2016/01/04 Commentary: Special Alert (early)
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COMMENTARY (Non-Video): Monday, January 4, 2016
Special Alert
First of all, welcome back from the holiday weekend and Happy New Year. Or possibly not so happy new year for the equities. However, the immediate exacerbation of what was likely to be a negative start to 2016 would seem to be driven by geopolitical events. As such, even the equities weakness which might have been the case this morning on the back of weaker than expected economic data is that much greater due to the disarray in the Middle East.
Without being too political about it, this is the extension of the Obama administration’s very weak US foreign policy stance. It has been clear for a while the more aggressive players on the world stage did not agree to Mr. Obama’s “Kumbaya Moment” group hug. In fact, all of them have taken extensive advantage of US weakness. That is now evolving into a new, more pernicious phase. Lack of respect from friends and no fear of reprisals by America’s enemies is part of what is driving the current Saudi-Iranian imbroglio.
Each is now acting like the US doesn’t matter. And it is not just for now that this is an issue. Regardless of how tediously long the prematurely started US election campaign has already run, the world can look forward to another year of Mr. Obama and his minions before anything changes. And that is just the political dimension of the politico-economic weakness affecting the global equities.
On the economic front we were very clear through all of last year that major headwinds were brewing for the global economy and equities (along with those being reasons to still see resilient primary bond markets.) We will touch on the key aspects again below.
[NOTE: We are providing this brief Special Alert in lieu of a full TrendView Global View video analysis this morning in order to provide more accessible analysis in the context of the major equities market weakness. We will be developing a full Global View video analysis once the dust has settled after today’s US Close.]
Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options and join us. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the extended trend assessment as well.
NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of this year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out last month that in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? (even though the actual crash was deferred into 2008.)
▪ The underlying weakness brewing throughout last year in the wake of the lack of any meaningful structural reforms since the 2008-2009 Crisis is not surprising. As we noted since last January’s It’s Lack of Reform, Stupid (Part 1 & 2 on the 19th and the 24th), the political class has taken all of the extended QE as a giant gift allowing it to avoid any of the tough choices necessary to support the extended global recovery. We highlighted the looming negatives for the global economies and equities in our May 2nd Extended Perspective: Tail Risk is Back!, and accentuated that after the August 19th release of the previous meeting’s FOMC minutes in Commentary: Tail Risk Now Mainstream? (obviously a rhetorical question.)
▪ And since the ensuing mid-late August meltdown we remained bearish on the global economic outlook and equities. In that Will 2016 be 2007 Redux? post on December 8th we refer to a key global economic indication as the “OECD Trade Fade”. After the strong early November US Employment report it was a fairly striking to see the OECD (Organization for Economic Cooperation and Development) Semiannual Economic Outlook the following Monday morning (November 9th.) It was quite downbeat, mirroring the slippage into atypical negative outlooks in all of its recent monthly CLI.
And two areas which seem most crucial to the anticipation out of 2015 into at least the early part of 2016 are economic weaknesses we have noted previous. The first is the telling sharp contraction in international trade. The second is the political class’ lack of desire or ability (take your pick) to provide the structural reforms necessary to complement the previous and ongoing massive Quantitative Easing programs of so many central banks.
Especially of note is the slideshow (enlarge to full screen) and the video of the Outlook presentation. Of particular interest in the press conference video discussion by Secretary General Angel Gurria and others is the focus from approximately 03:00 on the extreme weakness of global trade (we have noted previous), and (from 05:15) the fact that structural reform we have been so focused on all year is the only policy lever left after monetary and fiscal tools have been mostly exhausted.
That is increasingly important in the context of the significantly diminished global trading volumes. Global trade that had been growing slowly over the past few years now it seems to have gone completely stagnant, growing only 2.00% in 2015. The rule of thumb is that trade grows at double the rate of global economic growth. And here’s the rub:
Over the past 50 years there were only five years where trade growth was 2.00% or less. Each of those coincided with a marked downturn in global growth. 2016 may turn out to be the exception, but the historic context is not propitious, especially as future growth is expected to be subdued. Even the extended outlook into 2017 and 2018 is not very strong. And that is the sort of thing on which businesses base investment and hiring decisions. There is also little chance that the political class in the US will engage in any constructive compromise on badly needed structural reforms into an election year.
▪ So all of the reasons we have for being negative toward the global economy and equities are already out there in the anticipatory analyses at many junctures last year. That was all also exacerbated by what we see from the US central bank as the Fed’s ‘Normalcy Bias’ Continues (posted after the December 16th FOMC announcements and press conference.) Needless to say, the equities did not like that either. Note the reaction from that Thursday morning into the end of the week’s previous test of the 1,990 area.
And what else have we heard since that time? Repeated indications from the Fed’s minions on their determination to put through an additional four 25 basis point rate hikes this year. While they will claim they are data dependent meeting to meeting, the strong indication they are very much inclined to see things as ‘normal’ once again in the face of obvious indications things are not so normal is disconcerting.
Cleveland Fed head Loretta Mester even went so far as to say that there is no need to see further signs of inflation to feel comfortable hiking rates. This seems as out of touch in the current context as Ben Bernanke’s lack of desire to raise rates when the DJIA exceeded the 11,750 Dot.Com Bubble all-time high back in October 2006. You can review much more on this in the December 16th Fed’s ‘Normalcy Bias’ Continues post.
Market Response
On current form the March S&P 500 future stalling again into 2,075-80 resistance as recently as last week Tuesday was a negative sign. Slipping back below 2,062-58 left it back into 2,040-35 at the end of last week/year.
The COMMENTARY Extended Trend Assessment is accessible below.
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