Ringing in a New Year

We have now turned the corner from 2015 into 2016.  Anytime we enter into another year, it is time that economists study tea leaves, the position of the planets with the stars, or the spreads on the playoff football games in hopes of gathering useful data to forecast what lies ahead for business and the markets.  These forecasts vary greatly and often one individual will come up with multiple forecasts that often contradict each other. 

Such is the field of economics, where people can espouse multiple opinions and can make a pretty good living by being right only a fraction of the time.  Compare this to lending, where one needs to be right 99% of the time or credit losses will greatly exceed earnings.  The forecasts often do not lead to anything concrete.  The old story goes that you can line up all the economists in the world and never reach a conclusion!  The wiser economists tend to reveal what factors are happening today and allow the reader to come to their own conclusions for the future.  It is with this spirit, that I point out a few factors as we enter the year.

First, I must congratulate those few students we had the privilege of spending time with this fall, for their accurate prediction of a Federal Reserve rate increase in December.  Overall, less than 10% of our classes thought that economic forces indicate that now is the time for the Fed to begin to cool down the economy.  When one looks at some factors like deflationary pressures and falling labor force participation rates, the tailwinds propelling the economy appear as strong as a slight breeze.  But if one figures that the Fed has to put itself in a position where they can use fiscal policy to lower rates when the next economic crisis hits, then they have to begin to increase the rates.  If this is the mindset of the Fed, I would look for more rate increases this year, barring some disaster.

The next factor that increasing rates will impact is the strength of the US dollar.  For the past several years, we have been in a round of currency wars, where other countries have worked to weaken their home currency in an effort to make their exports attractive to the world market, thus stimulating economic growth at home.  Every time the Fed raises rates, this strengths the dollar.  If the dollar is strong, it will buy more goods and services.  Look for this spiral of the currency wars and the Fed increases to depress prices further and hold inflation in check.  This will be good news for consumers but anyone who produces commodities may see a challenge again this year.

Turmoil in the Middle East and a division in OPEC will play a greater role in the world oil markets this year than it did in the last.  The Saudi plan to break the back of the US fracking industry will take a back seat to their seeking to reduce their sky high budget deficit and preserve their home economy.  We enter this year with gasoline prices doubling inside Saudi Arabia as internal subsidies have been cut.  Also a 1400 year old rift in Islam has raised its head as Saudi Arabia and Iran begin to break off diplomatic ties.  When you throw in ISIS, Syria, Russia’s involvement, and an absence of any solid US foreign policy in the region, all this points toward a potentially volatile year in the oil market. 

Look for slowing economic growth around the world.   Brazil is forecast to have its worst economy in a century.  China has seen its purchasing manager index fall into a recession zone and also had a selloff in its stock market that was so great the exchange was closed, all within the first 4 days of the year.  None of the other economies around the world really stand out as a good possibility for on-fire growth.  Look for governments to engage in more stimulus measures as they try to push against the gravitational forces of a falling economy.

As this is an election year, expect for advertising to receive a shot in the arm with the billions that will be poured in from all the various campaigns.  This is something we all cringe at but has become a part of our American landscape.  Many wish for a change in our system.  Some prefer the intellectual stimulation of the Lincoln-Douglass debates while others may wish a return to colonial days when candidates spent their advertising money on beer and whiskey for the voters.  But we have developed a citizenry with the thought depth of a puddle and the attention of a gnat. 

All these factors and more will prove for an interesting year.  While we all may be tempted to run for the hills and hide out until the year is over, we will see a lot of good buying opportunities in the market.  Baron Rothschild said that “the best time to buy is when blood is running in the streets.”  This year may prove to be one of those opportunities.