2016 Economic Predictions: Year of the Epocalypse
An economic apocalypse upon us. My 2016 economic predictions provide the full explanation as to why 2016 will be the year of the Epocalypse — a word that encompasses the roots “economic, epoch, collapse” and “apocalypse.” I needed a word big enough to describe all that is about to befall the world in 2016. When you see the towering forces that are prevailing against failing global economic architecture and the pit of debt beneath that structure, as laid out here, I think you’ll recognize that the Epocalypse is here, and it is everywhere. The Great Collapse has already begun.
What follows are the megatrends that will increasingly gang up in the first part of 2016 to stomp the deeply flawed global economy down into its own hole of debt. The economic collapse that is already developing includes the US economy and the US stock market that is now collapsing from the external forces and internal vacuum that I’ve been writing about for a few years here.
Nations deep in the hole
Fire in the hole. Brazil is already burning and has been declared by Bank of America and others to be in a recession deeper than the Great Depression — its worst since 1901. Brazil is struggling to combat runaway inflation at the same time. That’s is an impossible combination to battle.
It ain’t Zimbabwe yet, but it’s looking like a place where Mugabe might want to run for president. Only a couple of years ago, Brazil was a nation of rising glory — the shining light of South America, one of the brightest of emerging markets. Now, as the US starts raising interest, its problems will grow worse as its debt, in a time of deep national crisis, is made impossible to manage.
Japan, Canada, Australia, Venezuela, Russia, Ukraine, Brazil and Greece are just some of the nations officially in recession during 2015. The planet as a whole is in recession, meaning aggregate growth in GDP of all nations, if measured in dollars, has been in reverse for more than two quarters. And the head of the International Monetary Fund predicts that global “growth” will be worse in 2016 than it was in 2015, and 2015 looked pathetic!
Christine Lagarde, leader of the IMF, said higher interest rates on national debts owed to institutions in the US will increase vulnerability worldwide. It’s long been said that, “As goes the US economy, so goes the world;” but it is equally true to say, “As goes the global economy, so goes the US.” In other words, the US economy is so big and influential that this single economy can move the world (and almost always does); but the global economy is even bigger and, so, can and will move the US. That’s why my 2016 economic predictions state this is the year the world moves the US. Rapidly failing, intertwined global economies are falling into their own holes of debt, and the US is certainly going to get swept down all of that. Recent interactions between China’s small stock market and the huge US stock market show the US is clearly not immune.
The Federal Reserve’s rate increase is also generally expected to strengthen the dollar (though that is not certain as the dollar’s strength depends on other factors, too). If so, dollar-denominated debt in other nations gets a double whammy of higher interest and higher premiums on currency conversion to make the payments. Lagarde doesn’t see things as looking better after 2016 either due to aging demographics as baby boomers move into retirement and slow down a little. (A good time to invest in artificial hips and knees.) So, there are many reasons global economic collapse is a trend that will prevail throughout 2016.
It’s already lining up poorly for the US. Both UBS and the Atlanta Fed have placed US GDP growth for 2016 at a likely 0.5%. Dutch Bank cut their predictions of US growth to 0.5% as well. The big boys are rapidly cutting back their expectations. While I think they are wrong because the truth will be much worse, 0.5% is still a cloudy forecast for those particular institutions that are typically very conservative in their downgrades.
These institutions have typically overestimated national growth. They started with 2016 expectations that were over 2%, which they cut back to 1.5%, which they, then, cut back to 1% and now 0.5%, all in less time than a year. Their track record says they always overestimate. I form my 2016 economic predictions based on the many trends that will be affecting future data. Thus, you might say the Federal Reserve Bank of Atlanta is a trailing economic indicator.
I believe that, as data for the last quarter of 2015 comes in, these institutions will be revising their projections for 2016 down even further, just as they did throughout 2015. That said, their figures are already borderline recession numbers.
I think the US may already be in recession, given that recessions are never declared until six months after they begin (being officially defined by two successive quarters of contraction in GDP). The biggest of my 2016 economic predictions, however, is that the US experiences something far worse than what we normally think of as a “recession.” Hence, coining the word “epocalypse” to refer to the crash that is just getting started — an economic demolition that will cause the whole world to rebuild its economic structures. This is truly epoch in the sense that it is an extinction-level event economically that will open the world to transition to a new global economy over time. The world you live in is about to change.
Another basis for my 2016 economic predictions is the China Syndrome
We are seeing it now. Even if China does not meltdown, it is certain beyond anyone’s reasonable doubt that China will slow more in 2016. Even China predicts its economy will slow more, and 2015 was already China’s slowest year in fifteen years. We already know what that slowing caused; so, it doesn’t take any brain wizardry to extrapolate what further slowing in China adds to the global problems just laid out above. Since major companies started going out of business or defaulting in 2015, more that are badly weakened from 2015 will fail to make it through 2016, and nations that have lost in selling resources will lose even more. So, the second of my 2016 economic predictions is that their situations will all get harder, not better.
China’s stock market has a lot more crashing to do, as well. Consider that China has frozen its stock market in suspension for half a year now. Meanwhile, its companies are doing worse, and its economy has slowed a little more. That means the ground has moved out from under the suspended market. The economic landscape is now pretty far below where the market remains suspended. So, Beijing is stuck. If it releases the market to be free again, it will certainly crash just to make contact with reality below.
As I finish up these predictions, the Chinese stock-market crash appears to have abated; but look deeper. Articles are already appearing that say stock prices were supported after a Chinese change in strategy via huge purchases of stock by the Chinese government. The flip side to that kind of rescue is that it simply means the free market is being re-absorbed into the Chinese colossus. Private industry is, again, being socialized.
The world’s second largest economy is on the edge of a great transformation… or an epic disaster. It has enormous implications for the global economy either way. This book will help you consider China’s future from a variety of perspectives. Most important, you’ll learn what China’s changes means for your portfolio.
The oil pit
Tom Kloza, founder and head of Oil Price Information Service, predicted oil prices in 2015 more accurately than anyone, and his predictions for oil prices in 2016 are even more dour. So, the next major trend that my 2016 economic predictions encompasses, as a force that is changing global economics is the continued, long-term crash of oil. (Not just based on Khoza, but on many others, as well as my own sense of what has to happen in oil.)
Kloza, to stay with the guy who did the best in 2015, predicts West Texas Intermediate will drop all the way to $32 per barrel, and it looks like he’s just about already right. Kloza predicted oil would drop to $35 in 2015, and it did. I said it would drop to $40 and not lower, which it did and held there for a couple of months (so that was a very close call), but eventually it went down further. I was overly optimistic. Kloza expects oil to go back to where it was in 2008.
To make matters worse, Kloza expects a decoupling of oil and gasoline prices with gas starting to rise due to storage expenses. That means both the oil industry (and all of its backers and suppliers) and consumers lose. So, that’s worse than last year. He doesn’t expect oil to stay down all year, however; but it will certainly deepen the wreckage in the first half of 2016.
My own sense of it is this: With oil storage facilities full to the brim around the world and a promised glut from the Saudis to continue all of next year and Iran possibly coming back online, oil is almost certain to go down more. US companies are already being crushed at the present level. Saudi Arabia has strengthened its ability to hold its position by drastically altering its national budget and implementing new taxes to replace lost oil revenues. That says for certain they plan to be in this fight for the long haul.
Moreover, Iranian oil is the cheapest oil to extract in the world; so, if they get back into the market, they can try to hurt the Saudis more with even lower prices and still make a profit. Iran and Saudi Arabia, two of the world’s largest oil producers are now practically at war with each other (see that trend below). The US government is determined to see its deal with Iran go through, so we can be fairly certain Iran will re-enter the oil market early this year.
Saudi Arabia has used oil to keep its populace at peace by not taxing them. Iran will use that leverage against Saudi Arabia by dumping as much cheap oil on the market as it can pump in order to press the Saudis to raise taxes more as they lose more money, thus destabilizing the Saudi government. The Obama administration has already shown itself to be completely non-supporting of the Saudis as an old US ally and to prefer to form a new alliance with Iran. So, there is nothing to stand in Iran’s way, and Iran is dying to pump and sell oil anyway.
To show you how rapidly the oil market is deteriorating, prices were close to $35/barrel for West Texas Intermediate crude oil when I started working on my 2016 economic predictions, and they almost touched Khoza’s $32 as I finished this up … and Iran hasn’t even entered the market yet. All of the trends in oil are worse for the global economy in 2016 than they were in 2015, and they have already been hugely devastating.
US Industrial Recession also part of my 2016 economic predictions
Two major manufacturing surveys over the past week have come in well below economists’ expectations — solidly in a manufacturing recession — with new orders also falling below expectations, offering no hope for an improvement in the near future. US manufacturing fell at its fastest pace in six years, and US factory orders have never fallen like they did in 2015 without the US going into recession. November’s reports brought the 13th month of year-on-year decline! And that, according to Zero Hedge, was with a 47% surge in defense spending — the largest defense increase since 9/11.
The Baltic Dry Index, which tracks the cost of shipping dry goods overseas has reached an all-time low, partly because too many new ships were ordered in recent years but also because so little product is shipping as industry is sinking.
When manufacturing falls and starts to layoff people, as it did at the end of 2015, then services to those people start to fall. A recession in the service sector, in other words, lags a recession in the manufacturing sector because it is largely a response to falling incomes and rising unemployment to where people cannot afford the services.
Manufacturing in China and the UK has contracted significantly, as in US big-equipment manufacturers. The eurozone, however, saw manufacturing grow, probably due to the falling value of the euro causing a rise in demand for exports from that zone.
Stocks in bondage
The top-ten stocks that gave a positive average to a falling US stock market are now also declining with some of them now taking bigger hits than most other stocks. That means the last pillars of the stock market’s support are crumbling. The two biggest — the Big Ace’s, Apple and Amazon — have been pounded hard in the last couple of weeks. Sixty points for Amazon is a pretty hefty plunge. Apple, having become the most valued stock ever, is plummeting even faster.
Apple has been in decline for roughly half a year as iPhone sales are flagging, and investors seem unwilling to be impressed by other Apple technology like the new Watch or more distant technology like whatever the heck Apple is doing with cars. Google, too, has been entering the car game by taking the driver out of the game. Given how much we text while driving, apparently we have a great desire to drive our telephones because it is now phone companies who are the innovators in the automobile industry. Apple’s iPhone production is anticipated to be cut by as much as 30%; but maybe that will be made up by the new iCar. (Don’t ask.)
In the meantime, the top ten are descending. When you only have ten secure stocks to move to and then two of those go into retreat, index averages are bound to fall … and fall they have, triggered by China’s all-out, stock-market crash.
Dow theory says that when transportation stocks drop while non-transportation stocks stay up, then the non-transportation stocks will drop, too. That’s because transportation is one of the first areas to notice a coming recession while other areas of the market lag. What we see right now is particularly foreboding, then. Transportation stocks have been leading the decline for a few months, even though they are the one sector that should benefit most from the drop in the price of oil. Even as this industry’s main expense is plunging, the industry is having a hard time managing its drop in revenue. The plunge in the price of oil would normally have caused transportation stocks to rise, but they are losing more from not shipping as much oil or gas or coal; so they’re going down. The lack of movement of raw materials is sucking everything down with it.
The US market was also artificially inflated by cheap buybacks of company stock, which have been funded by cheap credit made widely available by the Fed’s zero-interest strategy. That stimulus scheme is now unwinding as credit costs start to rise. So, a market that remains flat, in spite of huge buybacks, now will be finding less of that support. It has to settle. One of the primary decisions makers in Fed policy, Richard Fisher, has just said he warned the Fed that the market would go wobbly when policy was reversed because, in his own words, the Fed “front-ran” the US stock market and created a huge asset bubble. He expects a 20% drop, but I think he is way conservative because he doesn’t want to think about his nightmares.
UBS, Switzerland’s largest bank and one of the largest banks in the world, now says that it expects the S&P 500 to fall by 30% this year. UBS says we are definitely in the final stages of a bull market and adds,
Last year’s rise in volatility was in our view just the beginning for a dramatic rise in cross-asset volatility over the next few years. (ZeroHedge)
The Dow Jones Transportation sector has already become a bear market, and it is widely accepted in Dow theory that transportation stocks are leading indicators of the stock market’s direction as they respond more quickly to how the economy is doing overall than other stocks.
The Russel 2000 index of smaller companies has already fallen 14% since its average is not buoyed by the top ten.
US corporate earnings right now are not strong, and stocks are not cheap. They have an inherent reason to drop, as it appears earnings will weaken more due to the crush of commodities and of foreign trade due to a strong dollar. The commodities crush is boarding up mines, capping oil wells, unloading transportation, lightening heavy-equipment manufactures, and will ultimately turn boom towns in the midwest into ghost towns.
So, one more major trend I see that will press the entire world and the US toward total economic collapse is the crash of the US stock market, which I have said is already beginning. I would not be surprised to see the Dow drop by as much as 60% in a year and half if there is no US government or Federal Reserve intervention (an unlikely “if”) in order to hit the level it would have reached if not pumped up by decades of Fed stimulus.
The big bond bust
Only the weakest fall first, as they did in the fall of 2015. The second tier of bond funds will start to fall in 2016. Companies that defaulted in 2015 did so when interest rates were the cheapest they have been in the history of the nation. So, how much more will others fall as interest rates now start rising? It’s just logical. Enough said because it is already happening, so it’s not a future scenario; it is a present scenario that will contribute to the failure of all sides of the US economy, which will add serious downward momentum to the epocalyptic collapse of the entire global economy, making this something the Fed cannot rescue.
Hedge hogs head for the hills
And not so much Beverley Hills. In crumbling markets, many take refuge in hedge funds. I don’t pretend to understand their mysterious incantations and inner machinations; but celebrated geniuses cast bets against other bets and then, I think, bet that you can’t figure out what they’re up to. The magic that is supposed to come out the other side is that, when something goes down, they go up.
Well, a lot of somethings seem to be going down, and the hedge funds are going down, too. The funds that were supposed to protect you from volatility are dying from volatility in a huge fund flush. The problem for the Hedge Hogs is that their old magic never accounted for new patterns that make no sense where governments like China buy stocks en mass, and where central banks buy their nation’s debt in really, really big chunks (like almost all of it) and where money is free or now, in some countries, you even have to pay someone to hold your money for you.
Thus, the hogs are having a tough time of things, and many of them have put out their “going out of business sale” signs. More hedge funds boarded up their windows in 2015 than in any year on record. But, then, they haven’t been around long anyway. So, who cares? What’s a billion here and a half a billion there spread across a landscape of economic wreckage, especially when it is mostly the rich who use these things? A lot of what these funds buy is distressed debt, so what did the rich expect?
Here’s what concerns me and why it enters my economic predictions for 2016: These funds were supposedly managed by the best and brightest … like those people who figured out how to create mortgaged-backed securities — complex organisms made of other microorganisms that most of the buyers didn’t understand at all — even the supposedly smart buyers like banks that make a lot of money.
So, you have to wonder how smart the smart guys are and whether anyone is paying attention to anything anymore. How much junk is in the system that very few know about because of financial invertebrates? What kind of funny algorithms run the auto-trader market now, making stock trade decisions across nations in nano-seconds that no human being ever sees — decision that were designed in advance by people who read and write in ones and zeros and speak arcane languages like C++ over a cup of Java and who are married at their fingertips to names like Ruby and Perl?
Can anyone be certain that some algorithm that is making auto-stock decisions for investors while they sleep won’t misfire now that the market is running in reverse where there are no more Fed puts? Most of the toddlers who created today’s robotrading applications never knew the real world where money wasn’t free. Will all their clients wake up some morning to find a soft-coded circuit breaker failed to trip, and the computers of the world got into a bidding war and priced all stocks down to zero?
You think I’m kidding? A lot of supposedly smart people thought the hedge-fund managers were geniuses, yet those geniuses are being wiped out by the very volatility they were supposed to protect you from! The irony of the virologist who died from a head cold. When will some econovirus, first contrived in the desserts of Afghanistan, hit the robotraders? Will the giants be taken down by a simple virus like complex invaders were taken down in War of the Worlds — bitten by something they can’t even see?
My point is that we’re right back where we were in 2007 where banks and other major institutions were buying things they didn’t begin to comprehend. Are the big decision makers trusting risk management to software engineers? No surprise to me. I’ve long thought the big CEOs are just good at shaking hands and smiling and drinking overpriced, designer water. Have things become too complex to even identify risk in some cases? Maybe the actual market deciders — the software engineers — are so far out of touch with the real economic world that they’ve forgotten what gravity feels like.
Well, gravity is here, Baby! So, hold on to your lead socks as we discover how robo-traders work when markets reverse.
Iran’s Supreme Leader Ayatollah Ali Khamenei has threatened Saudi Arabia with “divine revenge” over its execution of Shi’ite cleric Nimir al-Nimir. Iran’s Revolutionary Guard made similar statements, promising “harsh revenge” and the “downfall” of the House of Saud.
Saudi Arabia and Iran — longtime arch foes — support opposite sides of the war in Syria where ISIS, al Qaeda, Russia, Iran, Assad’s government, the US, France, and Turkey are all clustered in active battle. (Ah, what a bouquet of thorns.) The execution of Nimir also complicates relations for Saudi Arabia with Iraq’s Shi’ite-led government, where Saudi Arabia just re-opened an embassy after 25 years of shutdown only to have protestors shouting for its immediate closure following the execution.
As far as I can see, Obama’s foreign policy of abandoning US allies in the Middle East has opened the doors to extraordinary conflict. The US is involved in more wars than we were under George Bush. Afghanistan continues to haunt us, as pulling out left the job undone. We’re now back to fighting in Iraq because the power vacuum created by Bush left a mess that can’t be cleaned up as other entities stepped in, and pulling out only made it worse. These were risks Obama was warned about from the beginning, should he pull out of Afghanistan and Iraq, not surprises.
We’re now newly involved in Syria, as if we hadn’t kicked enough hornet nests in that region. Meanwhile, conflict continues to brew between Ukraine and Russia. China is threatening to raise its guns at US planes and boats in the South China Sea. North Korea this week made its first claim to have an H-bomb with “United States” written on it. Iran has admitted to having more long-range missiles than Obama ever knew about, yet the Obama administration seems to be ditching all allies in the Middle East in order to cosy up to Iran. Right or wrong, the US is involved in all of those conflicts, and all of it looks expensive.
Obama’s foreign policy can be described as looking somewhat like throwing a bowl of meatballs and sticky rice at a wall. I don’t understand what the plan is, but that’s not what concerns me. What concerns me is that Obama doesn’t seem able to explain what the plan is either, and that makes me think he doesn’t know what the plan is. I will admit that he has certainly brought a great deal of change to the world.
And then we have the Palestinians and Israelis, increasingly in tension that centers on the Temple Mount where the Bible predicts the events of the great apocalypse will happen. Both sides are increasingly less willing to talk to each other. So, this could all go biblical in scale.
We haven’t been this close to the Middle East becoming a world war since the last World War.
Fed float fled
The precise timer for my 2015 economic predictions was the Fed’s change in its zero-interest policy. What many people missed with this event now gone by is that a tiny rise in interest was not the issue. Nevertheless, it is a bigger issue than thought. When the Fed only raised its interest target by one-quarter of a percent in December, and just two weeks later the high-yield spread (junk-bond spread) had grown by 2.5%. So, one concern is how much control the Fed has over interest rates as it starts trying to raise them. Do the math in terms of what this widening spread means to companies in the oil industry that are already struggling with their high-yield bonds. They will have to pay that much more if they need to refinance bonds they already cannot pay off.
The bigger issue to the end of the Fed’s free float is that it transported us back out of Wonderland where bad news was good news for nearly seven years. For years we’ve seen the market go up when economic news was bad. That Mad-Hatter reaction happened because bad economic news meant the Fed would prolong its stimulus, and stimulus was, by far, the biggest game in town. That dynamic ended on December 16. Now we’re back in economic reality where bad news is simply bad news. We’re rightside-up again, and our re-entry into reality happened at a time when there is more bad economic news than I can ever remember.
The instant move back to being rightside-up is why I predicted December 2016 would be a tiny trigger that would set off the explosives that bring our already crumbling structures down.
The housing hustle hangs over us
In the face of the Fed’s first looming rate hike, mortgage applications spiked — the rush of last-minute buyers wanting to make their move before interest started climbing. Now, two weeks after the Fed’s raise, mortgage applications have fallen off by a whopping 25%. A seasonal adjustment for bank closures over the holidays, etc., actually makes the figure come out a little worse at 27%. Most of the spike was in refi. Although applications for the purchase of homes has also fallen off 15%, they remained considerably higher than a year ago.
Housing is NOT actually one of the bases for my 2016 economic predictions. I see no reason for housing to lead our collapse into the Epocalypse. Housing, however, will be a following trend that deepens the hole the Epocalypse crashes us into. As jobs fade back and unemployment starts to grow, mortgages will start to fail and housing prices will fall again.
The large fall of home sales in November was mostly because of rising prices (as some areas of the market now reach the peak they had before the Great Recession began) and because of a short supply of homes for sale. This peaking out of the housing market is similar to what we saw in 2007 and 2008 and shows the market is highly prone to topple again, so I don’t expect it to lag long as we now move into the Epocalypse.
The fact is that the extraordinary home prices at the housing peak in 2007 could only be supported by loose credit. They have only been supported now by loose credit and low interest now, so prices have to start moving down as interest starts moving up, or we have to loosen the terms of credit even more, as we did last time around. Either road leads home to the same collapse.
Student loan crisis also part of my 2016 economic predictions
Outstanding student loans in the United States now top a trillion dollars. That’s not so outstanding. Nearly $1.2 trillion to come closer. How are people who are barely past the point of being kids going to pay that off? While student loans won’t be the cause of the Epocalypse, they will fail at a greater rate, intensifying government financial stress, thereby adding to the falling weight. The Ecocalypse is an economic collapse that happens throughout the world and in all sectors of the economy. It’s total. (But it is also so huge that it will likely take more than a year before its grandeur is truly appreciated.)
Auto-traders are auto-traitors
I’m speaking here of the financiers and the manufacturers, not the buyers. Auto sales are at a record high (up 15% in 2015), and some look to that as evidence that the US economy is strong. I would say, instead, it is the exception that proves the rule. It is one more part of the problem because that accounting is all baloney, and baloney is why most of the world’s economic experts don’t see any of this coming. They believe their own baloney.
You have to consider what factors have taken auto sales to these supposedly soaring heights. In part, it’s consumer confidence, which is is a positive tail wind for the economy; but terms of credit on automobiles have been extended out to all-time extremes, too, of seven years on a highly depreciable asset. Down payments have, as they were just before the Great Recession, been minimized, as has interest. Most of all, most of these sales are not sales at all. The industry now leases far more cars than it sells.
You have to wonder why so many economists are blind to how significant all of that is and to what it means. So blind, in fact, that they point to auto sales as an indicator of a strong economy when it is the same mess we saw in the Great Recession. Apparently economists are incapable of learning anything. So, the biggest scare here is how blind it proves the experts are who guide the economy.
Has anyone forgotten what supported auto sales in the year before the Great Recession? Zero interest, zero down, and zero payments for a year. At the time, I was asking, “What’s their end game? Where do they go from here now that they’ve spent the year giving away one-year leases because people can return all these cars at no loss?
What we see now is that the automotive industry has doubled down on desperation by adding to that original mess longer-term loans and particularly by moving toward leases and calling them the new auto sales. As recently as 2010 fewer than one in ten auto loans exceeded a six-year term. Now, that is the average loan length.
It’s dumbfounding to me that people are stupid enough to site auto sales as evidence of a healthy economy when they are built on such precarious terms and are mostly not even true sales. Just as in housing, we have switched from being a nation of auto owners to auto renters. As with housing, I expect a collapse of auto sales because it is built on a rickety foundation, but it will be trailing trend because it depends on a weakening of the consumer base as the economy slides back into recession. However, it will increase the speed and depth of the economic collapse as it joins the forces of the fall.
Auto sales may not join the parade of panic until late in the year or 2017; but expect automakers within a year of so to end up right back where they were during the worst of the Great Recession … with less hope of a bailout. Oh, my goodness, the sheer stupidity!
But enough of the cheery news. December sales fell to their lowest in six months, and December is supposed to be a really hot month when dealers close out all their inventory. Sales missed expectations by the most since November … of 2008! And while the year as a whole was up (as measured by counting bits of baloney strung on an abacus), the last half of the year fell more than any year since November … of 2008! Does anyone remember 2008 when automakers went bankrupt-or-bailout? They’re betraying the bailouts we gave them by setting up disaster all over again.
Sales right now are particularly declining in China where the ratio of inventory to demand hasn’t been higher since the Great Recession. Sales might have hit a top since total car debt in the US right now is 30% higher than it was at its last peak right before … 2008! It has risen from about 600 billion dollars in outstanding debt to over a trillion dollars. Does that really leave any headroom for market expansion? Are you seeing a pattern here?
All of this debt pressing down, even if it doesn’t go into default, certainly reduces our capability to do other things. It’s quite a load to carry.
These are the events you cannot see coming, unlike the trends above that anyone can see if they take off their rose-colored glasses and look reality straight in its glowing red eyes. So, I’m not saying any of these will happen; whereas, I am saying all of the above are as close to certain as you can ever find in a world filled with chance.
Cyber attacks on the energy grid or on corporations like the one brought against Sony last year or into government computers could happen on a game-changing scale. One such attack on an energy grid just happened in Ukraine over the holidays where a virus was deployed to disconnect substations, causing a blackout; but it was minor. It’s only importance is in showing that the vulnerability is real.
Sandworm, the organization believed to be responsible, is targeting NATO, U.S. academic institutions, and government organizations in Ukraine, Poland and Western Europe. John Hultquist, head of iSIGHT Partner’s, the cyberespionage firm that discovered the virus, said,
It’s always been the scenario we’ve been worried about for years because it has ramifications across broad sectors…. Operators who have previously targeted American and European sensitive systems look to have actually carried out a successful attack that turned the lights out. (The Washington Post)
Of course, he has a service to sell, and fear of cyber attacks is a good marketing strategy for cyber espionage companies. On a positive note, Ukraine’s power grid rebounded in less than a day.
What about internal terrorism as a black swan event? Millions of immigrants are flooding across borders from nations that are steeped in war, and they are being accepted as fast as they choose to come. How is it even remotely possible to screen out terrorists when you don’t have a government you can work with that knows anything about these people? Just recently people with terrorist connections were caught coming across the Mexican border from Afghanistan and Pakistan. Are we foolish enough to believe we actually catch all of them or that terrorists are too stupid to exploit this path of easy entry?
Social unrest is becoming rampant. It’s not politically correct to even question that some of these nice people might be hell-bent on destroying Western civilization. That’s xenophobic. But let’s look at Germany. They have taken in over a million immigrants from Syria in less than one year. The culture clash is growing rapidly. Citizens have been raped by a few bad people that entered. I know that most of the people are not bad, but when the conveyor is running at full speed, it’s hard to pick off the bad apples. Is it worth risking another few skyscraper collapses in order to help the refugees?
The social unrest in Europe is becoming substantial enough to cause government turnovers as minority parties rise in power by tapping into the anger that Merkel and the other majority leaders are causing with their immigration policy. It is too much immigration, too fast to allow for realistic and peaceful integration. You simply cannot force people of differing cultures together that quickly without stirring a lot of anger.
Social anger is stirring in the US, too. We see it in Trump’s hugely successful anti-establishment campaign, which taps into growing resentment over immigration and resentment against Wall Street and crony politics; but we also see it in the way cities in various parts of the nation increasingly riot over racial issues. Civility is down, rioting is up … as is political tolerance toward anarchy. Cities appear afraid to clamp down on looting and rioting, lest they appear less tolerant of expression than is liberally acceptable or lest the police appear to be too violent in arresting anarchists, who won’t go down without a fight.
Then there is another form of social unrest. What about a return of the Grexit. For those old enough to remember Snagglepuss the Cat, will it be “Grexit, stage left, politically even?” I still think a breakout of rage is on the near horizon. Between all the social issues from mass-immigration being forced on the citizenry of Europe and all the economic hardship of austerity forced on Greeks by their creditors, I’m thinking peasant revolts and storming of the castles may be seen in Europe in 2016.
Social unrest adds greatly to a nation’s security costs when economic structures collapse. This non-productive expense becomes an accelerant to the flames of global economic collapse. One other reason I use the word “epocalypse” is that it carries connotations of anarchy often associated with “apocalypse.” Poverty fires anarchy up because people do not care that their actions are self-destructive toward the economy when they don’t feel they have a share in the economy’s benefits anyway. The attitude becomes “The economy doesn’t care about me; I don’t care about it. It exists solely to serve the rich. I’m clearly not a part of it; so economic damage be damned.”
With remarkable accuracy, George Friedman has forecasted coming trends in global politics and culture. Flashpoints is an engrossing analysis of modern-day Europe, its remarkable past, and the simmering fault lines that have awakened and will be pivotal in the near future.
US debt problems
A longer-term question, which may not come to fully bear this year, so is not one of my 2016 economic predictions, is how long can the US refinance its debt? Reductions in oil use and the plunge in oil prices mean fewer petrol dollars are necessary, so fewer US bonds and other treasuries might be purchased in other countries as a way of converting currencies to dollars and holding the dollars.
On top of that, China and Russia have teamed toward turning the yuan into a global currency as part of plan to intentionally move away from buying US dollar-denominated bonds. Russia’s has just made it illegal for former Soviet partners to trade in oil using US dollars. They must trade in rubles, instead. Neither Russia nor China wish to support US hegemony in world politics, so they have strong political reasons to damage the US economically by reducing demand for US treasuries, making it more expensive for the US to finance its debt.
This is, I’m sure, partly why China has also moved toward developing its internal consumer market, rather than focusing on exports. That will make it less dependent on exports to the US. Of course, it only makes good sense for them to make that kind of shift anyway.
With the Federal Reserve now raising interest rates, the interest on US debt could also go up. I say, could because one mitigating factor for the US is that it is, as I’ve said in the past, the best looking horse at the glue factory; so money streaming out of all the nations of the earth could pour into US bonds. Likewise with money fleeing the US stock market. That caveat is the only reason I’m not sure what will happen this year in terms of the US being able to refinance its debt; but longer term, this is a towering problem that will have a serious day of reckoning. And it could be the biggest black swan of all for 2016.
The United States’ government is running annually on deficits that are measured in parts of a trillion!
Fundamental flaws in the foundation
While all of these severe forces will batter the global economy — US economy now fully included — they are not the reason the US economy now enters the Epocalypse. They are the overwhelming trends pressuring the global economy and the US economy, but there are fundamental economic fault lines throughout the US economy that I am banking on as the basis for my predictions.
The stock markets of the entire world have positioned themselves for years now on the premise that central banks could prevail in getting us out of the Great Recession by printing copious amounts of money and piling debt on debt. I am certain beyond the slightest doubt — and have been since the very beginning of the Great Recession — that you cannot bail yourself out of a debt-caused recession by quadrupling down on debt! It’s insane. Nor can you repair bubbles by inflating them into balloons!
Since the beginning of the Federal fantasy, I’ve said that the only thing we have done is push the debt further forward until it will become an immovable mountain of debt. We have taken deflated assets and re-inflated them to levels where only ludicrous terms of credit can finance them.
My running analogy has been that of snowplows, pushing the snow straight ahead, instead of angling their blades to shove it off the side of the road. The general slowing of the entire global economy that you see right now is the sound of all the snowplows grinding to a stop as the mountain of snow finally becomes too big to push.
We have built all of our markets on debt because that is how central banks created money. Stocks, bonds, houses, automobiles, etc. are all really mountains of debt, not stored assets. And I believe this is the year the grand scheme comes down (though it may take longer than a year to fully unfold, given the sheer scale of the collapse).
Creating greater debt to solve something we knew was a debt problem in 2008 has been the wrong solution from the beginning. I’ve said all along that it would go forward for quite a long time because you can do a lot of partying when you are not paying for it; and governments have a lot of capacity. That’s why, over all the years of writing this blog, I have not predicted such a big collapse as being imminent (already happening, in fact, but unseen by most) as I am now. It is now the immovable mountain, built up so high above us, that it is going to avalanche down on us.
So, it is not just that the free money has been invested in stocks and bonds, but that the entire market is positioned on top of a delusion. Once the delusion of recovery begins to break up, the market has enormous repositioning to do in order to line itself up with reality. Now that we are leaving Wonderland where bad news is just bad news, the cracks in the bad structure will show up quickly.
Banks have continued to be freewheeling throughout this so-called recovery, playing the same games that created the Great Recession. Both the government and the Fed wanted to keep the old dinosaur economy alive because neither has the creativity to envision another way to grow an economy. The Federal Reserve is based on economic expansion through debt because its method of creating new money is through banks issuing loans that give out money that didn’t exist before the loan was made. Both the government and the Federal reserve believe expanding the money supply is what we need to do to goose the economy.
Currently banks appear to be backed with stronger reserves than they had before the Great Recession, so investors, the media, the public in general and the government and Fed all believe they are in stronger shape. BUT, as stocks crash and bonds go bust, those reserves will evaporate.
What do you get when well meaning people with a Titanic degree of certitude apply small-scale logic to inappropriately large scale planning? “Hormegeddon.” Financial disaster cannot be stopped by the people who planned it in the first place.
What will be the recovery plan?
The full degree to which the Epocalypse develops will depend on how soon and how strongly the government and the Fed intervene now that things are beginning to fall.
Bear in mind, though, that few economists or stock analysts are predicting a recession in 2016. Therefore, there is a very good chance of having one. Why, after all, would you listen to the people who predicted a rising market in 2007? (I’m sure glad I took my own advice back then.) By the same token, the Fed gives all appearances of believing in its recovery, so it will be slow to intervene. Congress clearly can’t work together long enough to come up with a solution and also believes in the Fed’s recovery. The Obama Administration will just look to the same experts it turned to who came out of the Bush Administration.
How much of the full depth of this collapse you see will depends on how soon intervention happens and what the intervention is; but my snapshot of government’s ability to see what is coming, its creativity and its ability to work together indicates that response will come too slow and too late. They certainly will respond before things get as bad as I’m saying they will if they fall to their full potential, but will they respond before the momentum is more than they can arrest?
Most of all, I don’t believe they will do any of the right things to arrest the fall. The lack even a hint toward ideas that follow any different course does not give much hope that government or central banks, when they propose a solution, will propose a good one. My prediction is that all of this leads to the presentation of a global solution for a global problem. What stop-gaps governments will take as they try to develop a global solution, I don’t know.
The economic expansion is in its seventh year, and that is about as long as they usually run. If anyone wants to believe this one can endure longer, they can go right ahead. I’m more than glad to let them make the big, easy money that they think is out there. I’ve already taken shelter because I don’t want to try to squeeze outside the door alongside the rushing masses. As a result, I sleep easy. My money isn’t making any money, but I sleep easy.
Read earlier articles about the building Epocalypse here.
Learn how to invest in rare gold and silver coins as a longterm way to protect your assets: