I just thought I'd post a few things I have been contemplating about the current year:
1. I truly think that China's problems will become the world's problems. The world has been increasingly reliant on Chinese growth over the last 25 years, but debt has grown exponentially in China, and China is now drawing on currency reserves to prop up its economy, stock market and growth rates. It will be harder to profit from this thesis, as increasingly this thesis is becoming consensus in the marketplace.
2. I believe that the Federal Reserve will reverse course on interest rates later this year, and this eventually (but likely not this year) will result in negative federal funds rate. I simply don't believe that the U.S. can increase rates and experience a stronger currency, and still expect to experience any form of inflation. Currently, by raising rates, I feel the Federal Reserve has created an environment of exporting inflation to economies with weakening currencies, while deflating commodities, imports and prices of consumer goods in US dollar terms. I don't feel this process ends quickly, and the ECB's current calls for further quantitative easing in the Euro region will only exasperate the situation.
3. I feel that the U.S. may experience its first brokered convention in many decades, and, should Bloomberg attempt a presidential run, they may even see a situation where Congress and the Senate determine the next president and vice president of the United States (12th Amendment). This could be a black swan event, and I'm unsure what impact this has on the markets, or world order for that matter. This is simply something I am contemplating (thanks to cherzeca CoBF for bringing the potential general election issue to my attention).
4. I have believed that deflation will become a global phenomenon, and I still see no reason to back away from that thesis.
There are hundreds of thousands of other risks that could arise, but I can only prepare my portfolio to handle such issues, rather than attempt to directly profit from those risks.
Sunday, January 17, 2016
Currently, the market participants are embroiled in discussions about whether the market is simply undergoing a simple but violent correction, or if something more sinister is in the cards. To me, it appears to be a little bit of both. While the U.S. appears to be seeing improved economic metrics, much of the rest of the world is not. Europe, China, South America and much of the rest of the advanced economies of the world are experiencing slowing growth or outright recessionary pressures. China is sporting a 282% overall debtload to GDP, and is desperately trying to prop up its market via the currency market. Europe continues in the doldrums they have been stuck in over the last 7-8 years, and their demographics continue to work against them. Finally, South America, Canada, Australia and the like are all experiencing deep and painful declines in much of their economies, due to the dramatic declines in commodities and the strengthening US dollar. The issues in China appear to be problematic, similar in nature to what occurred in Japan in the 1980's and Southeast Asia in the 1990's. The economy reached an inflection point in 2008, when it appears much of the demand-driven growth slowed. Since then, Chinese consumers, corporations and governments appear to have fueled further growth using debt and building inventories. The debt load to GDP appears to be very high, but, as has occurred in numerous occasions in the past, and it likely could grow further now, unless the market reaction confirms debt deflation is in the cards. European trade appears to have ground to a halt, although the lifting of Iran sanctions will help Airbus immensely. Nothing really has been resolved to repair the treasury/fiscal issues that a complex arrangement as the Euro economies present (multiple budgets and economies versus one currency). Deflation could very well be imported from China and the US over time as currencies continue to be manipulated via quantitative easing and interest rate policies. In the next few months, I will be watching for WTI/Brent oil to fall to the low $20's per barrel, gold to rise to $1,200/oz, the S&P 500 to fall to 1,700 or slightly below, and the CAD/USD to fall to the $0.67 mark. I feel that oil will bottom when the market has a washout fall, while the oil futures do not fall in sympathy (building a more thorough contango). In the meantime, I had established a short position in the S&P 500 ETF (SPY) to hedge my long positions in equities. My major positions are in tobacco, consumer packaging (CCL Industries) and Novo Nordisk, a diabetes drug company. I also hold a fairly large position in Fairfax Financial, a Canadian based, global insurance company that is fully hedged against the market, and is holding deflation hedges (CPI puts) against major global economies.