Prognosis Of Financial Markets For 2017 And BeyondStock-Markets / Financial Markets 2017 Feb 06, 2017 - 02:06 AM GMT
The right time to consider our future financial markets for investing
Since the presidential election there have been many reports as how the financial markets of 2017 and beyond may evolve. Given the acrimonious post election environment, it would be wiser to forecast the direction of markets after we see Mr. Trump’s full team in action for at least a few months, and more fully understand or experience his actual policies. However, it is clear that at no time in history will a president’s fiscal, trade, national security, or FED’s monetary policies affect our financial markets more, which will determine the future wellness of America’s citizens. At the same time, however, no policies can fully extricate us from our overbearing debt, and the painful economic consequences which we are to experience in the very near future.
When Mr. Obama was elected, he noted for several years quite publically and loudly, that president Bush had handed off to him an ailing economy. Well, yes, this was true. When Mr. Bush was elected, the national debt was at $5.7 trillion, but by the end of his term that debt had risen dramatically to $10 trillion. Yet it was during Mr. Obama’s own tenure and his policies that national debt rose to nearly $20 trillion. If Mr. Obama’s criticism of his inherited economy had any validity, then we can doubly condemn the national debt that Mr. Obama leaves as an inheritance to president Trump and the American people.
With this huge national debt we are now to consider how the next several years may evolve in financial market performance for debt, equity, and precious metal markets.
Our current economic setting
Likely, there as many views of the state of our economy and financial markets as there are observers. Our view of the economic and financial status of America is as follows: America has a demographic profile of later and slowing rate of family formations, and a rate of birth that is continuing to decline, resulting in a continued reduction in the rate of population growth which has been confirmed over the last several decades. In addition, the average age of this population is increasing such that the rate of traditional consumer purchases will continue to decline, as an increase in the number of retired persons changes America’s overall spending patterns and consumer-driven growth potential. The rest of the advanced nations, principally those of Europe, have similar troubling demographic patterns. This means that younger and faster growing nations of the world will be the principal drivers of future economic growth, and likely its main beneficiaries.
Over the last several decades America has exported or invested (off-shored) significant manufacturing capacity and factories to lower labor cost nations in Asia. This, in part, has been done by our transnational manufacturing and banking industries as it was far more profitable to invest offshore than to build such facilities at home, where a combination of lower labor, regulatory, and interest costs made an attractive, unbeatable investment combination. The recipient nations of this investment have further improved and upgraded these production facilities, and often are now more modern or advanced than those in our own country.
Domestic retail sales in stores and restaurants have ranged from stagnant to disappointing, underscoring the financial weakness of our average consumer. Big retailers have been closing stores and reducing their workforce by thousands of workers. Product shipping has been declining, as air, rail, sea, and truck transport has been in a long term decline confirming the direction of trade and present economic growth. The percentage of people in our workforce has been declining, even as phony unemployment statistics show a satisfactory rate of unemployment.
For a more comprehensive review of these considerations please refer to an article entitled “Our Future Economy, Jobs, Banking, and Governance: Part 1. Our Past and Present Experience” posted by Market Oracle (http://www.marketoracle.co.uk/Article57416.html).
Our likely future economic outlook
The principal determinant of our economic future is our total indebtedness. Individuals have utilized their home equity to finance consumption, and they are not able to borrow more. State politicians have promised pension and retirement benefits that are not actuarially feasible, as investment returns over the last decade have been below those necessary to fund the benefits. States are in a crisis of not being able to fulfill their legal obligations while budget deficits soar as state borrowing capacity and investment quality rating is being downgraded.
Our federal government has placed a yoke on its citizens by adding dramatically to federal debt without individual citizen acquiescence. No one knows how much additional borrowing capacity our national government can sustain without precipitating a global investor rejection, FED insolvency, currency collapse, or hyperinflation.
The prospect for our physical involvement in war is rising, as our national strategic policies use tumult, chaos, false-flag events to maintain a persistent level of military potential threat or actual confrontation. Our falsely perceived need to control global oil supply as a pillar of our national defense is not only likely to raise further the probabilities of a larger military conflict, but it is becoming a catalyst for the demise of our, America’s global leadership.
For those interested in more detail on our future economic prospects may review Market Oracle’s posting entitled “Our Future Economy, Jobs, Banking, and Governance Part 2. One Possible Outcome: http://www.marketoracle.co.uk/Article57481.html
What our new president can accomplish and what he cannot
President Trump will initiate infrastructure programs which will help people find thousands if not millions of new jobs. He has also announced his intentions to reduce taxes for individuals and corporations. These programs will require spending money that we as a nation do not have, and therefore our national debt will increase to even more dangerous levels. The positive karma from the president’s efforts to bring jobs back home will help to foster a much more positive atmosphere within the country. However, rising consumer confidence statistics will not suffice, as such sentiment cannot cancel economic laws, nor negate “financial gravity”. We actually needed a president Trump or his policies two to three decades ago; today it is too late to emerge from our national debt burden without trauma.
Better trade deals with the rest of the world will help America, and will provide more jobs to American workers. Dramatically reducing federal regulations, which cost business regardless of size, billions of dollars will reinvigorate business formations and improve profits for those already paying for these overbearing constraints. Rebuilding our dilapidated infrastructure can add jobs for millions of skilled trade workers. These jobs will be welcomed as they will provide income for those employed, and raise federal taxes from those benefiting from these programs, overall increasing the soundness of our economy.
What cannot be achieved by this economic renaissance is the reduction of our national debt from our current level. This is particularly true given that president Trump’s programs in total may require as much a $9 trillion of additional spending, increasing budget deficits and our national debt. Federal Reserve’s intentions to meaningfully raise interest rates in a controlled fashion over the next several years will not be achieved, and are dangerous to our economy with rising national debt.
Unless our total debt (federal, state, corporate, individual) can be restructured so as to be reduced to a manageable level, the present economic system will eventually collapse. FED money printing, promoting the reduction in purchasing value of the dollar is risking currency collapse and hyperinflation - not a desirable means of debt restructuring. In addition, utilizing the debt restructuring plan which the IMF has applied to the rest of the debtor world over the last several decades would destroy America, the same way that it hobbled other indebted countries. Ultimately there is no acceptable or easy way out of this debt dilemma. Our economic system including the means of currency creation will need to be changed.
Rest of the world problems
Europe and the Euro have been in a state of active demise since the global financial conflagration of 2008. Constraints set for limiting budget deficits have been violated by almost every nation in that Union. Dramatic rise in foreign sovereign debt, and the weakness of foreign banks from high default rates in their loan portfolios raise the very real potential of EU’s major bank failures and the eventual split-up of its union. Upcoming 2017 national elections in several European countries, which have experienced bank or sovereign debt problems in recent years, will likely speed EU’s dismemberment.
Greece and Italy demonstrate that country financial problems continue to fester and expand. The problems in Spain, Portugal and Ireland have recently remained in the background, but they are still there. More recently Germany with its Deutsche Bank problems has risen to the world’s attention. If the strongest country bank in the EU can raise questions of its own solvency then the viability of its weaker cousins is dramatically exposed and the stability of the EU unhinged.
Banks in Europe have continued to periodically flash instability problems as some in Greece, Austria, Italy and Germany have failed. Their interdependency, owning exposures to other European sovereign country and bank debt means that when one accepts default as an option, the rest of Europe can inflame. That global inter-connected dependency signifies that one relatively small problem in any country could infest the whole world’s financial community.
The US will allow that problem to evolve as it is in its interest to ultimately only protect its own global currency. Hence the Euro could dissolve into multiple small independent states each with its own currency. The U.S. dollar remains standing, with one less major global currency competitor, the Euro, to challenge it.
Even as decades ago the United States was promoting the idea of a European union, today it would likely rather see it “fold its tent” than to see a problem develop for the global petrodollar. Know that when the time comes, the United States will scuttle the Euro, rather than expose the dollar to devaluation. It’s nothing personal, just business. Such action may extend the empire for some additional time, but it does not change the ultimate required reset.
The CRISIS (China, Russia, India, South America, Iran, and South Africa) countries are uniting to bypass the US dollar reserve currency, and establish an alternate trading coalition that will provide opportunities for development of member countries. It does not take anything from that which America now has; more precisely, this coalition provides growth for the rest of the world in which America simply participates less, or does not participate at all.
For those interested in more detailed analysis about the CRISIS countries and their trade and financial coalition progress may read the article posted on Market Oracle entitled “BRICS? No, CRISIS” http://www.marketoracle.co.uk/Article53009
Financial derivatives problems
Financial securitization was an insightful means of providing liquidity to otherwise individually illiquid debt. But the financial derivatives that it spawned provides a means for institutional investors, banks, hedge funds, to speculate on the outcome of financial
events in which they have no direct financial stake or involvement. It means being able to make a bet! This is surely not investing and should be prohibited to institutions holding public money.
The Glass Steagall Act of 1934 was intended to prevent such transactions, but its repeal under the Clinton administration opened the casino’s doors. Unfortunately, the consequence of this policy has resulted in banks making big bets and losing billions of dollars which require having the public, through federal bailouts, socialize its losses to taxpayers.
Global derivatives exposures by some estimates approximate $1,000 trillion. As these positions are not traded through an exchange, but are over the counter, no one really knows their full risk profile or exposure. However, it is reasonably clear that a rapid rise in the general interest rate level would explode these agreements requiring the margin posting of additional substantial assets which would cascade sales of such instruments or their collateral such that an avalanche of such transactions would leave the major banks of this country bankrupt.
Our geopolitical and military actions
Since the breakup of the Soviet Union, America has been active militarily in the Middle East and Eurasia to both constrain countries seeking independent action from U.S. hegemony and to capture or control natural resources on a global basis. Accordingly, our military actions in Iraq, Libya, Afghanistan, Iran, Egypt, Yemen, Ukraine, Yugoslavia, and in the China Sea have been initiated by us, rather than our acting in response to some proactive or provocative military threat or action by those countries towards the United States.
Unfortunately, so far this has accomplished one totally undesirable end from a geopolitical perspective and that is to bind countries such as Russia, China, and Iran more closely together for their common trade collaboration and defense. The consequence is that we will not be able to intimidate this expanding coalition of countries. Should we risk military conflict to achieve hegemonic goals, a winning outcome is no longer guaranteed. Alternatively, should America not be insistent in maintaining our global hegemony, we will lose ground as the global leader - a lose-lose situation.
A world not dependent on the singular global dominance of America will allow the development of trade among a large group of countries along China’s One Belt One Road continuum. Such trade and development will be based on currencies which only occasionally will use the dollar. This development will result in the loss of trade, global influence, and a weaker petrodollar further diminishing America’s stature. Fortunately, a shared responsibility in global decision making will mature foreign nation governance which is ultimately good for all countries and peace in the world. Yet the exclusion of America or its dollar from increasing portions of world trade does not help promote domestic growth or its financial markets.
Our manipulated markets
The Federal Reserve Bank had announced some eight years ago that interest rates would remain low until our unemployment rate was under 5%, and until their interest rate policy with quantitative easing achieved a 2% growth in inflation. That policy statement should be understood as interest rate and market manipulation for that eight year period. During the week of our presidential inauguration, the FED indicated that by 2019 interest rates may be raised. A statement indicating such increases in the future is again confirmation of intended market manipulation. In fact any future interest rate guidance by the FED can be interpreted as upcoming manipulation.
It is disquieting to observe such statements or action promised or promoted by the FED. If indeed they do raise interest rates, then this is also the best and most positive announcement that you are going to get as an investor – that the bond and stock markets are to decline. Yes, anytime that interest rates increase, there generally is an attendant decline in the bond and equity markets. Reflect what happened in the late 1920-1930’s and the 1970-1980’s. As available credit at low interest rates flowed into the stock market of the 1920’s that market moved up dramatically. When interest rates were raised the market crashed. In the 1970’s as interest rates moved up, the market declined. When interest rates started to decline in 1981 a bull market followed. We are now again at an inflection point when interest rates will soon rise and markets decline.
This writer believes that the FED cannot raise interest rates, not meaningfully, because the rise in the interest cost on our national debt associated with a rise in interest rate levels will implode the economy. Interest rates will only rise when the FED cannot constrain interest rates from moving up, driving global market pressures and currency confidence concerns. In other words, when interest rates actually do rise it will reflect an accelerating and perhaps uncontrollable increase in inflation, as the FED’s ability to control or manipulate markets will have been lost. This would dramatically increase financial instrument market volatility with significant attendant price devaluation.
Money managers versus individuals
Most of the time there are advantages investing with or through money managers. Certainly, on average, such organizations have far greater resources, knowledge and experience to do a good job in managing your money, particularly when compared to a single individual. However, such organizations also have restrictions and requirements in their ability to hold substantial portions of their assets in cash – that is, not being invested. In certain times, which can be measured in many years, the individual has the advantage, for there are times when people simply should not be investing at all.
While popular advice suggests that being invested at all times is better than trying to time the market, we should reflect on the fact that it took 25 years for the stock market to exceed its pre-market crash price of 1929. Owning stock before the market crash was costly and required many years to recover. Another way to say this is that after the crash, the market direction basically was up and one could invest profitably for the long term. A similar experience occurred in the 1970’s as rising interest rates and inflation caused the financial markets to decline. After this interest/inflation driven market decline, it was possible to buy stocks at 4-5 P/E multiples and at 8% plus dividend yields. After that, interest rates declined over the next three decades, and it was again a great market to invest in for the long term.
It is likely that in attempting to market-time entry and exit points often in the market, investors will fail. Yet common sense, not market timing considerations, would inform an investor that this is not the time to be invested in any financial markets at all. The risk is simply too great from a financial depression or currency collapse perspective. Using Rothschild’s admonition that one should only invest when there is “blood in the streets” suggests that the time for market entry in reasonably identifiable, its timing does not need to be precise, and the event is relatively or very rare occurring once every several decades.
It appears that we are in a time period now where the risk losing one’s money is far greater than the probability of making real or significant gains. It is a time to be out all financial markets. Indeed, we may see “blood in the streets” this year or certainly in the next several years. This is a time to preserve capital.
For those interested in reading more about the timing of a possible market decline see Market Oracle’s posted article entitled “Countdown to Global Financial Collapse” http://www.marketoracle.co.uk/Article50770.html. The timing indicated that 2015 article is still operative today (mid-year 2017), although the forces in national government and the FED are so powerful and deliberate in maintaining their power that this timing may be possible to postpone.
Where to invest while waiting for “blood in the streets”
All financial investment instruments are exposed to a multitude of risk; but the most pervasive and consistent is the continued debauchery of our money. It is largely for this reason that an investor periodically needs a place to park or preserve his financial assets, sometimes for years - until the opportunity to invest appears again. The most common and popular investments include bonds, stocks, real estate. Other choices can include a personal business, farms, precious metals, art and antiques.
Fixed income and equity investments are most easily evaluated, as at any point in time there are professional analysis and independent appraisals of their investment merit. In addition, the presumed liquidity of such investments makes them attractive for the immediate opportunity to sell them to raise cash quickly when needed. By contrast, real estate appraisals are less often available, particularly if it happens to be commercial property which can also have a wide disparity in estimated value. In addition, real estate is far less liquid, and there may be times when the sale of residential or commercial property is simply not feasible, or may require substantial discount to make the property liquid.
Yet even with this seeming disadvantage, real estate has some compelling features. The most important feature of real estate, when compared to financial securities, is that the loss of purchasing power of money is usually directly offset in real estate by a rise in market price. Remember those houses priced in the market of the 1960-1970’s at $50,000 that are now priced at $500,000? That is to say, if inflation reduces the value of money, real estate prices will increase in direct proportion to this loss in the purchasing power of currency.
Another inherent advantage is that in most real estate transactions there is the opportunity of using greater leverage, than can be achieved with financial securities. The percentage of money needed to complete a real estate transaction is lower than the margin needed to purchase stocks. Because real estate loans are not adjusted for the future market value of property, they are safer from the perspective that you will not be required to add equity to the initial investment. Additionally, in the event of a currency collapse, the mortgage is easily paid off with severely depreciated dollars, leaving the investor as a secure owner of the property. However, when interest rates rise, and the economy sputters, the price of all real estate will decline.
Precious metals have been the proven bed rock of preserving value over centuries. Despite official denunciation by economists and bankers of gold, banks still hold gold as an official reserve asset. If gold did not have merit as money or as a reserve asset, the banks would not hold gold, or their solvency would decrease by the loss of this previously valued asset. So physical precious metals, or equity ownership of their production facilities is a viable alternative.
Bond market outlook
Interest rates have declined for over three decades, and are at a point where they cannot go lower. Sovereign governments may desire to see a continuation of a low interest rate environment for the purpose of being able to service their mountain of debt; however the confluence of buyers of our debt will eventually dictate raising the level of interest rates. Corporations and individuals have taken on additional debt in the decade since the crash of 2008 such that they are not likely candidates to keep increasing their borrowings, nor stimulating the economy.
The FED has publically announced their intent to raise interest rates over the next several years by implementing small rate increases over specific selected periods of time. As long the FED controls this manipulation it can control bond prices. However, any increase in interest rates has to mean a decline in the market price of current outstanding debt. Increasing national debt which is implied by our president’s necessary and reasonable fiscal policies will also likely to put upward pressure on interest rates.
The result of these actions means that bond prices will decline. These prices may decline stepwise over a several year period reflecting small increments by which the FED would seek to control any increase in rates. In this scenario prices of Treasuries will decline by varying amounts based on the length of their maturity and the remaining time to maturity. Failing to maintain control, prices could decline rapidly as interest rates spike upwards. So where are the markets going? The bond market, over the next several years, will be dragged kicking and screaming by foreign investors to interest rates at least 50% higher than they are at the beginning of this year. And rates from there will increase further in subsequent years.
As an example, a 30 year Treasury bond purchased for $1000 at the current market rate of 3% with 25 years remaining to maturity in a new economic environment where the interest rate for these bonds has risen to 5% (not an outrageous interest rate) would have a market value of $738 creating a 26% unrealized capital loss. So a bond portfolio of mixed maturities and credits can still register significant long term losses.
Equities market outlook
Most investors are amazed at the recovery and strength of our stock market since 2008, often using its performance as the indicator or proof that our economy has been recovering. The reason for this market performance is misplaced, as we should instead be in awe of the FED’s ability to manipulate and maintain the stock market at the current level. We are not investing in the environment of real un-manipulated financial market.
The desired wealth effect from a rising stock market has not helped much our eviscerated middle class, but instead is working to widen the gap between the 0.1% and the rest of our population.
By every measure and metric the stock market has been deemed by the vast majority of analysts and money managers to be overvalued, not having the potential to rise much further. Most project that market returns for the next 5-10 year period will be far lower than for previous periods. This is a correct assessment for the next several years in both equity and fixed income investments. This is a time when one should not be invested in financial markets at all, as the time for the infrequent “blood in the streets” investment opportunity is near.
It is possible that the stock market will decline from present levels, over the next several years by more than 60%. It is less likely, but the market as measured by the Dow Index could rise first to 30,000 or more in a period of rapid currency collapse signaling a hyperinflationary period, after which the equity market collapses by far more than 60%. It is, of course not possible to know how this market will evolve – but it is relatively easy to ascertain that one should not be in this market at all.
As a recapitulation, consider that our national debt is at historic highs and guaranteed to rise further because of announced fiscal policy. Global interest rates are at historic lows, or even negative. Their return to levels that provide reasonable yields for investors will explode government deficit, and reduce confidence in all currencies and the dollar as the global reserve currency. Our State Department entanglement and proactive uninvited activities into sovereign nation decisions is increasing global hostility against America. Foreign countries have created coalitions that will reduce our involvement in foreign trade, and the use of the dollar. The present day economic reality in America will require a market drop of depression proportions.
In Europe, the EU has been careening towards collapse since 2008 - and its problems today are larger today than before. Previously, the problem was simply that their banks were failing, and sovereign debt was too large to be paid off. Today, those problems still exist, but are now more dangerous as there is real underlying movement by people and countries deciding that they no longer want to be a part of that union, and actively seek political mandates to leave it. This movement has been further empowered by Britain voting to exit, while other countries voting to leave the EU will cause volatility in markets to explode financial derivative contracts, igniting a global conflagration. Remember that Germany is counted as the strongest EU country. Deutsche Bank has huge capital deficits and exposure to derivatives, as do the four largest banks in the United States – and we are operating in an interconnected world.
It truly is difficult for an optimist to find information, surveys, statistics, financial results, central bank balance sheets, geopolitical activities that can support views that are not pessimistic for an investor. It seems clear that a colossal global reset will have to take place which will include huge market and currency disruptions, societal disorder, and possibly additional physical military conflicts. The period for “blood in the streets” is near. After the reset, there will be unimaginably attractive investment opportunities – for those who have managed to preserve their capital and survived.
Precious metals outlook
In comparison to fixed income and equity markets, the market for precious metals is relatively easy to manipulate. For those who may not be up to date on such manipulation one may mention that Deutsche Bank agreed on 12/2/2016 to pay $60 million to settle a gold price-fixing lawsuit and $38 million for the price fixing of silver.
A cable written in December of 1974 by the State Department, and obtained by Wikileaks, confirms that the gold futures market was created with the purpose of price suppression while discouraging physical metals ownership. A low gold price obscures the fact that an economy or its currency is weak.
Numerous web sites promoting precious metals describe fundamental reasons why gold and silver prices will rise soon. An equal number of chartists and market timers suggest that the time for a profitable trade is near. Unfortunately, this is all nonsense. Precious metals market prices will not move as predicted until the market manipulation is stopped. However, such manipulation will continue for as long as it is possible for banks and our government to manage it.
It is worthwhile to remember that one of the ways that gold is valued is by its comparison to the price of oil. Over decades, one ounce of gold has the value between 10-20 barrels of oil. By this historic measure, gold could decline as the 15 times average ratio of an ounce of gold to the price of a barrel of oil would value gold substantially lower than the present market price. However, gold and silver are money, and accordingly they will provide protection against the reset event when fiat money loses its acceptance in the market.
For those interested in a different perspective regarding precious metals may be interested to read an article posted on Market Oracle entitled: “Portfolios, Insurance and Gold” http://www.marketoracle.co.uk/Artice49711.html
Risk cannot be avoided nor eliminated
Regardless how carefully one prepares to have a riskless investment portfolio, that is not possible. Regardless how one diversifies between asset classes, industries, and specific country risk by investing around the globe, risk and possible loss cannot be avoided.
In our present economic scenario, the three domestic risk elephants in our investment room are inordinate debt, fiat currency risk, and derivatives. Fortunately it is possible to insulate yourself against these risks by being out of financial markets, and owning precious metals or other real assets. The foreign risks including the unraveling of the EU with its significant contagion consequences to our domestic financial markets can also be insulated against by exiting them. Historically, controlling elites have responded to such crisis by initiating a military conflict. This, unfortunately, we cannot be insulated from.
Risk is everywhere. Former Chairman of Intel, Andy Grove, wrote a book in 1996 describing the development of his outstanding company in the very competitive computer chip industry – entitled “Only the Paranoid Survive”. It is an appropriate phrase for describing an attitude required for survival, but an uncomfortable solution to our near term investment and economic prospects. It is much better to survive being relaxed - but having understood and prepared beforehand for the coming investment chaos, and the not too distant “blood in the streets” investment opportunity.
Mr. Matison is a U.S. patriot who immigrated to this country in 1949. With a B.S. in engineering physics, an M.S. in Actuarial Science, work in the actuarial field, and as a financial analyst at Legg, Mason Inc., Lehman Brothers, and investment banking at Kidder Peabody, and Merrill Lynch provides a diverse background for experience. First-hand exposure to fascism, socialism, and communism as well as the completion of a U.S. Army military intelligence course in the 1960’s have inspired a continuing interest in selected topics in science, military, and economics. He can be e-mailed at email@example.com
Copyright © 2006 Raymond Matison - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.