I was at a meeting last night where a very smart man talked about what he had predicted for last year (I was at that one also) and he was correct. His predictions for 2016 were interesting.
What was particularly interesting is that the numbers we get from the government – about almost everything – are just wrong. One example is the job gains numbers. They reported something like 130k new jobs in January, seasonally adjusted. What they don’t say is that the seasonal adjustment was 1.3 MILLION or something like that. Because they expect all the part time holiday jobs to drop off, they don’t want to count these, so they add them into the number. I don’t know about you, but when the adjustment is 10x bigger than the actual signal, there is a problem.
Another one is how the government measures GDP. It is just silly. Suppose you have a house, and you borrow 100k against it. Now you have 100k, right? That’s growth, right? Um, no, because you have to pay it back and more; but the government counts that as growth. So rather than GDP, look at GDP MINUS borrowing and a more real picture of the economy emerges. This number tracks with national power consumption (electricity). In economies that report real numbers, electricity usage tracks GDP.
Another measure of GDP is watching Caterpillar. This is more of a global measure, because CAT sends heavy equipment all over the world to build stuff. When CAT is suffering, the world economy is slow.
Lots of economists say that low oil prices are a good thing. First, the lost jobs from it are very high paying – 100k-200k type jobs. These are gone at current oil prices. And the shale producers took on lots of debt to make their companies work. And so now they are pumping oil at a loss because they have to make their loan payments, trying to stretch the cycle until prices come back.
What about the average consumer? If you make 50k and 4k of it was fuel, and now 2k of it is fuel due to lower gas prices, that’s 2k that goes back into the economy, right? No, because mostly people are using that money to pay off debt.
What about the stock market? Government meddling has caused a dangerous and artificial bubble there, too: There is a law about CEO compensation. But this compensation does not include stock holdings, grants, and options. So if 2/3 of a CEO’s pay is in stock, then they are strongly motivated to keep prices high. How do they do this? (IBM is a prime offender) They borrow money to buy back the stock. When there are fewer shares, earnings per share go up. Wall street tracks this as an important number. What they don’t track is debt to equity, which is going the wrong way. If you look at when these purchases occur, you would think that they happen when the stock is cheap, right? That would be the fiscally responsible time to do it. But, no, they do it when the stock is high, right before earnings are announced. Since they can’t do buybacks during earnings season, we see these stocks take a hit right after earnings because the buybacks stop.
So we are probably in for a flat to lower stock market this year, with some significant drops. Interest rates will stay low, and banks may soon offer to hold your money for a fee. And they are looking at strong incentives to get you to invest your IRA or 401K in treasuries, to make the balance sheet work. They might make it a requirement, if the market crashes, but more likely they will offer a 3-4% guaranteed return and exit tax free which would get lots of people to park their funds there.
The elephant in the room is what happens if/when the dollar loses reserve currency status. If this happens the standard of living in the USA will fall 25-50% and it will be really ugly. So they will work hard to prevent this. This is why we are such good friends with Saudi Arabia. They still price oil in dollars. If the House of Saud falls, this would likely change. The Euro is being used for trade lots lately, but it is likely that it (the Euro) will fail as a currency in the next 5 years. The EU compact makes it so people can move between nations freely. The refugee crisis is causing many EU nations to close their borders; it is another nail in the coffin of the EU. EU nations are failing under socialist policies, the national health care in some countries is now failing, many nations have a year wait to be seen if you have cancer and the people are revolting.
It will be an interesting few years. There will likely be another MASSIVE round of quantitative easing to prop things up. That and the IRA takeover should buy us another 10-15 years before the Rally Big Crash comes.
Worldwide debt is unsustainable. It isn’t just the USA, it is a worldwide problem. And at some point all the debt has to get unwound. It won’t be pretty. All the politicians just continue to kick the can down the road, keep the fantasy alive for another 4 years.
That’s a summary of the talk last night…. Sweet dreams!