Volatility Is Here to Stay
Yes 2016 started with a bang and yes that volatility is here to stay and will keep increasing especially into 2017 and beyond. Liquidity, and I’m not referring to liquidity on bank’s balance sheets, but the liquidity in markets, meaning the ability to enter/exit trades – has collapsed. The global economy topped last summer and is deteriorating rapidly. The US is also now in a recession. So we are now in the situation that I’ve warned about. That is, short term interest rates are now in a massive uptrend, based on something that we haven’t seen since the 1930’s – CREDIT QUALITY concerns. The US mostly escaped those concerns back then, but not this time. The decades old safe haven status of US Treasury Securities is ending. And as I explained in my last few updates, the bond market will force the Fed to raise rates. The Fed is NOT raising rates because of a strengthening economy. So the increasing rates with a slowing economy will result in a negative feedback loop together, as global government deficits explode higher. Also, expect the yield curve to continue flattening as the rise in long term rates lags the rise on the short end.
The two main pillars of strength in our country’s otherwise feeble economy since the 2009 bottom have been shale drilling and the US automobile market, both thanks to zero interest rates/leverage. Both of those industries are in huge trouble, because of all of the leverage involved. I’m extremely bearish on GM. I expect to see them enter bankruptcy once again, along with most small shale drillers, and also Fannie Mae and Freddy Mac. So where do we go from here in the markets.
As I explained in my last 2 outlooks and as we were still right at record highs, I have become bearish on stocks and selling short into rallies. For perspective, I became bearish on stocks in July of 2007. The high for the Dow was 14,200 in Oct. 2007, after which it dropped over 50% into the major bottom in March 2009. Currently, I am not as bearish as I was 8 years ago, but that could change. I came on this show for the last 7 years and stated that there was a zero % chance of a stock market crash. However, that is not as true, especially if stocks manage to eek out one more record high. So down to 12,000 – 14,000 on the Dow is a possibility, but the big support is first at the August 2014 lows. Foreign stock markets are even more dangerous.
Regarding oil, when everyone was bullish with $100/barrel, I told the listeners that oil would likely fall below $35 before a major low began forming. And amazingly enough, that’s what has happened – with oil hitting $34.50, accompanied by a bullish technical situation. At the same time, the analysts who were bullish at $100 are now looking for $20 or even $5 per barrel. So oil is beginning a bottoming process. Also, to disagree with the consensus out there regarding deflation. I have been waiting patiently to go against the consensus about deflation and that time is almost here. Five years ago, almost no one saw the deflationary wave about to hit, now almost everyone sees no end to the deflation. 2016 is the year for the bottom in both inflation and commodities, likely by March, especially agriculture. Inflation will bottom, as velocity begins rising courtesy of the concerns about the credit quality of the 100’s of trillions of debt and leverage in the world.
Gold – in the update in December, I said that it’s now time to begin accumulating gold as an investment, and not just for a trade That is the first time that I’ve said that since 2008. Of course, you should always buy on price weakness to minimize risk. There was an opportunity to do just that after the December update and there will be more opportunities as we go thru 2016. There’s still a decent probability of sub $1000 gold, but the future for both gold and silver is beginning to brighten.
Finally, the economic situation and the consistency of the volatility in markets will be something that none of us have ever seen. Andrew is doing a wonderful job, and I hope that I can do my small part to help. If anyone has questions, let me know. [email protected]