2016 Forecasts and Predictions
Honest Assessment of the Current Economy
“Welcome to CrushTheStreet.com. Whether you are a long-time follower or have just recently subscribed, we value you as a member, and our job is to provide you with the tools you need to stay educated and thrive in what we see as a rapidly-changing global economy.”
For those of you who might not be aware, things are not as rosy as the mainstream media would like you to believe. For the majority of us who have been around a few decades, what we have become accustomed to in terms of normal is rapidly coming to an end, and the global monetary experiment is literally bursting at the seams.
Central banks have used the raising and lowering of interest rates for years to artificially control markets and their own interests. In extreme economic situations, like we are seeing now, more drastic measures have been taken, such as QE and other QE-type measures. Japan was the first country to do the unthinkable and implement its own version of QE in the early 2000s to combat deflation. The financial crisis of 2008 was where we saw the start of what has become QE 1, 2, and 3, and operation twist to control the markets beyond what was capable by just adjusting interest rates. Even the interest rate move also known as ZIRP was unprecedented.
Right now, countries around the world are seeing something that is unprecedented, which is interest rates at all-time lows, and even some going into negative territories. This is one clear indication that this experiment is ultimately over. As of June 2014, the world saw negative interest rates become a reality, as a number of major central banks in Europe, including the European Central Bank, the Danish National Bank, the Swedish Riksbank, and the Swiss National Bank all pushed key short-term policy rates into the negative territory. Recent news is showing that more countries are considering it as well – one of them being Canada. Not even in the Great Depression did we have negative interest rates. Imagine having to pay money to save it. It’s unthinkable, and a final plea to get people to literally not save and spend.
The U.S. is not in the negative territory yet, but this could very well be where the country is headed if need be. After all, Janet Yellen did say the Fed would consider interest rates below zero if the U.S. took a serious turn for the worse.
How Bad is the Economy?
The Fed Chairman would like us to think that the economy is improving. She has even gone as far as bluffing, by raising interest rates by one quarter of a percent to make a statement about how strong she would like everyone to believe the economy is. As of December 16, 2015, the Fed made a move to raise interest rates by 25 basis points. The Fed funds rate went from .25% to .5%. This is a move that the Fed knew was eventually going to have to be made, and it was a statement to the markets that they can raise rates and back off of zero if they want to. Of course, I believe this is a total bluff, and the stock market is already contracting as a result of the rate hike.
If you listen to the mainstream media, representatives at the Federal Reserve, or the Obama administration, you might actually think the economy is improving and on the rise. According to the Bureau of Labor Statistics, they would tell you we are at a healthy 5% unemployment rate. You might also hear things like people covered with health insurance is hitting all-time highs, and the stock market has been thriving since the financial crisis of 2008. As John Williams, of Shadow Stats, points out, the government is very good at boosting reported economic growth and understating inflation.
This fantasy narrative is not the case, and we will show you why…
Right off the bat, there is the labor force participation rate, which is at 40-year lows, at 62%. What this clearly shows is that there is a huge sum of people falling out of the labor force in droves. Each time the unemployment number drops, the labor force shrinks to a new low, clearly showing the unemployment number is not a number that can be used to gauge the true economy.
It isn’t bartending jobs and bussers that dictate the strength of the U.S. economy. For that matter, neither is any job in the public sector (i.e., government), which also goes towards boosting the unemployment number. Real production happens in manufacturing, and we aren’t seeing that whatsoever. Without manufacturing, an economy crumbles. Obama promised 1 million new manufacturing jobs by 2016, but we’ve been losing them. 1.4 million manufacturing jobs have actually been lost since 2007. ISM manufacturing came out at the end of 2015, and we are seeing levels that we haven’t seen since 2008/09. Another time in our recent history where we have seen ISM manufacturing get close to these levels was in 2012, right before they reinstated another massive round of QE.
To give Obama some credit, we’ve seen our fair share of growth in the service sector, with 1.4 million jobs created in the waiter/bartending job market since 2007. Unfortunately, those jobs aren’t real drivers for the economy. Another major economic factor that played a big role in the financial crisis of 2008 was real estate. Real estate is reaching levels of true unaffordability. Shadow Stats has reported that housing starts are still at levels 60% below the peak of housing in 2005 when you back out the underreported inflation.
Nation of Renters
Though the economic recovery is six years in the making and home prices have recovered to their pre-bubble norms, the real estate market has changed radically—mostly for the worse.
It should come as no surprise that new home buying still remains weak. With this new trend unfolding, it shouldn’t come as a shock that multi-unit permits are surging.
According to the Census Bureau, we are seeing Quarterly Home Ownership Rate for individuals under 35, the worst they’ve been in over 2 decades. Young men and women are staying at home longer and getting crushed under the weight of the bubble economy. This is not sustainable. In a city like Los Angeles, your typical 22 to 34 year old is spending close to half of their income on rent, according to data compiled by Zillow.
Additional data from Zillow shows, the percentage change for households renting has been skyrocketing over the past 10 years. Combined with affordability crushing the buyers, it hasn’t helped the average buyer that investors have been buying up tons of real estate turning them into rentals, taking an already low supply of homes off the market and making it lower.
See Chart Below
You can see that renters in 2005 have been drastically increasing since 2005, right before the housing bubble. In 2016, as we see the economy continue to contract, we will see wages cut and jobs lost that will put stress on an already unaffordable housing market.
Global Economy is Tanking
It’s not just in the U.S.; the global economy is tanking as well. The Baltic Dry Index remains among the best “real” indicators of the state of the global economy, and it’s bad. With no ability to really fudge the numbers to trick people into thinking everything is okay, it is showing a major global slowdown, with yearend 2015 levels being at all-time lows. This is especially telling, considering this time is a time of the year when freight traffic is not typically slow.
Diminishing returns for each dollar of QE circulated into the market has clearly been seen, as the stock market has cooled off during 2015 and will likely accelerate downwards into 2016 as well. As QE cooled off, so did the returns that were seen in the markets. Just looking at the Debt-to-GDP ratio, we are seeing diminishing returns for each dollar that the U.S. goes into debt for and sees as a return in the real economy. When you look at total debt, the numbers are even worse, and the exponential rate at which the debt is outpacing GDP can be seen in this chart provided by MacroTrends.net.
The U.S. markets are in for a major bubble burst, and with rate hikes on the rise, this will only perpetuate. With all that debt owed by the government, businesses, and individuals, we know that the debt will only grow with higher interest rates and GDP will slow down, making these numbers worse. Markets have been trying to deflate since 2008, but the Fed has been fighting this left and right with artificial stimuli. What we have “enjoyed” for the last 7 years is an economy based on a bubble, with money that is going to instantly vanish (to a large extent). Hence the credit crunch and bubble burst.
Because people were avoiding the almost nonexistent interest rates in the bond markets, they dove into stocks, which has contributed to the years of bullish momentum that we’ve seen in the major markets. If and when the Fed normalizes interest rates, we will see a shift from stocks to bonds, which will inherently add more selling pressure to the stock market.
Lag in Corporate Productivity
Corporate productivity is seriously lagging, with corporate investment in fixed assets being at the lowest levels in 60 years. In fact, corporate leverage is now at its highest level in a decade, because cash-flow is lagging the amount of malinvestments that are being made in the economy, according to 2015 analysis from Goldman Sachs. Goldman also estimates close to $1 trillion of the intangible asset known as goodwill has been added to corporate balance sheets since 2008. This is a premium that one company pays for another during mergers and acquisitions. This is all fueled by bubble spending, and will quickly become part of the vanishing dollars that disappear as the economy deflates.
Corporate profits for U.S. companies during the third quarter of 2015 posted their largest annual decline since the official recession started during the financial crisis. A comprehensive measure of companies’ profits across the U.S. – earnings adjusted for inventory and depreciation – dropped to $2.1 trillion in the third quarter, according to the Commerce Department. Global weakness and a strong dollar have magnified this issue as demand overseas has severely dropped off. We know weak profits are going to weigh on business investing and stock prices, which will only get worse as the Fed attempts to tighten up monetary policy. How can corporations continue to go into more debt to continue to fuel this bubble economy if their profits are tanking? The answer is they can’t. Add higher interest rates to the equation and it’s even worse.
There are more ways to show the economy is deflating, too. Companies have defaulted on $78 billion worth of debt so far this year, according to Standard & Poor’s, with 2015 set to finish with the highest number of worldwide defaults since 2009. Together with a chart we have been showing for the past year, this shows the staggering disconnect between junk bond yields and the S&P 500. Many credit investors have mandates to invest only in bonds with minimum ratings provided by the rating agencies. S&P issued 297 downgrades YTD, the most in a year since 2009.
Confidence in the Market Will Deflate the Economy
The Bank of International Settlement has come out and said that there are over $1 quadrillion in derivatives circling the global economy. 1,000,000,000,000,000… That’s a 1 with 15 zeros past it. That’s roughly 50 times the official U.S. national debt, which is a number that is beyond anyone’s control. This is an area that is not only artificially high with record-low interest rates, it is HIGHLY leveraged.
Confidence in the markets is very bleak. As of November 2015, consumer confidence is sitting at 15-month lows. Janet Yellen, in her effort to instill confidence in the face of fear, raised interest rates. This was the first Fed funds rate hike since 2006! Confidence in the market is just a feeling, really, and can quickly change. It does actually have an impact on spending and short-term moves in the markets, but fundamentals ultimately overwhelm a simple feeling. And just like sheep, when “something” happens that kicks off the selling wave, they will all sell at the same time.
Take Action: Have at least 10-20% of your portfolio in precious metals. Normally, we would say just 10%, but considering the low valuations of gold and silver at the moment, upping the percentage while we are seeing precious metals valued low is a solid idea. Having a substantial supply of physical supply is also advised, because of the uncertainties that exist in the paper markets, and the risk of your paper ounce not really being backed by a true ounce of gold is a real risk.
The reality is, however, it’s not always practical to store your own physical metal (at least, large amounts of it), and having a portion of your money in paper securities isn’t always a bad thing. With the physical, you know you are hedged. If you are going to buy the ETF, we recommend looking at Sprott Physical. Look at the Gold Trust PHYS, Silver Trust PSLV, and Platinum and Palladium Trust SPPP.
This next suggestion is going to go against the grain, especially with what we know the economy is facing, and this is to simply store cash. We have to assume conventional wisdom is going to play a major role in how people react to a severe market downturn, and this will likely mean a flight to safety, which is the U.S. dollar. Keep in mind that this is only a forecast for 2016. The reason cash is such a hard thing to accept in your portfolio as an investment is that it doesn’t pay anything and doesn’t grow on a nominal basis. What you have to wrap your mind around is the possibility of what will happen in the event of a market meltdown. Think about what happened during the financial crisis of 2008 and the Great Depression. As everything got substantially cheaper, what you were able to buy with your cash skyrocketed, and having cash as dry powder to pull the trigger on major opportunities will likely present itself.
Short-Term Bonds: After talking about the U.S. economy and the dire situation that it’s facing, investing in bonds might sound like such a foolish decision as well. The fact is short-term bonds, especially T-Bills, are essentially being in cash. Giving up your money for 5 to 10 years or more at a ridiculously low interest rate is extremely risky in this environment. But the chances of not seeing the Treasury go belly up in the next 4 weeks to a year is minimal, in my opinion. Chances are you are safe, and if the dollar strengthens during a credit crunch, your purchasing power will increase with your T-Bill position.
Personally, I also own multiple rentals and hold only value plays in my stock portfolio, and do not plan on selling my positions there. If we do see the effects of QE and monetary stimuli continue to bubble up asset prices, my exposure here will benefit from the ongoing bubbling economy. And even if the market takes a dive, which I believe is more likely, I am confident enough in my value positions to wait it out with my hedges in precious metals. Cash and short-term bonds will take care of me on that front.
For a more personalized portfolio analysis and strategy, visit FMTAdvisory.com to speak with a licensed financial advisor.
10 Forecasts and Predictions
I will advise you to take these predictions with a grain of salt. There is no 100% certainty that these will happen, and it is the same reason that I don’t normally make predictions – because nobody has a crystal ball. If I knew 100% exactly what was going to happen in the economy, I wouldn’t diversify and hedge myself. But for the sake of having some fun and sharing my gut feelings with everyone, here they are:
Chief Editor at CrushTheStreet.com
CrushTheStreet.com is owned by Future Money Trends, LLC. The website, its owners, their affiliates, directors, officers, employees and agents are hereafter collectively referred to as “we”, “our” or “us”.
We are publishers of publicly disseminated information on behalf of our clients, most of whom are issuers or non-affiliate third party shareholders of various issuers. We receive either monetary or securities compensation for our services and are required under Section 17(b) of the Securities Act of 1933, as amended (“Securities Act”), to specifically disclose our compensation. Section 17(b) provides that:
We endeavor to strictly comply by the disclosure requirements of Securities Act Section 17(b), the disclosure of which appears herein. We most often receive monetary consideration; however, we may on occasion receive securities compensation or buy and sell securities of the same security we are disseminating information for. Whether we receive cash or securities compensation, we fully disclose the receipt or anticipated receipt of such compensation.
We do not act in the capacity of any of the following and you should not construe our activities as involving any of the following:
You should not interpret any of our publications as investment advice. If you are seeking investment advice you should consult with an registered investment adviser, registered stockbroker, or other financial professional of your choosing.
Our activities involve actual conflicts of interest, since we receive monetary or securities compensation in the very securities we are promoting and shortly after we receive the monetary compensation we promote the securities or after we receive the securities, we sell the securities during our promotional activities or thereafter. The non-affiliate third party shareholder from which we receive compensation also has an actual conflict of interest since he or she is paying us securities compensation for promotion services and such non-affiliate third party shareholder may sell other shares he or she holds while we are promoting the issuer that issues the stock that the third party shareholder holds.
Many of the securities we profile are considered penny stocks. Penny stocks inherently involve high risk and price volatility. You may lose your entire investment in any penny stock that you invest in. You should be acutely aware of the following information and risks inherent in any penny stock investment that you may make, including any issuer profiled on our websites or otherwise:
Never base any decision off of our website or emails.