This Week in Barrons – 1-3-2016:
“Yippee Ki Yay – Mother-F!#$#@” – Bruce Willis in the movie Die Hard
Happy New Year:
I can almost guarantee that if you liked 2015 – you’re going to love 2016. Here are some sobering thoughts by a very smart man – Dr. Paul Craig Roberts. Dr. Roberts was Assistant Secretary of the Treasury for Economic Policy under President Ronald Reagan, and associate editor of the Wall Street Journal. He believes that as long as the European governments (especially Germany and the UK) continue to act as nothing more than an extension of Washington, the prospect of World War III / Armageddon will continue to rise. But let’s take a step back.
In 1991, the collapse of the Soviet Union gave birth to Neo-conservatism. Neo-conservatism generally states that the U.S. is the ONLY superpower that can act without restraint anywhere in the world. In 1992, Undersecretary Paul Wolfowitz wrote the Wolfowitz Doctrine. It states that our first objective is to prevent the re-emergence of any new rival that poses a threat to the U.S. In 1998 (three years prior to 9/11), the Neo-conservatives sent a letter to President Clinton calling for the removal of Saddam Hussein from power, and for removing seven other governments from power in the next five years. http://www.globalresearch.ca/we-re-going-to-take-out-7-countries-in-5-years-iraq-syria-lebanon-libya-somalia-sudan-iran/5166. Neo-conservatives view the events of September 11, 2001, as 'the New Pearl Harbor’ – which was necessary in order to begin the conquest of the Middle East. Since 9/11, Washington has destroyed (in whole or part) eight countries – and now confronts Russia both in Syria and Ukraine.
Russia's president Vladimir Putin has been demonized by Neo-conservatives. Even Hillary Clinton has declared him to be ‘the New Hitler.' Putin's responsible behavior, however, has been misinterpreted by Neo-conservatives as a sign of weakness and fear. Putin has made it clear that Russia will not give in. By example, on September 28, 2015 (at the 70th anniversary of the United Nations) Putin said that Russia would no longer tolerate the state of affairs in the world. Two days later Putin took command of the war against ISIS in Syria.
Dr. Roberts believes that nuclear war is coming, and can only be avoided in two instances:
- One is for Russia and China to surrender and accept Washington's leadership.
- The other way is for an independent leader in Germany, the UK, or France to rise to office and withdraw their country from NATO.
That would begin a stampede to leave NATO. NATO is Washington's primary tool for creating a conflict with Russia, and is (therefore) the most dangerous force on earth. If NATO continues to exist, NATO together with the Neo-conservative ideology of American leadership will make nuclear war inevitable.
Well, Yippee Ki Yay, and on with my New Year’s predictions.
2015 was a tough year. 267 Hedge funds went under. Some of the biggest investors on the planet lost money. The damage was everywhere:
- People that purchased the initial dip in oil thinking that it was going to rebound – got creamed.
- People that bought the small caps in May and June looking for new highs – got slammed.
- People thinking that the financials would power to new highs – were dead wrong.
- Except for Facebook, Amazon, Google, and Netflix – the number of winners was few and far between.
In 2016, I see a whole lot more trouble. If the best the market could do in 2015 was to lose 1% (despite the umpteen trillions of dollars being pumped into it globally by the Central banks); it tells me that the ‘going’ is about to get even tougher.
- Interest Rates: My prediction comes down to whether or not the FED will continue to drive the market and the headlines, or whether they will change policy. The FED will always continue to be the ‘buyer of last resort’ – supporting bonds and inflating stock prices. In 2016, I don’t see any significant change in interest rates or FED policy.
- Commodities: Whether it was oil, corn, gold or soybeans, 2015 put tremendous pressure on commodities. The primary driver for this pressure has been the strong dollar. I believe that we could see the dollar spike higher at the beginning of the year. We could see the DXY (the dollar index) break above 100 again; however, unless the FED takes a significant ‘hawkish’ position, I think we could see the dollar begin to collapse. And if the DXY cannot hold support at 94, we could see the dollar fall into the 80's before support is found. If the dollar drops into the 80’s, commodities will see a significant rally in 2016.
- Inflation: If there is a drop in the dollar, commodities will rally, and inflation will kick in. We have been in a disinflationary environment for a while. But why? After all, the FED’s easy money policy is trying to spur inflation by pushing bond prices higher, lowering rates, and increasing the money supply. But the reality is that outside forces are the primary cause for the disinflation that we are experiencing.
o Today the majority of our goods are imported.
o We have a trade deficit as we continue to consume far more than we export.
o Old economic theories are no longer working. The proof is that after printing trillions of dollars, buying trillions of bonds, and keeping rates at zero – we are not seeing any inflation, actually the opposite.
o Currently all of our trading partners are devaluing their currencies by cutting rates and increasing their own versions of a QE type of stimulus. But in 2015, we started to strengthen our own currency with a 25bps rate hike. I’m counting on this ‘perception’ and the reality of a cheaper dollar to drive inflation higher in 2016.
- - Stocks: The ‘Unicorn’ (over-valued) companies take me back to the dot.com era. I think we will see more consolidation, and fewer IPOs in 2016. With Apple closing DOWN on the year, I think that the tech sector will continue to be mixed, and strength will come from disruptors as well as from Asia. Environmental disruptors will also gain traction. The world has embraced the global warming story, and that is driving nations to change environmental policies and consumers are becoming more conscious with their purchasing. We will see more battery, green, and other environmentally conscious companies rise up. These environmental companies could be take-over targets by oil companies (and companies like GE) that are trying to expand into this growing space. The general market will have a difficult year in 2016. I believe that broad based index ETFs or index tracking mutual funds will most likely under perform a more sector driven economy and market.
- - The FED: The dollar rally is driving deflation, and THAT is the greatest fear of the FED. Hopefully the rate hike has quieted the media, and they can now turn back to their easy money policies and curb the dollar rally.
- - CONCLUSION: I think that the big story will be the U.S. dollar. It will not get much attention, but will drive the markets. If the dollar index holds in the 95 – 100 range through 2016 it will be a non-story. However, I don’t think it will stay there and if we crack below 94 we could see a spike in inflation, which will drive commodities higher. The FED’s wish of inflation could come fast and true which would be un-welcomed. The velocity of money continues to decline as money continues to pile up higher behind the dam. When inflation comes, it will be based upon what happens with the dollar index and the velocity of money – those two will be the prime indicators. The question is NOT whether it comes, but how fast it comes when it does.
Last week the Chicago Purchasing Manager’s Index (PMI) came in well below 50 at 42.9. Inside the report, new orders and backlogs both crashed. It was the worst Chicago PMI report since 2009. The latest Dallas FED Report confirmed those low industrial numbers by reporting a -20 reading.
To quote Michael Burry (the hedge-fund manager known for recognizing the subprime crisis and who is portrayed in the new movie “The Big Short): “It seems the world is headed toward negative, real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy.”
INDU 17,425: For next week I’m looking to potentially visit the 17,200 area.
NDX 4,593: The tech heavy index has held up well, despite some volatility. The beginning of the year could bring a test of 4,500.
SPX 2,044: I don’t see a strong rally in the near term, and we could visit 2,000 in the very short term.
RUT 1,136: The Russell finished the year weak. 1,120 is the support that we need to watch if the New Year decline continues.
- Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
- Long an oil supplier: REN @ $0.56,
- Sold RH – Jan – Put Credit Spread – 70 / 65, and
- Sold SPX – Mar – Call Credit Spread – 2150 / 2155.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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