A Pessimist's Guide to 2016

no problemo.
but you did ask.

 

@The Falcon. I agree in entirety.

 

From what I understand, shale oil is relatively cheap to ramp up and down, in comparison to conventional oil & has. If the oil price increases, marginal shale producers in the US and Canada will turn the production back on, thus increasing supply. Can't see the oil price going up to $100 per barrel in the next few years.

 

Oh God no...KSA, much of rest of OPEC and Russia can pump out oil far far far cheaper than US shale and yikes Canada is even more expensive up against the wall. The US shale drillers were supported by a mountain of debt. After the bankrupticies of 2015 and 2016 who is going to continue to lend to US shale drillers. Yes there will be some but nothing like before.

 

Oil climbing to $100 is terrible unless you have a leveraged position in Santos.

America needs inflation to inflate away its debt, which it is failing to manufacture sufficient amount of.

US rate cycle will be interesting. At 100 bps more I'm not sure it can afford to pay its bonds.

Trump becoming president is good for people who are protectionists, racists and war mongering. If he gets in the people will have spoken.

 

It might happen easily. In winter 2009 oil price was around 40 a barrel and in 2 years time - spring 2011 was near a 100 again. It happened once, it can happen again.

 

There's a pessimistic interview with Michael Burry in the New Yorker magazine. He thinks that another financial crisis is coming largely because low interest rates have mispriced risk.

 

I'm glad someone finally spelled that out

 

More pessimism for the habitual doom and gloomers.

Noah Smith, writing for Bloomberg, says we should be scared of China's debt, not it's stockmarket crash. His basic thesis is that the economy has been driven by borrowing, and if this unwinds then it'll hurt a lot more than by shares tanking.

There's been a suspicion that a some of the wealth of China's ultra-rich classes is down to misappropriating the financial stimulus that their economy has been running on, so a debt crisis could be very painful for them, and, by extension, those overseas selling luxury goods.

 

IMHO the unwinding has already started since their stock market crashed last year. Investors had crowded from a deflating property bubble to a stock bubble. Much like what happened in Japan in the early 90s.

The crash in commodity prices of which China was the main driver these past decade is pretty evident of just how much demand from China has tapered off.

China's Top Steel Province Will Cut Output in 2016, Xinhua Says

not looking good for iron ore and coal prices.

 

The Telegraph reckons UK house prices will crash.

Their argument is that we've seen commodities collapse in value, shares are the next wave, and then it'll be property's turn as assets are generally less liquid.

 

General sentiment in media doesn't look great. So that has an impact regardless

 

Another entry into Graeme's Bumper Thread of Bear Porn.

Lindsay David argues that Australia bet on China's never-ending growth, and now that's not looking like it'll end well. Or, as he put it:

Australia’s long-term bet on China was and still is conceptually simple – an incredibly flawed assumption that the country would never cease to consume increasingly more iron ore.

My views on the long-term sustainability of exponential growth are well documented. It does strike me as a naive view for the government to have taken, but that's easy to say in hindsight.

Greg Jericho has written a similar opinion piece for The Guardian. He's saying that the Chinese economy is suffering, and that might cause a downturn here in Australia. It contains a reference to an interview with Soros from last week in which he thinks the conditions are similar to those in 2008.

 

George Soros is predicting a crisis: here's 3 things you need to do to prepare now

 

The Royal Bank of Scotland says sell everything! And the reaction from economists polled by the Guardian.

With all this pessimism, my contrarian nature is feeling the urge to stop being a Doom and Gloomer.

 

You need to wait for the mainstream to get on board and not just economists before it's time to flip wagons

 

@wogitalia I'll keep that in mind. The stock markets are looking increasingly attractive to buy into. If I had a pile of cash sitting around I'd be tempted to drip feed it into the FTSE.

However, Albert Edwards is as bearish as ever.

There's a saying that when the last bear turns bullish you know it's time to run. Therefore Mr Edwards should be observed closely in case he changes his mind.

 

no need to drip feed, stock market moves much quicker than property, if previous crashes are any indication, it will only take a couple of months to get to the bottom.

 

The trouble is that you can't pick the bottom until after the fact. I like the idea of making investment decisions that are automatic rather than emotional.

So if I had $100K to invest, I might split it up into $10K or $20K tranches, and put it into an index tracker every few weeks. If the market plummets then I'd get in when it's cheap, and if it rises then I'd have caught it before it turned.

That said, Albert Edwards (mentioned above) has gone full bear. (Free FT registration required.)

Where will this all end? I believe the Fed and its promiscuous fraternity of central banks have created the conditions for another debacle every bit as large as the 2008 Global Financial Crisis. I believe the events we now see unfolding will drive us back into global recession. I have long believed that 30y US bond yields would converge with Japan, just as Germany has now done. But a key part of my Ice Age thesis is that the US equity market remains in a valuation bear market that did not fully play itself out in March 2009, when the S&P touched the 666 level, and we will see new lows…

If I am right and we have just seen a cyclical bull market within a secular bear market, then the next recession will spell real trouble for investors ill-prepared for equity valuations to fall to new lows. To bottom on a Shiller PE of 7x would see the S&P falling to around 550. I will repeat that: If I am right, the S&P would fall to 550, a 75% decline from the recent 2100 peak…

Can things get even worse? Yes! We will probably see a trade war not unlike that in the 1930’s.

 

I would liken the current situation similar to almost 20 decades ago with the Asian financial crisis where economies and currencies of many asian countries practically just crashed. China is also in a similar position as Japan 20+ years back with high debt load and overpriced stocks and property + aging population.

It is hard to wait for a crash and time the bottom. But usually it easy to tell for stocks when the market gets quiet (low daily volume) and stocks are at their lows. As the carry trade into australia unwinds there will be high volume as capital flows out, once this abates you can start buying into the market.

It is very possible once the selling gains enough momentum, we might be back to 2008 stock market levels. The ASX200 is not even back to 2011 lows yet