A Pessimists' Guide To 2016: When Everything That Can Go Wrong, Does Go Wrong

There’s a lot to be worried about going into 2016 both in terms of financial markets and in terms of geopolitical concerns. 

We outlined the risks that pervade capital markets earlier today on the way to noting that the sellside penguin brigade seems to believe that somehow, nothing can derail the market’s momentum going forward. Here are the potential landmines investors face going into the new year:

  • soaring junk bond redemptions; 
  • rising investment grade (and high yield) yields pressuring corporate buybacks; 
  • record corporate leverage and sliding cash flows; 
  • Chinese devaluation back with a vengeance; 
  • capital outflows from EM accelerating as dollar strength returns; 
  • corporate profits and revenues in recession; 
  • CEOs most pessimistic since 2012, 
  • oh and the Fed's first rate hike in 9 years expected to soak up as much as $800 billion in excess liquidity

As ominous as all of that most assuredly is, the geopolitical outlook is even scarier. Here’s a rundown of some of the key issues politicians will need to grapple with in 2016:

  • Syria’s seemingly intractable civil war
  • the still simmering conflict in Ukraine
  • Brazil’s political crisis which threatens to keep one of the world’s most important emerging markets mired in a stagflationary nightmare
  • a migrant crisis that threatens to tear Europe apart at the seams
  • the resurgence of the far left and far right as voters lose faith in the political status quo

In fact, we've already seen quite a few black swan landings in the past several months. Here's our black swan map (click the image to read the background):

Those who frequent these pages likely recall that both SocGen and Citi were out recently with their take on the risks that lie ahead (here and here). We encourage you to review their respective analyses in their entirety, but below, find two graphics which summarize a few key points.

From Citi:

From SocGen:

For those who can't get enough black swans, we present excerpts from a new infographic put together by Bloomberg, who outlines 10 "worst case scenarios" for 2016 as dreamed up by "dozens of former and current diplomats, geopolitical strategists, security consultants, and economists" ("Scenario #3 is priceless): 

*  *  *

Scenario #1: Oil climbs to $100 barrel

Scenario #2: The UK leaves the EU

Scenario #3: Banks hit by cyber attack

Scenario #4: The EU crumbles over anti-migration fears

Scenario #5: China's economy falls, military rises

For the entire list, including "Putin sidelines America," and "Trump wins the White House," see the full infographic here.