Archive - 2016 - Story

From EM darling to depression, it's been a rough ride for the "B" in BRICS. As we kick off 2016, analysts are growing increasingly concerned that Brazil's economic downturn could well be deeper and longer than anyone expected. The market's collapsing expectations are summarized in one stunning chart.

With market valuations elevated, leverage high, economic weakness pervasive and profit margins deteriorating, investors should be watching the month of January carefully for clues. The weight of evidence suggests that despite ongoing “bullish calls” for the markets in the year ahead, this could be a year of disappointment. Pay attention, things are beginning to get interesting.

Just two weeks ago we warned of the looming "hyperinflation monster" in Africa with the continent appearing to be running out of dollars as some of Africa’s largest economies, including Nigeria, Angola, Ethiopia and Mozambique, are restricting access to the greenback to protect dwindling reserves. Specifically we warned of Angola's already-soaring inflation hampering its ability to 'adjust' its currency towards its black market 'reality'. But that did not stop the central bank devaluing Kwanza by 15% over the weekend - the most since 2001 - to record lows as crude prices crush their economy and the flow of USDs.

When a pair of Sunni mosques were bombed in Iraq on Sunday, the assumption was that the attacks were carried out by angry Shiites protesting the execution of Sheikh Nimr al-Nimr. Iraqi officials on the other hand, blame ISIS. If Islamic State is behind the attacks, the question becomes this: were they instructed to carry out the bombings by a handler or a benefactor with a hidden agenda?

There’s really one supreme element of this story that you must keep in view at all times: a society (i.e. an economy + a polity = a political economy) based on debt that will never be paid back is certain to crack up. Its institutions will stop functioning. Its business activities will seize up. Its leaders will be demoralized. Its denizens will act up and act out. Its wealth will evaporate. Given where we are in human history - the moment of techno-industrial over-reach - this crackup will not be easy to recover from. Things have gone too far in too many ways. The coming crackup will re-set the terms of civilized life to levels largely pre-techno-industrial. How far backward remains to be seen.

The South China Sea is continually paraded as a region rich in oil and gas deposits; however, no one really knows what’s there with any degree of accuracy. Furthermore, these possible deposits are shrouded in conflict that will not abate anytime soon, and will most likely worsen with an intensification of the security competition between China and the United States along with its regional allies, which is tightly related to these disputes. So, what deposits do these areas contain?

“The Israelis are hiding like rats along the border. The retaliation to Samir’s assassination will inevitably come. Hezbollah would not tolerate the blood of our jihadist fighters and brothers to be shed anywhere in this world.”

A number of systemic, structural forces are intersecting in 2016. One is the decline of Great Power leverage.

"The United States equity market has a down year. Stocks suffer from weak earnings, margin pressure (higher wages and no pricing power) and a price- earnings ratio contraction. Investors keeping large cash balances because of global instability is another reason for the disappointing performance."

The reckless herd has been in control for the last few years, but their recklessness is going to get them slaughtered. Corporate profits are plunging. Labor participation continues to fall. A global recession is in progress. The strong U.S. dollar is crushing exports and profits of international corporations. Real household income remains stagnant, while healthcare, rent, home prices, education, and a myriad of other daily living expenses relentlessly rises. The world is a powder keg, with tensions rising ever higher in the Middle East, Ukraine, Europe, and China. The lessons of history scream for caution at this moment in time, not recklessness. 2016 will be a year of reckoning for the reckless herd.

An 88-page "Research Note" from the SEC's Division of Trading and Markets titled "Equity Market Volatility on August 24, 2015," outlines the facts of that fateful trading day, discussing what went wrong, and which classes of securities were affected. The conclusions of the piece are purely factual, with little or no conjecture, and there's absolutely no policy recommendations. There are dozens of unintended consequences already baked into its proposed rulemaking. That's bad enough when you're talking about the inner workings of mutual funds and ETFs; it's a bigger deal when we're talking about the inner workings of the markets themselves.

Moments ago, in its latest Q4 GDP revision, the Atlanta Fed just pulled the rug from under the economy (and the market now that bad news for the economy is bad news for stocks), and slashed its latest quarterly forecast by another 50%, from 1.3% to a barely positive 0.7%.  In other words, according to the Atlanta Fed, Janet Yellen launched a rate hike cycle in a quarter when GDP will be just 0.7%, and which when averaged across the prior 3 quarters, would mean that the US will have grown at just 1.8% in 2015, a 25% drop from the 2.4% GDP growth in 2014.

Led by a 4.3% collapse in Germany's DAX index, European Stocks plunged 2.5% today which is the worst start to a year ever. European credit markets spiked higher in risk. 10Y bund yields tumbled over 6bps and peripheral sovereign risk spreads jumped 10-15bps. Not a good start for Draghi and his pals...

Early on Monday, gun shots were fired at a home for asylum seekers in western Germany and one resident was lightly injured, police said. The shots were fired at a window of the building in the town of Dreieich at around 2.30 a.m (0130 GMT), and one hit a 23-year-old asylum seeker who was sleeping, according to police in Offenbach, near Frankfurt. He was taken to a hospital, but was able to leave shortly afterward.