It is now highly likely that the fed will raise rates 25 basis points in December, if for no other reason than to stop the speculation and criticism. It is as much political as driven by data. The unemployment rate is the excuse not the cause. Clearly inflation is not near reaching the 2% trigger, and it is not likely to get there anytime soon given that much of the world's primary economies are either already in recession, or in a slowdown. China is slowing faster than expected and is likely to continue to slow further now. Xi has decided to push his political agenda to enhance the party control of the state and the economy, and that has led to a renewed push to have state run companies in the forefront. Those companies are short of cash flow due to the economic slowdown, so they are slow to pay their payables to the small companies that supply them. These small companies have relied on the shadow banking system of finance companies to fund their operations. This is high cost financing and so if the big state operated companies are slow to pay these smaller ones, then the small ones end up defaulting on their loans, which has happened. They struggle to even pay interest right now so the finance companies are deemed by regulators to have non performing loans and so are pressured by the regulators. We all know this kind of cycle does not end well. The slowdown in China is now getting more concerning and may become worse as this plays out. The result is the Chinese demand for imports from Europe and from resource and oil producing countries is slowing, and so the world economy thus slows further. Combine that with the oil decline and we have Canada, Australia, Japan, Norway and the entire southeast Asia in recession. The IMF has lowered projections for 2016. The ECB has lowered projections for 2016. And all of these projections are likely still optimistic. QE will be renewed in Europe, but it is likely asset prices may not rise much or not at all as the European economy skirts renewed recession.
While the jobs report for October was good, the participation rate did not really improve and U6 is still at 9.8%, very high. We still have too few workers supporting too many entitlement receivers. Now Obama and the Democrats want to do what they always want, higher taxes on those of us who actually work and produce and who create jobs, so they can give more to those who do not work or produce jobs. A sure way to slow the economy further. Once the Fed raises, the dollar rises, which it already did this week, and that slows exports and tourism. Not good for factories and hotels. In a very candid off the record moment with a friend of mine, he admitted that the political pressures of the job of Fed president or unrelenting, and terrible. The Fed lives in fear that one day the right wing crazies and Elizabeth Warren and her extreme left wing acolytes in Congress, will actually be able to shut down the Fed or so restrict it, that monetary policy is unworkable. It is therefore highly unlikely that there will any more rate increases until 2017. We are in for ultra low rates for at least another 12-18 months and maybe much longer as the world economy remains mired and election politics remains in the way.
The Chinese are moving money out as fast as they can but the government is cracking down harder on corruption, not only because it needs to end the era of corruption, but it is being used as a political weapon to arrest those who may represent any resistance to the regime. Colleagues f mine operating in the Chinese financial sphere are growing reluctant to get involved in capital transactions with Chinese they are not sure they know well, as it is not clear who might get caught up in the crackdown, and the potential to be accused of wrong doing if you are associated with someone the regime is going after. Just a word of caution if you are dealing in China financial markets. Know who you are doing business with.
It is hard to see how the US economy can grow much in 2016, given the rest of the world is in trouble, European banks are in massive restructuring mode and layoffs, and demand for all types of goods is slowing. It is hard to see how oil prices rise under these conditions and with the Obama entitlement to Iran with his nuke deal which will dump over 2 million more barrels a day on an already slow market. As a result, it is unlikely that energy dependent locations or production companies will see any real recovery in 2016.
On top of all of this is the rapidly deteriorating geopolitical mess and Obama in the White house another full year of weakness and terrible policies. Putin has to respond with a major attack in Syria on ISIS once the bomb is proven and acknowledged. He cannot allow them to go unpunished in a devastating way. If he did he would lose all credibility at home and internationally. In some ways that is good for us, but the war will ramp up now, the chaos and international terror incidents likely will increase, and air travel could potentially become more challenged. If that happens tourism gets affected.
All in all, 2016 is shaping up to be a rough year in the world, and the world economy is not likely to grow much if at all. That means the US will also not grow much, rates will remain low and inflation will remain low. It increases the likelihood of a Republican win. It is the economy stupid, as Carville said.
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