central bank monetary policy experiments since 2008 (QE, etc.) was that household income would rise as the economy recovered, enabling more household consumption/debt.
This has not turned out to be true: for a variety of structural reasons, income of the bottom 90% of households has declined since 2007 (or 2000) when adjusted for official inflation (which is understated in big-ticket items such as higher education and healthcare).
3. The "wealth effect" from boosting global stock and junk-bond markets has been very limited. The second basic assumption of the central bank monetary policy experiments since 2008 was that the rise in financial assets (stocks, bonds and real estate) would "trickle down" to households who would respond to the psychological sense of increasing wealth to consume and borrow more.
What actually happened was the assets of the bottom 90% were gutted in the crashes of 2000-02 and 2008-09 and could not recover because the assets had lost so much value.
In terms of stocks, many in the bottom 90% (or even bottom 95%) decided against gambling money in the stock market after being wiped out by the dot-com crash. As a result, they missed out on the extraordinary gains of the past seven years.
Those who traded up in the housing bubble of 2000-2008 and took on big mortgages found that the recovery in housing prices has at best restored their marginal equity but hasn't enriched them (with the exception of those who managed to buy in Manhattan, West L.A., San Francisco, etc., where gains have now exceeded the 2007 highs).
Millions of households that do not own homes in these hyper-hot globally attractive (and relatively small) markets are either still under water (they owe more than the home is worth after commissions and closing costs), or their equity is so limited that it doesn't create a 'wealth effect" (i.e. less than 20%).
4. None of the structural problems revealed by the 2008 Global Financial Meltdown have actually been fixed.
I don't mean risky banking or lending fraud, as destructive as these were--I mean the demographics that have mooted the entire financial foundation of pensions, the parallel rise in healthcare costs (let's estimate 750 million Baby Boomers globally are going to retire and need more medical care--75 million in the US alone), the unstoppable rise of automation that replaces human labor, the environmental disasters that have been papered over but not actually sloved--the list is long.
5. The Oil Head-Fake I have often described is playing out to perfection. As demand plummets, oil producers have no choice but to keep producing to service their debts or fund their social welfare program costs. This sets up a mismatch in demand and supply that will push energy prices even lower, gutting the budgets of oil exporters and crushing their currencies.
For these reasons, I expect a deep global recession in 2016.
By all rights, U.S. stock markets should decline as corporate sales and and profits stagnate or decline. But there is a counterforce: the global flow of capital into US dollar-based assets (real estate, stocks and bonds) as emerging market currencies continue their downward drift and global capital escapes into the US dollar.
For this reason, one scenario that seems likely to me is a US stock market that doesn't crash so much as drift down in an uneven trend marked by massive rallies that seem to promise a reversal of trend but do not because they cannot reverse a trend that is based on the reversal of a speculative "risk-on" era to a "risk-off" era.
If this scenario plays out, it will be treacherous waters for both Bulls and Bears.
Summary of the Blog This Past Week
What's Cooking at Our House: Thai Pumpkin-Chicken Curry 10/3/15
The Dangerous Illusion That Risk Can Be Offloaded Onto Others 10/2/15
You Can't Separate Empire, the State, Financialization and Crony Capitalism: It's One Indivisible System 10/1/15
Following in Ancient Rome's Footsteps: Moral Decay, Rising Wealth Inequality 9/30/15
China's Leadership: Brilliant or Clueless? 9/29/15
The Echo Bubble in Housing Is About to Pop 9/28/15
Best Thing That Happened To Me This Week
Pushed my time for a 2-mile run down to 18:08--basically hit my target of two 9-minute miles. I also managed 60 sit-ups and 37 push-ups--the three elements of the Army Physical Fitness test I do annually. (I'm 61, soon to be 62. I scored 254 out of a maximum of 300 in my age group 57-61.) Note I only compete against myself.
Market Musings: A Bounce ahead?
The financial and economic news is bleak virtually everywhere in the global economy, but if we set that aside and simply look at the daily and weekly charts of the S&P 500 (SPX), we see the potential for a substantial rally.
Yes, such a rally would make no fundamental sense, but the market is driven now by monetary policy and global capital flows.
The weekly chart (long-term) shows a bullish corss setting up in the MACDand oversold stochastics--both of which suggest a rally in the making, if not in the next few days, within the next few weeks.
If recent support at 1860 gives way, the 200-week moving average at 1725 becomes an attractor.
The daily chart is also constructive, as MACD slowly works its way up to the neutral line. If it can punch above that, the rally will likely get some serious legs.
Stochastics also crossed bullishly.
What the Bulls need is a higher high--specially, a close above the 50-day MA at 2002 and a recovery of the 200-day MA at 2060. If the rally can't achieve those targets, its staying power is suspect.
From Left Field
Fleetwood Mac - Black Magic Woman (Live, 1970) Many forget this is a Peter Green composition, though Santana's version is more well-known; this live recording is a bit rough (the first minute is Green asking photographers to sit down) but the blues guitar from about the 2-minute mark is worth a listen...
Shoji Sayaka Plays Beethoven's Violin Concerto (Part 2 of 4, 13:21) Check out Sayaka's marvelous cadenza from 9:12 to 11:44....
Hit Charade: Meet the bald Norwegians and other unknowns who actually create the songs that top the charts.
Why We Don’t Mature With Age, We Mature Through Hardship - channeling Steve Jobs...
Trotify Makes Your Bike Sound Like a Galloping Horse -- this is great! This will sound like Sherlock Holmes is pulling up in a hansom cab at Baker Street...
We've Missed the Entire Point About GMO Food -- A Farmer Explains Why
A poetic vision of Paris’s crumbling suburban high-rises -- a global movement of terrible architecture...
McKinsey warns banks face wipeout in some financial services -- good riddance, unless it's your job that's being eliminated...
The Downsizing of the American Dream
People used to believe they would someday move on up in the world. Now they’re more concerned with just holding on to what they have... see the 5 points in the main essay...
Zombie Narcissists Have No Secrets -- nurturing a generation of self-absorbed people who also happen to be shameless...
Socialism and IT: Can Technology Liberate Us From Capitalism?
The Price of the Internet of Things will be a Vague Dread of a Malcicious World (via Steve K.) -- excellent, a must-read...
“Don't get involved in partial problems, but always take flight to where there is a free view over the whole single great problem, even if this view is still not a clear one.” Ludwig Wittgenstein
Thanks for reading--
charles |
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