2016 Is Not GoingTo Be Good

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.