Global Market Comments
May 15, 2018
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Global Market Comments
March 22, 2018
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My former employer, The Economist, once the ever tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its ?Big Mac? index of international currency valuations.
Although initially launched by an imaginative journalist as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.
The index counts the cost of McDonald?s (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.
What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai Baht are cheap.
I couldn?t agree more with many of these conclusions. It?s as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas.
I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool, than a speedy lunch.
The Big Mac in Yen is Definitely Not a Buy
Economists around the world have been scanning the horizon with their high powered Zeiss binoculars in search of the cause of the next global recession.
It has been a conundrum of the first order because a recession has NEVER taken place in the face of LOW interest rates and LOW oil prices.
However, we may have just found the trigger.
The possible impending departure of the United Kingdom from the European community has cataclysmic implications for economies everywhere.
We?ll know for sure when the referendum is held on June 23.
Yikes! I?ll be in England then!
The move is being driven by the same factors present in the American Republican Party presidential nomination race.
Working class Brits have lost jobs to a tidal wave of immigrants from the rest of the EC, whose common passports allow unfettered access to Old Blighty.
Take a weekend trip to London, and chances are that the desk clerk is from Poland, the porter is from Croatia, the waitress is from Italy, and the cleaning ladies are from Spain and Greece.
Actual Englishmen are to be found only in distant suburbs, or in unemployment offices.
The recent influx of immigrants from the Middle East has also placed a massive strain on the country?s social services resources.
Visit your local neighborhood National Health GP, and you will share the waiting room with foreign refugees missing arms or legs, or bearing near fatal combat injuries. It?s almost like visiting a wartime MASH unit.
Net net, the view is that EC membership is costing England jobs and money, probably in the billions of pounds per year.
As with the US, the populist view is at odds with the economic reality.
While the UK is a net contributor to the Brussels budget, that misses the point. It is greatly outweighed by the additional economic growth generated by EC membership.
Goods flow freely, duty free between all 23 member countries.
A manufacturer in Birmingham, Leeds, or Manchester doesn?t think twice about jumping on the Channel train to call on customers in Paris, Munich, or Copenhagen.
I often sit next to them during my summer continental travels and also get an update on whatever business they may be in.
A British departure would take nearly 20 years of business integration and dump it into the dustbin of history.
That would be a crushing loss for the British economy, which would lose much of the nearly ?200 billion pounds worth of exports it sent to the EC in 2015. These exports have grown at an impressive 3.6% a year for the past 15 years.
It would also deliver a fatal blow to the City of London, the financial center for all of Europe and one of its largest employers.
I can see the dominoes fall from here.
Europe would lose a similar amount of trade with the UK, taking a chunk out of GDP growth there.
A weak Europe brings a stumbling China, which relies on the continent as its largest customer (yes, even bigger than the US). And a wobbling China will certainly torpedo US exports, increasing volatility in our own financial markets.
In fact, the EC is the world?s largest economic entity. It is hard to see trouble there not spreading everywhere.
The turmoil is already easily visible in the foreign exchange markets. The British pound (FXB) has suffered a gut churning 10.5% nosedive over the past four months to a new ten year low. It has also smothered in the crib the recent rally in the Euro (FXE).
A newly resurgent dollar (UUP) is starting to once again cast a shadow over US multinational earnings.
It seems like the UK is determined to shrink to a smaller country, either by hook or crook.? Only last year, Scotland mounted a campaign to split off from the UK, an effort that eventually failed.
However, it is another one of those cases of being careful what you wish for.
How do you spell ?GLOBAL RECESSION??
Caveat Emptor
I Don't See Anything Yet
I have been to Greece many times over the past 45 years, and I?ll tell you that I just love the place. The beaches are perfect, the Ouzo wine enticing, and I?ll never say ?No? to a good moussaka.
However, I don?t let Greece dictate my investment strategy.
Greece, in fact, accounts for less than 2% of Europe?s GDP. It is not a storm in a teacup that is going on there, but a storm in a thimble. Greece is really just a full employment contract for financial journalists, who like to throw around big words like bankruptcy, default and contagion.
I have other things to worry about.
In fact, I am starting to come around to the belief that Europe is looking pretty good right here. Cisco (CSCO) CEO, John Chambers, announced that he was seeing the early signs of a turnaround.
Fiat CEO, Sergio Marchionne, the brilliant personal savior of Chrysler during the crash, thinks the beleaguered continent is about to recover from ?hell? to only ?purgatory.?
Only a devout Catholic could come up with such a characterization. But I love Sergio nevertheless because he generously helps me with my Italian pronunciation when we speak (aspirapolvere for vacuum cleaner, really?).
What are the two best performing stock markets since the big ?RISK ON? move started last Thursday? Greece (GREK) (+5%) and Russia (RSX) (+7.5%)!
And here is where I come in with my own 30,000 foot view.
The undisputed lesson of the past five years is that you always want to own stock markets that are about to receive an overdose of quantitative easing.
Since the US Federal Reserve launched their aggressive monetary policy, the S&P 500 (SPY) nearly tripled off the bottom.? Look how well US markets have performed since American QE ended 18 months ago.
Europe has only just barely started QE, and it could run for five more years. Corporations across the pond are about to be force-fed mountains of cash at negative interest rates, much like a goose being fattened for a fine dish of foie gras (only decriminalized in California last year).
Mind you, it could be another year before we get another dose of Euro QE, which is why I just bought the Euro (FXE) for a short-term trade.
A cheaper currency automatically reduces the prices of continental exports, making them more competitive in the international markets, and boosting their economies. Needless to say, this is all great new for stock markets.
Get Europe off the mat, and you can also add 10% to US share prices as well, as the global economy revives. The Euro drag dies and goes to heaven.
Buy the Wisdom Tree International Hedged Equity Fund ETF (HEDJ) down here on dips, which is long a basket of European stocks and short the Euro (FXE). This could be the big performer this year.
Praise the Lord and pass the foie gras!
It?s all a Matter of Perspective in Greece
Those of a certain age can?t help but remember that things for the US went to hell in a hand basket after 1963.
That?s when President John F. Kennedy was assassinated, heralding decades of turmoil. Race riots exploded everywhere. The Vietnam War ramped up out of control, taking 60,000 lives, and destroying the nation?s finances. Nixon took the US off the gold standard.
When people complain about our challenges now, I laugh to my self and think this is nothing compared to that unfortunate decade.
Two oil shocks and hyper inflation followed. We reached a low point when Revolutionary Guards seized American hostages in Tehran in 1979.
We received a respite after 1982 with the rollback of a century?s worth of regulation during the Reagan years. But a borrowing binge sent the national debt soaring, from $1 trillion to $18 trillion. An 18-year bull market in stocks ensued. The United States share of global GDP continued to fade.
Basking in the decisive victories of WWII, the Greatest Generation saw their country account for 50% of global GDP, the largest in history, except, perhaps, for the Roman Empire. After that, our share of global business activity began a long steady decline. Today, we are hovering around 22%.
Hitch hiking around Europe in 1968 and 1969 with a backpack and a dog-eared copy of Europe on $5 a Day, I traded in a dollar for five French francs, four Deutschmarks, three Swiss francs, and 0.40 British pounds.
When I first landed in Japan in 1974, there were Y305 yen to the dollar. Even after a strong year, the greenback is still down by 75% against these currencies, except for sterling. How things have changed.
We now live in a world where the US suddenly has the strongest economy, currency and stock market in the world. Are these leading indicators of better things to come?
Is the Great American Rot finally ending? Is everything that has gone wrong with the United States over the past half century reversing?
The national finances are hinting as much. Over the last four years, the federal budget deficit has been shrinking at the fastest rate in history, from $1.4 trillion to only $483 million.
If the economy continues to grow at its present modest 2.5% rate, we should be in balance by 2018. Then the national debt, which will peak at around $18 trillion, will start to shrink for the first time in 20 years.
And since chronic deflation has crashed borrowing costs precipitously, the cost of maintaining this debt has dramatically declined.
A country with high economic growth, no inflation, generationally low energy costs, a strong currency, overwhelming technology superiority, a strong military and political stability is always a fantastic investment opportunity.
It certainly is compared to the highly deflationary, weak currency, technologically lagging major economies abroad.
You spend a lifetime looking for these as a researcher, and only come up with a handful. Perhaps this is what financial markets have been trying to tell us all along.
It certainly is what foreign investors have been telling us for years, who have been moving capital into the US as fast as they can (click here for ?The New Offshore Center: America?).
It gets even better. These ideal conditions are only the lead up to my roaring twenties scenario (click here for ?Get Ready for the Coming Golden Age?), when over saving, under consuming baby boomers enter a mass extinction, and a gale force demographic headwind veers to a tailwind.
That opens the way for the country to return to a consistent 4% GDP growth, with modest inflation and higher interest rates.
Which leads us all to the great screaming question of the moment: Why is the US stock market trading so poorly this year? If the long term prospects for companies are so great, why have shares suddenly started performing feebly?
Not only has it gone nowhere for three months, market volatility has doubled, making life for all of us dull, mean and brutish.
There are a few short-term answers to this conundrum.
There is no doubt that the Euro and the yen have fallen so sharply against the greenback that it is hurting the earnings of multinationals when translated back to dollars.
This has cut S&P 500 earnings forecasts for the year. And these days, everyone is a multinational, including the Diary of a Mad Hedge Fund Trader, where one third of our subscribers live abroad.
Another short-term factor is the complete collapse of the price of oil. Again, it happened so fast, and was so unexpected, that it too is having a sudden deleterious influence of broader S&P earnings.
Go no further than oil giant Chevron, which just announced a big drop in earnings and a massive cut in its capital spending budget for 2016.
The final nail in the Q4 coffin has been bank earnings, which all took big hits in trading revenues. Virtually all were taken short by the huge, one-way rally in bond prices in recent months and the collapse of interest rates.
This happens when panicky customers come in and lift the banks? inventories, and trading desks have to spend the rest of the day, week and month trying to get them back at a loss.
I have seen this happen too many times. This is why the industry always trades at such low multiples.
With no leadership from the biggest sectors of the market, financials and energy, and with the horsemen of technology and biotech vastly overbought, it doesn?t leave the nimble stock picker with too many choices.
The end result is a stock market that goes nowhere, but with a lot of volatility. Sound familiar?
Fortunately, there is a happy ending to this story. Eventually, all of the short-term factors will disappear. Oil prices and bond yields will go back up. The dollar will moderate. Corporate earnings growth will return to the 10% neighborhood. And stocks will reach new highs.
But it could take a while to digest all of this. This is a lot of red meat to take in all at one time. If the market grinds sideways in a 15% range all year, and then breaks out to the upside once again for a 5% annual gain, most investors would consider this a win.
Once again, index investors will beat the pants off of hedge fund managers, as they have for the past seven years.
In the meantime, I doubt the stock indexes will drop more than 6% % from here, with the (SPY) at $189, and we have already seen a 6% hair cut from last year?s peak.?
Knock a tenth off a 16.5 X forward earnings multiple with zero inflation, cheap energy, ultra low interest rates and hyper accelerating technology, and all of a sudden, stocks look pretty cheap again.
As the super sleuth, Sherlock Homes used to say, ?When you have eliminated the impossible, whatever remains, however improbable, must be the truth?.
It?s All Elementary
I noticed last week that Angela Merkel, the Chancellor of Germany, was picked by the editors of Time Magazine as their ?Person of the Year.?
This is creating an outstanding investment opportunity, a real game changer. As a result, Germany?s economy could grow by an extra 1% a year. But more on that later.
She received the accolade for convincing her country to accept 1 million refugees from the Middle East. They will be plopped down in the middle of a population of 80.6 million, so it is a very big deal.
That is like the US taking in 4 million refugees with no notice. The most we took in after the collapse of Vietnam was 125,000.
In addition, she talked her electorate into bailing out Greece, not once, but twice.
I SAY ?THREE CHEERS? FOR GERMANY.
History has really come full circle. After bearing the cross for the holocaust for seven decades, the country carries out one of the greatest humanitarian acts of all time.
I know the Germans well.
I lived in West Berlin during the 1960?s with a former Nazi family. Needless to say, the dinner conversations were interesting. But they loved Americans, for it was we who rescued them from the Russians and Bolshevism in 1945.
I spent my weekends smuggling western newspapers and US dollars into East Berlin to the underground across Checkpoint Charlie. I was too young and dumb to know any better.
When I got caught, I spent a night in a communist jail cell. To this day, the words ?Das ist Verboten? still send a chill down my back. The East German Volkspolizei were not very nice guys.
If you want to see a close approximation of that prison, go watch the just released Stephen Spielberg movie ?Bridge of Spies,? about the Gary Powers exchange. They really nailed the Cold War atmosphere of Berlin during the sixties.
Yes, when I was 16, I used to listen to machine guns mow down fleeing refugees at night. Every time a guard hit someone, they were awarded a gold watch. I lived in Tiergarten, within easy earshot of the Berlin Wall at Brandenburg Gate. And you wonder why I?m such a tough guy.
Angela Merkel has always been an enigma to me. Those of us who know the old East Germany well, find it difficult to imagine anyone intelligent or useful coming from there. To see her leading an essentially conservative country is positively mind blowing.
She is clearly brilliant, with a PhD in physics. She is fluent in Russian, and is in close communication with Vladimir Putin on a regular basis in his own language. She entered politics as soon as the wall came down in 1989, signing up with the conservative Christian Democratic Union.
Today, she is widely considered the de facto leader of Europe. She is also regarded as the most powerful woman in history (at least for another year).
Full Disclosure: During my annual European sojourns, I always spend a day briefing Merkel?s staff in Berlin about the current state of the world. I also attempt to decode the American political scene, which Europeans find an indecipherable mystery, but which has enormous implications for them.
?The Person of the Year? can be a dubious honor, and is defined as the person who most influenced history that year. Aviation pioneer Charles Lindbergh, who first soloed the Atlantic Ocean, was originally picked by Time in 1927.
Adolph Hitler was named in 1938 for peacefully redrawing the map of Europe. The only other Germans so named were Konrad Adenauer in 1953, the country?s postwar leader, and Willy Brandt in 1970, noted for normalizing relations with the Soviet Union and Eastern Europe.
To say that Germany is overwhelmed by the immigrant crisis would be a severe understatement.
Almost every high school gym in the country has been converted to emergency housing. There are shortages of everything, from blankets to clothing and translators.
Medieval Afghan men are showing up with 13-year old brides. The backlash is that the Nazi party is experiencing a resurgence of popularity, not only in Germany, also in the Netherlands, France, and Sweden.
If it weren?t for the commitments of this newsletter, I would be back in Berlin in a heartbeat volunteering my services.
Needless to say, the bill for all of this will be enormous. Germany is really the only country that could afford dispensing so much aid.
One of the reasons it can do so is that it happens to have a spare country at hand. Much of the old East Germany is still empty, its cities depopulated. This is where the new immigrants will eventually be settled.
It is perhaps because Angela is a mathematician that she understands there is an enormous long-term dividend that the country will reap.
Look at the economic growth rates of the US and Europe for the past 50 years, and the continent has always lagged the US by 1% per annum. By opening up the gates to a flood of immigration, Germany can make up this difference. So can the rest of Europe.
The great thing for Germany is that these are not your ordinary political or economic refugees. Much of the Syrian middle class has decamped, bringing their educational and professional skills with them. For the Germans, it is a win-win.
This is not a long-term thing. German GDP growth recently and unexpectedly surged, from a 0.3% to a +1.5% annual rate. Some of this is no doubt due to the European Central Bank?s newly aggressive policy of monetary easing. Massive spending on social services has to also be a factor.
European stocks are already poised to outperform American ones by two to one in 2016, thanks to quantitative easing, the postponement of the Greek crisis, and a generation low in asset prices there. Immigrants could pour the economic gasoline to the fire.
Clearly German stocks are a prime target here, which you can buy through the iShares Germany Fund (EWG), as is Europe in general, with the Wisdom Tree European Hedged Equity Fund (HEDJ). But make sure you hedge out your European currency risk for the short term, as the (HEDJ) does.
A revival of the continental economy will also eventually engineer a recovery in the Euro (FXE), (EUO) against the dollar. Don?t press those shorts too aggressively down here.
The great irony here is that this is all unfolding in Germany while mosque burning and bombing are taking place across the US, and there is talk of closing its border on religious grounds.
It is the sort of thing that happened in Germany in 1938, as my former Berlin hosts would have reminded me.
History is coming full circle a second time.
Good for You Angela
ECB president Mario Draghi certainly let go of a lead balloon today.
Instead of announcing a 20 basis point cut in Euro interest rates, we only got 10.
The world blew apart.
The Euro rocketed against the dollar some 3.5% in minutes, the best gain since 2009, and one of the top ten moves of all time for the beleaguered continental currency.
US Treasury bonds crashed, giving up $3, and popping yields from 2.18% to 2.32%. Stocks fell to pieces globally. The Volatility Index (VIX) went through he roof.
Never mind that Draghi announced an extension of European quantitative easing by six more months to March 2017, or that the number of qualified securities for the central bank could buy was expanded.
All traders wanted was one more rally before yearend into which they could unload their sizable Euro shorts. When they didn?t get it, they panicked and stampeded for the exits.
It was your classic flash fire in the movie theater.
This is what happens when positioning in financial markets gets too one-sided. Risk managers talk about too many passengers in one side of the canoe. Everyone gets to go swimming.
That is why I quit rolling down the strikes on my Euro shorts three weeks ago, loathe to sell to much at the bottom. My one remaining short Euro position successfully weathered today?s spike, is still in the money, and only has ten trading until expiration.
The important takeaway here is that today?s moves were entirely technical, and had nothing to do with fundamentals, which always win out over time.
The meteoric move in the Euro did not occur because of a sudden burst of strength in the European economy. It didn?t take place because the ECB is raising rates.
So, I think this entire move is bogus. It is a typical December event, where all of the hot money wants to get out of the market within the next four weeks so they can close their books and start over again next year.
It is also a great lesson on what happens when you have too many hedge fund chasing the same few trades. It always ends in tears.
Which leads me to believe that the dramatic moves we saw today will reverse themselves shortly. Stocks (SPY) will soar, bonds (TLT) will rise modestly, and the Euro (FXE), (EUO) will take the express train downtown. The (VIX) will fade, again.
These gyrations could possibly take place as soon as Friday?s November nonfarm payroll report. All we need is a number north of 200,000, and it will be off to the raises once again.
I am so convinced of my convictions that I bought the Velocity Shares Daily Inverse VIX ETF (XIV) 30 minutes before the close (that?s the latest I can send out a Trade Alert and expect readers to have time to open and execute).
USE THE HEDGE FUNDS? PAIN FOR YOUR GAIN!
If you still hold a Euro short, keep it.
If you are underweight stocks, here is another fine entry point.
This is especially true for hedged European stocks (HEDJ), which have just opened an excellent entry point.
The (SPY) is only down 2.1% from its recent high, and off 3.7% from its all time high, hardly the stuff of bear markets, or even corrections.
Surprise!
You wanted clarity in understanding the current state of play in the global financial markets? Here?s your #$%&*#!! clarity.
You should expect nothing less for this ridiculously expensive service of mine.
But maybe that is the cabin fever talking, now that I have been cooped up in my Tahoe lakefront estate for a week, engaging in deep research and grinding out the Trade Alerts, devoid of any human contact whatsoever.
Or, maybe it?s the high altitude.
I did have one visitor.
A black bear broke into my trash cans last light and spread garbage all over the back yard. He then left his calling card, a giant poop, in my parking space.
Judging by the size of the turds, I would say he was at least 600 pounds. This is why you never take out the trash at night in the High Sierras.
Ah, the delights of Mother Nature!
We certainly live in a confusing, topsy-turvy, tear your hair out world this year. Good news is bad news, bad news worse, and no news the worst of all.
The biggest under performing week of the year for stocks is then followed by the best. Net net, we are absolutely at a zero movement, and lots of clients complaining about poor returns on their investment.
I tallied the year-on-year performance of every major assets class and this is what I found.
+16% - Hedged Japanese Stocks (DXJ)
+15% - Hedged European stocks (HEDJ)
+13% - US dollar basket (UUP)
+10% - My house
0% - Stocks (SPY)
0% -? bonds (TLT)
-5% - Japanese Yen (FXY)
-11% - Euro (FXE)
-12% - Gold (GLD)
-18% -? Oil (USO)
-27% -? Commodities (CU)
-27% - Natural Gas (UNG)
There are some sobering conclusions to be drawn from these numbers.
There were very few opportunities to make money this year. If you were short energy, commodities, and foreign currencies, you did very well.
Followers of the Mad hedge Fund Trader can?t help but know and love these ticker symbols. They?ll notice that our long plays were found among the asset classes with the best performance, while our short bets populated the losers.
The problem with that is most financial advisors are not permitted to place client funds in the sort of inverse or leveraged ETF?s that most benefit from these kinds of moves (like the (YCS), (EUO), and (DUG)).
That left them reading about the success of others in the newspapers, even when they knew these trends were unfolding (through reading this letter).
How frustrating is that?
What was one of my best investments of 2015?
My San Francisco home, which has the additional benefit in that I get to live in it, have a place to stash all my junk, and claim big tax deductions (depreciated home office space, business use of phone, blah, blah, blah).
Of course, I do have the advantage of living in the middle of one of the greatest technology and IPO booms of all time. Every time one of these ?sharing? companies goes public, the value of my home rises by a few hundred grand.
The real problem here is that investing since the end of the Federal Reserve?s quantitative easing program ended a year ago has become a real uphill battle.
While the government was adding $3.9 trillion in funds to the economy we traders enjoyed one of the greatest free lunches of all time. It made us all look like freakin? geniuses!
Just maintaining their present $3.9 trillion balance sheet, not adding to it, has left almost every asset class dead in the water.
Heaven help us if they ever try to unwind some of that debt!
Janet has promised me that she isn?t going to engage in such monetary suicide.
The Fed is continuing with Ben Bernanke?s plan to run all of their Treasury bond holdings into expiration, even if it takes a decade to achieve this. And with deflation accelerating (see charts below), the need for such a desperate action is remote.
Still, one has to ponder the potential implications.
It all kind of makes my own 43% Trade Alert gain in 2015 look pretty good. But I don?t want to boast too much. That tends to invite bad luck and losses, which I would much rather avoid.
What! No QE?
The Teflon market is back.
Good news is good news. Bad news is good news. What could be better than that?
However, there are a few issues out there lurking on the horizon that could pee on everyone?s parade. Let me call out the roster for you.
1) Economic Data Continues to Weaken - After a nice data run into September, the numbers have suddenly turned ugly, taking Q3, 2015 GDP forecasts from 3.9% down to 1.5%.
Sluggish corporate earnings in 2015 should rebound in 2016, as the European and Chinese drag dissipates. They should improve going into Q4 and Q1, 2016. But if they don?t, watch out below.
2) The Fed Raises Interest Rates in December - This has been the world?s greatest guessing game for the past two years. With China stabilizing, and the US stock market on the mend, the path is open for our central bank to raise interest rates for the first time in nine years. Janet Yellen lives in fear of the American economy going into the next recession with interest rates at zero! That would leave them powerless to do anything.
We could get a 4% mini correction in stocks off the back of a December surprise, especially if the stock indexes go into the announcement from a high level. But, I doubt we?ll see more than that.
3) Another Geopolitical Crisis - You could always get a surprise on the international front. But the lesson of this bull market is that traders and investors could care less about ISIS, Al Qaida, Afghanistan, Iraq, Russia, the Ukraine, or the Chinese expansion in the South China Sea.
Everyone of these has been a buying opportunity, and they will continue to be so. At the end of the day, terrorists don?t impact American corporate earnings.
4) A Recovery in Oil - Texas Tea (USO) is clearly trying to bottom here, now that we are at the nadir of the supply/demand balance. If it recovers too fast, and rockets back to the $70 level, we lose some of our energy tax windfall.
5) The End of US QE - The Fed?s $3.5 billion quantitative easing policy ended a year ago, and since then the return on US stocks has been absolutely zero, save for the odd special situation (Amazon, Netflix, etc.). Anyone who said QE didn?t work obviously doesn?t own stocks. Still to be established is whether stocks can rise without QE.
6) A New War - If the US gets dragged into a new ground war, in Syria or elsewhere, you can kiss this bull market goodbye. Budget deficits would explode, the dollar would collapse, and there would be a massive exodus out of all risk assets, especially stocks.
However, it is unlikely that a pacifist President Obama would let things run out of control in the Middle East, nor would a future President Hillary. Better to leave it to the Russians. After all, their move into Afghanistan in 1979 worked out so well for them. It caused the demise of the old Soviet Union.
7) The European Refugee Crisis Worsens - If the numbers get too big, there are supposed to be 4 million refugees en route, it would demolish Europe?s (FXE) economic recovery.
Unfortunately, the enormous influx of Islamic migrants into Europe has already led to the resurgence of Nazi parties in Sweden, Denmark, and the Netherlands. Some are showing up with their 13 year old brides.
Good for Germany for doing the heavy lifting here. After all, they did happen to have a spare empty country at hand, the old East Germany. With a collapsing birthrate, it was the smartest thing they could have done to boost their long-term economic growth.
8) Another Emerging Market Crash - If the greenback resumes its long-term rise, as I expect, then another emerging market debt crisis is in the cards. With US rates rising and European rates falling, how could it go any other way? This is because too many emerging corporations have borrowed in dollars, some $2 trillion worth.
When their local currencies collapse, it has the effect of doubling the principal balance of their loans, and doubling the monthly payments, immediately. This is the problem that is currently taking apart the Brazilian economy right now. It happened in 1998, and it looks like we are seeing a replay.
9) China Goes Into Recession - So far, the Middle Kingdom has resorted to cutting interest rates, easing bank reserve requirements, and selling big chunks of its US Treasury and Eurobond holdings to reinvigorate its economy. What if it doesn?t work? Look for a new China scare to hit US stocks, and don your hard hat.
10) Interest Rates Start to Rise - I have already chronicled the sudden shortages in truck drivers, airline pilots, and minimum wage workers at Amazon fulfillment centers. What if wages really start to take off, and the trend towards 40 years of falling real wages reverses? That would bring substantial interest rate hikes, a rocketing dollar, true inflation, and eventually, a recession. 2017 anyone?
11) Donald Trump is Elected President - I doubt the Donald has seriously thought out his economic policies, and most of what he has proposed is unenforceable under current US law. But he has established that he has the money and the media strategy to win the Republican nomination.
What if Hillary then develops a major health problem and has to drop out of the race? The implications of a Trump presidency are hard to fathom, but it certainly would NOT be good for the stock market. This is an outlier, but is not impossible.
I know you already have trouble sleeping at night. The above should make your insomnia problem much worse.
Down the Ambien, and full speed ahead!
