Brazilian Politics, Players, Panama and Perpetual Motion

There is no simplifying Brazil’s political or economic situation. Anyone “certain” about the outcome is sure to get smacked in its crossfires sooner or later. Corruption might be bi-partisan in the United States, legalized in many cases, but in Brazil, it’s the full multi-party monty. Eduardo Cunha, the Lower House speaker gunning for President (and political rival) Dilma Rousseff’s impeachment,  has just been fingered by the Panama Papers for stashing millions in Switzerland.

He was also under Carwash corruption investigations. No one so tainted, should risk throwing stones so blithely at a sitting, elected president. Brazil’s new Attorney General, Jose Eduardo Cardozo, said as much, yesterday, on the grounds there are no legal reasons to impeach her, and that doing so would be to “rip up the constitution.”

The domestic and international implications associated with Brazil’s internal turmoil transcend the walls of the Planalto Palace in Brasilia, a planned city that belies its far less organized and cohesive government.

The majority of national and foreign press outlets have considered the impeachment of Dilma Rouseff a foregone conclusion, a question of when, not if. Last week’s defection of the PMDB party, led by wannabe President, Michel Temer, the current Vice President hand-picked by PT (Worker’s Party) leader, Dilma Rouseff was deemed another sign of her pending removal. Waiting in the wings of power, Temer had written a letter on December 7, 2015, that went viral and became the butte of many jokes in Brazil. He complained that Dilma didn't trust him enough to give him real latitude in her government. She was right. Score one for female intuition at least.

But that impeachment conclusion is based on a lattice of shaky alliances whose loyalties, like Temer’s and the party he represents that historically sides with power not policy, can not be fully trusted.  And even so, Temer isn’t on solid ground.

Individual PMDB deputies don’t have to vote with their party’s leader, in the case of impeachment proceeding, or on anything for that matter. Brazil’s major newspapers lean pro-impeachment and thus, tend to overplay that stance publicly, skewing popular opinion and downplaying the horse-trading strategies of Dilma’s supporters. Brazilian newspaper, O Estado de São Paulo (Estadão), released their own math on April 2 regarding the impeachment situation in the House of Representatives.

According to their research, which only applies to 442 out of 513 deputies, 261 deputies are pro impeachment, 117 are against it, and 44 are undecided or waiting for more party direction. Even if one takes what politicians say in secret to a right-leaning paper for granted, these figures are actually better for the government than the opposition. Moving forward on impeachment requires 342 votes - which aren’t there.  The real situation can be recapped as follows:

1) There are 261 votes pro-impeachment (the core of the right-wing opposition plus some new deputies from the PMDB and some smaller party deputies);

2) There are 117 votes against impeachment (the core of left-wing parties plus loyal PMDB and small parties deputies);

3) There are 135 votes to be disputed (considering 55 undecided, 71 not localized and 9 that didn’t answer). So, by this report, the opposition needs 60% of the votes in dispute to secure impeachment.  Obviously, this is possible, but it is not certain.

On the other hand, Lula is building deals with small parties, and therefore:

1) It is possible that the Worker’s Party (PT) will support the Brazilian Republican Party (PRB) in the Rio de Janeiro mayor election. By doing this, it is possible to turn most of those 12 and 5 votes that are pro-impeachment and undecided (maybe more in other parties because the PRB deputy is a popular evangelical church leader and owner of the second most important TV open channel in Brazil – Record TV);

2) The government is taking advantage of wobbly PMDB positions to negotiate with PP, PSD and PR deputies on the fence (examining the undecided votes of these three parties, gives 22 votes, and pro-impeachment votes could also change).

Separately, there’s Supreme Court Judge Marco Aurelio de Mello’s latest declaration. He just announced that Dilma could appeal to the Supreme Court in case of an impeachment, and that if this impeachment is made without proof of crime, she could win the appeal. He has opposed the overzealous nature of prosecutor, Sérgio Moro’s Carwash investigations.  Moro has the media fawning over him - he’s thin, attractive and clean-shaven (as compared to hefty, scruffier, former President “Lula”) But, he’s only an ambitious b-level judge (despite acting as a prosecutor), multiple slots below Marco Aurelio de Mello. Another wrinkle? If Dilma is found guilty of corruption, so would Temer be, as he’s been in her government since 2011.

Dilma denies any wrong-doing. It’s also not clear which law she ostensibly broke, and if breaking that particular law is an impeachable offense. Her oft-cited “pedaladas fiscais” actions (moving money into the public till from public banks) would be illegal under the Fiscal Responsibility Law. But, only if the monies remained there at the end of the fiscal year. They didn’t. She moved them back beforehand. This is sketchy, but common, and not necessarily illegal. However, her moves would not be illegal with respect to Public Budget Law, the operating law regarding responsibility crime and, consequently, impeachment.  

With all the scrutiny, no offical charges of corruption (that could describe deputies across the political spectrum) have yet been levied against Dilma. This is why many anti-impeachment demonstrators are calling the entire escapade a coup or “gulpe” as well as an anti-democracy, purely politically-motivated act.

None of that makes Dilma a great president, something many people on the left and right agree upon – for different reasons. She also had to contend with battered commodity prices and lower demand from China, which compromised Brazil’s economy. But it makes removing her more akin to a political coup (without the military involvement of the 1964 coup) than a measure of national justice. 

Still, the main conversation in Brazil’s streets revolves around speculation over Dilma’s survival or demise. Betting against Dilma is also a pro-market, investor-friendly sport. The market rallies when her prospects worsen. It has been tha way since she ran for her second presidential term in 2014. She won by a narrow margin, hence the anger in Brasilia. The environment, as esteemed economist, and former Finance Minister Luiz Carlos Bresser-Pereira, told me during a private meeting at his São Paulo home, “shows more hate than I have witnessed at any other time during my career.”

The idea of removing a left-wing government with a growing public debt to GDP ratio is embraced by the upper, business and new middle class (or upper middle class.) Current levels of social spending are seen as unnecessary even if they had helped tame inequality and provided services that all Brazilians enjoy.  Public debt to GDP stands at 66% up from 54% last year, and is predicted to grow to 70% (which would be about 34% lower than the 104% debt to GDP ratio of the United States.)

Right now, universities are free in Brazil. Engineers, economists, lawyers, and doctors can earn a top notch education without incurring the kind of crippling debt that similar students in the US face (and that Bernie Sanders is campaigning to remove.) With Dilma gone, Tuition subsidies would be cut. That’s one problem that students, regardless of their political ideologies would be hard-pressed to embrace. Health care, which is universal in Brazil , though the wealthier use private care as in many European countries, would be cut. Subsidies to the poor would be chopped as well.

Brazil’s inequality would grow, So would unrest, demonstrations and unemployment.  Even if Dilma is impeached and Temer remains somehow distant from being painted with the same brush of corruption being used against her, and embarks upon his austerity path – or ‘bridge to the future’ - economic conditions would still falter. That would make his position shakier with respect to the population (only a smattering of whom ever voted for him) and to interally hostile Machiavellian environment that characterize Brazil’s government. 

The alluring idea to those that want Dilma out, is the prospect of smooth sailing to a less left, more financially liberalized Brazil that would welcome foreign capital with even more open arms. But without her, waters could get much rougher. The anger of Brazilians could galvanize as the economy weakens.

This ramification may not be in the minds of most Brazilians, though strong opinions about her abound. The students in Porto Alegre, Brazil’s southern most important city, with whom I participated in a pro-democracy demonstration last Thursday (that drew the largest crowds yet, including people old and young, plus new additions to that cause) admit her many weaknesses (lying to them, being an ineffective negotiator, lacking the charisma of Lula, etc.). But they are equally skeptical of the politicians on ‘the other side’ and fearful of the future of the economy under their policies.  That said, one of my taxi drivers called her ‘that bitch.’ 

As more demonstrations are planned, and the numbers of pro-democracy citizens rise on the realization that any shifting in government leaders means the same corruption (or more), just different faces, deputies could think twice about their votes.  Dilma could keep her job by a sliver.

Because it’s Brazil though, every bit of this is in flux.  House of Cards isn’t popular here for no reason.  Meanwhile, the only thing that remains certain is uncertainty.

Think Brazil’s scandals have nothing to do with US banks? Guess again.

This weekend, millions of Brazilians took to major city streets (again) to protest the hydra of corruption gushing from Petrobras, Brazil’s largest oil company and the government amidst deepening economic recession. Calls for the impeachment of sitting Workers’ Party (PT) president (and former Chair of Petrobras), Dilma Rousseff filled the air.  (I can’t wait to see the frenetic state of things when I swing by there  in two weeks for talks and book research.)

It’s tempting to consider the spectacle as isolated to Brazil’s unique brand of political-corporate collusion, where pillaging state-run companies to line pockets of power players is standard practice.  But that doesn't do the whole story justice.  

In the US, bartering government contracts or certain legislation for billions of dollars of political donations falls under the umbrella of legalized bribery, better known as campaign contributions, including via SuperPacs, the elite’s favorite political currency thanks to Citizens United. Political stars leave Washington for cushy corporate board posts or lucrative speaking engagements, sometimes en route back to DC.

It’s similar in Brazil, where former President “Lula” allegedly bagged $8 million in post-presidential speaking gigs from six companies. Bill Clinton nabbed about $105 million since he left the White House. Exact comparisons of how much of either of those sets of fees were connected to companies practicing corporate corruption will be a topic for my book, or another time. One country’s public sector scandal is another country’s private sector cost of doing business. Let’s not pretend otherwise.

Details aside, establishment corruption is a global virus. It may fester in a certain spot for longer periods or in greater concentration for awhile, but it’s omnipresent. It morphs to adapt to its environment and leaders. It moves like liquid. Because it links money and power, its also snakes through banks and political parties of all persuasions all over.  For now, the scene is Brazil, but the corruption under scrutiny is bigger than Brazil.

Broken Promises

(A version of the next section appeared in the February Issue of Strategic Intelligence where you can see sneak peaks of Artisans of Money and follow my colleagues, Jim Rickards and Tres Knippa.)

Things once looked so promising for Petrobras, Brazil’s state-run mega-oil company. In July 2006, the discovery of a massive pre-salt layer, 300 kilometers off the coast had the potential to transform Brazil into a leading oil producer.

The notion of “oil autonomy” even played a prominent role in Brazil’s 2010 presidential campaign. That platform helped secure the presidency for Lula’s protégé, Dilma Rousseff, who also happened to chair Petrobras’ board of directors from 2003 to 2010. Petrobras was destined to become the biggest oil company in the world.

Naturally, everyone wanted a piece of it. Multinational banks wanted to finance it.  Speculators and pension fund managers bet on its success. Two years after the US financial crisis cratered the global banking system,  the energy sector provided mega banks fresh opportunity to manufactured and leverage debt. Subprime mortgages had gone cold. Oil was hot.  Petrobras was really hot.

On September 24, 2010, Petrobras raised $70 billion in the largest share issue ever. Three of the Big Six US banks, Bank of America/Merrill Lynch, Citigroup, and Morgan Stanley, while simultaneously facing multi-billion dollar fraud suits in the US were global book runners. Brazilian bank, Banco Bradesco lead the offering. Banco Itau was another global book runner.

Brazil’s Enron: The Unraveling of Petrobras: 2014

In the energy and finance sectors, the bigger they are, the more crimes they’ve committed. Just as US energy company Enron imploded in a haze of fraud in 2001, Petrobras followed suit. In March 2014, Brazilian investigators discovered certain Petrobras employees had taken kickbacks for awarding lucrative contracts. Petrobras sourced the bribe money the old–fashioned way - cooking its books; inflating contract payments and artificially inflating asset levels. Potential fraud totaled $30 billion over a 15-year period and became the focus of national probes and international lawsuits.

 On March 17, 2014, Brazilian Federal Police arrested two men as part of "Operation Carwash," a federal investigation into associated money laundering activities. Paulo Roberto Costa, former head of Petrobras’ refining and supply department, and Alberto Youssef, infamous Brazilian money launderer, were convicted and later sentenced to 12 and 8 years in prison respectively for having masterminded the web of corruption. They were also allegedly involved in money laundering operations for the PMDB (Brazilian Democratic Movement Party) and right wing PP (Progressive Party).

Costa’s role in the corruption was international. In 2006, under his direction, a sketchy US acquisition took place. Petrobras purchased Houston-based refinery company, Pasadena, for $1.2 billion, about 30 times its worth. The purchase began at ten times its prior value, or $360 million for 50% of Pasadena, to be shared with Belgium energy firm, Astra. By July 2012, Petrobras paid an extra $820.5 million for its stake. 

On July 23 2014, Brazil’s public-spending watchdog organization, Union Accounting Tribunal (TCU) determined that Petrobras had overpaid for Pasadena. The kicker? Dilma had approved the purchase while Minister of Energy and president of Petrobras’ board of directors. It was a decision that was either crooked or dumb, or both.

Three months later, on October 29, 2014, Veja Magazine published illegally leaked testimony from Youssef accusing Rousseff and Lula of knowing details about Petrobras’ corruption 48 hours before the Presidential election. She won again anyway, but by a much slimmer margin. Petrobras didn’t do so well. During 2014, Petrobras stock dropped by 37.9%.  The decline continued.

More Unraveling and International Ire: 2015

By early 2015, not only was Petrobras mired in scandal, but also its foreign investors were livid. Lawsuits for billions of dollars of losses due to investors having been “misinformed” about Petrobras' true condition were stacking up.

Certain American banks were not blameless. Though they will argue it in the courts, they helped inflate Petrobras' debt burden without appropriate due-diligence, and advised clients to invest in Petrobras. Just like with Enron: big banks helped the firm become the sham it was and shareholders paid the price. That government corruption was also involved was either the cake or the icing depending on your point of view.

In New York, US Judge Jed Rakoff consolidated all the lawsuits against Petrobras and its bankers – Citigroup Global Markets, JP Morgan Securities and Morgan Stanley - into one large class action.

The nine largest Petrobras’ American Depository Shares (ADS) holders claimed losses of more than $50 million each. Amongst claimants were US pensions funds already engaged in suits against US banks for subprime related fraud, such as the Ohio Public Employees Retirement fund. The Bill and Melinda Gates Foundation sued Petrobras. So did Pimco. The list is pretty long. Your pension fund may very well be on it.

Money!

With oil prices diving and scandal escalating, Petrobras needed money to make interest payments. Petrobras owes about $135 billion in loans and bonds (some estimates are lower) to banks and investors. China, Brazil’s largest trade partner came to its rescue last spring. On April 1, 2015, Petrobras signed a $3.5 billion financing agreement with the China Development Bank as part of a broader oil cooperation agreement with China. (On February 26, 2016, China Development Bank produced another lifeline –a $10 billion loan in return for oil supply that covers all Petrobras’ debt needs this year.)

China’s generosity stoked a competitive urge amongst US-Euro banks. There’s a reason for the phrase “throwing good money after bad” especially when it’s other people’s good money. On June 1, 2015, Petrobras issued $2.5 billion worth of a 100-year “century” bond with an annual yield of 8.45%. Deutsche Bank and J.P. Morgan coordinated operations for the first century bond issued by a Latin American company since 1997.

Foreign investor demand rendered the issue 5 times over-subscribed. Yet, mid-scandal Petrobras projections were based on crude oil prices of $60 and $70 per barrel for 2015 and 2016 when in fact oil prices closed 2015 nearer to $35 per barrel.

Big Banks were there to collect when the music stopped, too. On June 3, 2015, two years after Bank of America called Petrobras the “most indebted company in the world,” Petrobras invited it to run a $5 billion asset sale.

On July 17, 2015, Petrobras selected five banks to lead the IPO of BR Distribuidora, Petrobras’ fuel distribution unit that controls Brazil's largest gasoline network. They were Citigroup, Banco Bradesco, ItaúUnibanco, Banco do Brasil and BTG Pactual. 

You’ll notice that all three major US bank participants in the 2010 share issue bagged lucrative roles in Petrobras’ demise; Citigroup in the IPO spin-off, JPM Chase in the century bond issue, and Bank of America in the assets sales.

The US-lead suit against Petrobras and its bankers will get increasingly hostile.  On October 6, 2015, banks challenged the plaintiffs’ claims and tried to get the case dismissed. Rakoff said “No.” The suit is awaiting a trial date. (Petrobras Securities Litigation, U.S. District Court, Southern District of New York, No. 14-09662.)

Petrobras has denied all allegations and claims to be the victim of a plot against it by contractors and corrupt politicians. On October 20, 2015, a pro-government commission cleared Dilma of wrongdoings, but that ship remains in the harbor. Both Dilma and Lula could be called for testimony as the US case unfolds.

Other Problems

On December 22, 2015, newly appointed Minister of Finance, N. Barbosa, announced Petrobras didn’t need a government injection – just higher oil prices. The next day, Brazil's antitrust authority, CADE, opened its own investigations into contract rigging associated with the 21 companies and 59 execs already under criminal probe.

Petrobras’ problems have hampered Brazil on multiple levels beyond scandal and an estimated $30 billion in GDP losses. Due to ongoing investigations, Petrobras stopped payments to other firms, including rigging companies. That sent some into bankruptcy and others to the brink, a factor that will depress their share prices and cause more defaults in 2016. Related sectors remain imperiled, including the steel, construction and banking sectors.

In addition, Brazil’s pension funds are in crisis. Unemployment and inflation, over 10 percent for the first time in 12 years, are rising sharply, despite high interest rates fashioned to contain inflation. Debt, defaults, jobs losses, lawsuits and currency devaluation don’t paint a rosy picture.

Three investigations about Lula’s connections with two companies prosecuted in Carwash Operation (OAS and Odebrecht) were opened on February 11, 2016, involving his country estate and beachfront apartment as well as other family holdings. On March 4, 2016, police stormed Lula’s home to take him in for questioning. Because it’s Brazil, the drama drove the Real and local markets higher; the idea of an imminent end to Dilma seen (by markets and many Brazilians, including her former supporters) as a preferred alternative to the opposition party’s own equally corrupt leader.

Dilma has proven resilient so far, but political instability over her Petrobras relationship and alleged “dipping” into state bank funds to pay other expenses, will continue to darken the doorstep of Brazil’s political system. We have 30 days to see whether her other coalition partner, the more centrist PMDB party, backs away from her, signaling a major reshuffling in Brasilia. Yet it’s not like members of the opposition party are scandal-free. Which brings us back to the trio of money, power and corruption, it may have geographical or cultural nuances, but its stench is universal.

My Financial Road Map For 2016

Happy New Year to All! May 2016 bring peace to you and your loved ones.

Over the holidays, I had the opportunity to stay away from airports and hike Runyon Canyon with my dogs. For those of you that have never traversed Runyon’s peaks and dips, they are nature’s respite from the urban streets of Los Angeles, yet located in the heart of the City of Angels. It’s a place in which to observe, reflect, and think about what’s coming ahead.

As a writer and journalist covering the ebbs and flows of government, elite individual, central bank and private industry power, actions, co-dependencies, and impacts on populations and markets worldwide, I often find myself reacting too quickly to information. As I embark upon extensive research for my new book, Artisans of Money, my resolution for the book - and the year - is to more carefully consider small details in the context of the broader perspective. My travels will take me to Brazil, Mexico, China, Japan, Germany, Spain, Greece and more. My intent is to converse with people in their respective locales; those formulating (or trying to formulate) monetary, economic and financial policy, and those affected by it.

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever. 

The butterfly effect - the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part - is on center stage. There is much information to process. So, I’d like to share with you – not my financial predictions for 2016 exactly - – but some of the items that I will be examining from a geographical, political and financial perspective as the year unfolds.

1) Central Banks: Artisans of Money

Since the Fed raised (hiked is too strong a word) rates by 25 basis points on December 16^th, the Dow has dropped by about 3.5%. Indicating a mix of fear of decisive movements and a market awareness deficit regarding the impact of its actions, the Federal Reserve hedged its own rate rise announcement, noting that its "stance of monetary policy remains accommodative after this increase.”

These words seem fairly clear: there won’t be many, if any, hikes to come in 2016 unless economies markedly improve (which they won’t, or the words would be much more definitive.) Still, Janet Yellen did manage to alleviate some stress over the Fed's inaction on rate rises during the past 7 years, by invoking the slighted action possible with respect to rates. 

Projections are past reactions here. The Fed, to save face more than anything or to “appear” conclusive, raised the Fed Funds rate (the rate US banks charge each other to borrow excess reserves, of which about $2.5 billion are with the Fed anyway), to .25-.50% from 0-.25%. And yet, the effective rate stood within the old Fed target range, or at an average of .20% on December 31 for various reasons, the timing of which was not lost on the Fed. It was at .35% or so on the first day of 2016. The Fed’s rate move was tepid, and it’s possible the Fed moves rates up another 25 or 50 basis points over 2016, but less likely more than that and more likely it engages in heightened currency swap activities with other central banks as a way to “manage” rates and exchange rates regardless.

Meanwhile, most other central banks (Brazil being an extreme counter example) remain in easing mode or mirror mode to the Fed. It’s likely that more creative QE measures amongst the elite central banks will pop up if liquidity, markets or commodities head southward. Less powerful central banks will attempt to respond to the needs of their local economies while balancing the strains imposed upon them by the elite central banks.

2) Global Stock Markets

They say that behavior on the first day of the year is indicative of behavior in the year to come. If so, the first trading day doesn’t bode well for the rest. Turmoil began anew with Asian stock markets crumbling at the start of 2016. In China, the Shanghai Composite hit two circuit breakers and China further weakened the yuan.

Yes, there’s the prevailing growth-decline story, a relic of 2015 “popular opinion”, being served as a reason for the drop. But also, restrictions on short selling by local Chinese companies are expiring. Just as in last August, China will have to balance imposing fresh sell restrictions with market forces pushing the yuan down.

The People’s Bank of China will likely inject more liquidity through further reserve requirement reductions and rate cuts to counter balance losses. The demise in stock values is not simply due to slower growth, but to high debt burdens and speculative foreign capital outflows; the story of China as a quick bet is no longer as hot as it was when China opened its markets to more foreign investors in mid-2014, since which volumes and volatility increased. It will be interesting to see if China responds with more capital controls or less, and how its  “long-game” of global investments plays out.

Blood shed followed Asian into European markets. Subsequently, the Dow dropped by about 1.6% unleashing its worst start to a year since the financial crisis began. Last year's theme to me was volatility rising; this year is about markets falling, even core ones. This is both a reaction to global and local economic weakness, and speculative capital pondering definitive new stomping grounds, hence thinner and more dispersed volumes will be moving markets.

3) Global Debt and Defaults

As of November 2015, Standard & Poor’s tallied the number of global companies that defaulted at 99, a figure only exceeded by that of 222 in 2009. Debt loads now present greater dangers. Not only did companies (and governments, of course) pile on debt during this zero interest rate bonanza period; but currency values also declined relative to the dollar, making interest payments more expensive on a local basis.

If the dollar remains comparatively strong or local economies weaken by an amount equivalent to any dollar weakening, more defaults are likely in 2016. In addition, the proportion of junk bonds relative to investment grade bonds grew from 40% to 50% since the financial crisis, making the likelihood of defaults that much greater. Plus, the increase in foreign, especially dollar, denominated debt in emerging markets will continue to hurt those countries from a sovereign downgrade and a corporate downgrade to default basis.

I expect sovereign downgrades to increase this year in tandem with corporate downgrades and defaults. Also, as corporate defaults or default probabilities increase, so does corporate fraud discovery. This will be a year of global corporate scandals.

In the US about 60% of 2015 defaults were in the oil and gas industry, but if oil prices stay low or drop further, more will come. Related industries will also be impacted. In mid-December, Fitch released its leveraged loan default forecast of the TTM (Trailing Twelve Month index) predicting a 2.5% rise in default rates for 2016, or $24 billion in global defaults. That’s an almost 50% increase in default volume over 2015, and more than the total over the 2011-2013 period. Besides higher energy sector defaults, the retail sector could see more defaults, as consumers lose out and curtail spending.

4) Brazil and Argentina

Brazil is a basket case on multiple levels with nothing to indicate 2016 will be anything but messier than 2015. Even the upcoming Olympics there have reeked of scandal in the lead up to the summer games.

Brazilian corporations have already sold $10 billion in assets to scrape together cash in 2015, a drop in the bucket to what’s needed. Brazil’s main company, Petrobras, is mired in scandal, its bond and share prices took massive hits last year as it got downgraded to junk, and a feeding frenzy between US, Europe and China for any of its assets on the cheap won’t be enough to alter the downward trajectory of Brazilian’s economy. In fact, it will just make recovery harder as core resources will be effectively outsourced.

Fitch downgraded seven Brazilian sub nationals to junk, with more downgrades to come. Brazil itself was downgraded to junk by S&P with no positive outlook from anywhere for 2016. Falling revenues plus higher financial costs due to higher debt burdens will accentuate trouble. In addition, pension funds are going to be increasingly underfunded, which will enhance local population and political unrest, as unemployment increases, too.

Though Brazil will have the toughest time relative to neighboring countries, Argentina, will not be having a walk in the park under its new government either. The new centrist government removed currency capital controls in a desperate bid to attract capital. This resulted in crushing the Argentinean Peso (a.k.a. “Marci’s devaluation”) and will only invite further speculative and political volatility into the country. It could get ugly.

5) The Dollar and Gold

Despite what will be a year of continued pathways to trade and currency arrangements amongst countries trying to distance themselves from the US dollar, the fact that much of the world is careening toward global Depression will keep the dollar higher than it deserves to be. It will remain the comparative currency of choice, as long as central banks continue to fabricate liquidity in place of government revenues from productive growth.

Outside the US, most central banks (except Brazil which has a massive inflation problem) have maintained policies of rate reduction, lower reserve requirements, and other forms of QE or currency swap activities. As in 2015, the dollar will be a benefactor, despite problems facing the US economy and its general mismanagement of monetary policy. But the US dollar index and the dollar itself might exhibit more volatility to the downside this year, straying from its high levels more frequently than during 2015.

Last year, given the enhanced volatility in various markets, I expected gold to rise during the summer as a safe haven choice, which it did, but it also ended the year lower in US dollar terms. Because the US dollar preserved its strength, the dollar price of gold fell during the year - yet not by as much as other commodities, like oil.

I take that as a sign of gold finding some sort of a floor relative to the US dollar, with the possibility of more upside than downside for 2016, though in similar volatility bands to the US dollar. Gold relative to the Euro was just slightly down for 2015, relative to the approximate 10% decline in value relative to the US dollar. Considering the home currency is important when examining gold price behavior.

Also, it’s important to note that investing in gold requires a longer time horizon - months and years, rather than weeks and months - and should be done through physical gold, coins or allocated bars depending on disposable investment thresholds, not paper gold. 

In addition, as I mentioned last year, routinely extracting cash from bank accounts and keeping it in safe non-bank locations, remains a smart defensive play for 2016.

6) The People’s Economies

As companies default and economies suffer, industries will inevitably shed jobs this year around the world. The Fed’s publicly expressed optimism about employment figures and the headline figure decrease in US unemployment will be met with the realities of companies cutting jobs to pay the debts they took on during the ZIRP years and due to decreased demand.

Unemployment is already rising in many emerging countries, and it will be important to note what happens in Europe and Japan, as well as the US in that regard.  This Recession 3.0 (or ongoing Depression) could fuel further artisanal money practices that might again be good for the markets and banks, but not for real economies or jobs lost through reactive corporate actions.  

7) Oil

With Saudi Arabia and Iran pissed off at each other in a round of tit-for-tat power positioning, it’s unlikely either OPEC heavy weight will reduce oil production, this while tankers worldwide remain laden with their loads and rigs are quiet. Tankers off the coast of Long Beach in California for instance, that used to come in and unload, remain in stalling patterns away from the shoreline, waiting for better prices. This means tankers are making money on storage, but also that extra oil supplies are hovering off shore, and even if prices rise, release of that supply would have a dampening consequence on prices.

Oil futures have been a generally highly speculated product, so I’ve never believed that simple supply and demand ratios drive the price of spot oil as it relates to the futures price of oil. Only in this case, not only is there oversupply and weakening demand, but speculators are playing to the short side as well. That combination seems destined to keep oil prices low, or push them lower in the near future, but should be closely watched.

Meanwhile, signs of knock on problems are growing. In China, for instance, shipyards are struggling because global rig customers don’t need their rig model orders fulfilled.  

8) Europe

While Greece faces more blood-from-a-stone extortion tactics and none of the Troika get why austerity measures don't actually produce local revenues at high enough levels to pay expensive debts to foreign investors and multinational entities, other parts of Europe aren’t looking much better for 2016. Spain is facing political unrest, Italy, despite exhibiting a tenuous recovery of sorts, still has a major unemployment problem, and the Bank of Portugal lowered its growth estimates - for the next two years.

Mario Draghi, European Central Bank (ECB) head decided to extend Euro-QE to March 2017 from September 2016, having had the markets punish his less enthusiastic verbiages about QE late last year, because he has no other game. The Euro will thus likely continue to drop in value against the dollar, negative interest rates will prevail, and potential bail ins will appear if this extra dose of QE doesn’t keep the wheels, big banks and core markets of Europe properly greased.

9) Mexico

The Mexican Peso closed near record lows vs. the dollar for 2015. Much of the Peso’s weakness was attributed to low oil prices and Mexico’s dependence on its oil sector, but the Peso was already depreciating before oil prices dropped. If the US dollar remains comparatively high OR if oil prices continue to remain low or drop, the Peso is likely to do the same.

When I was in Mexico a few years ago, addressing the Senate on the dangers of foreign bank concentration, there were protests throughout Mexico City on everything from teachers’ pay to the opening of Pemex, Mexico’s main oil company to foreign players. The government’s promise then was that foreign firms would provide capital to Mexico as well as industry expertise that would translate to revenues. Oil prices were hedged then at 74 dollars per barrel. With oil prices at half of that, many of those hedges are coming off this year and that will cause additional pain to the industry and Pemex.

That said, though Mexico will feel the global Depression pain this year as a major player, it is still set to have a much better year than Brazil on every level; from a higher stock market to a higher currency valuation relative to the US dollar to lower inflation to lower unemployment to a better balance of trade with the US than Brazil will have with China. Plus, it has far less obvious inbred corporate-government corruption.

10) Elections and Media Coverage

It’s been a minute since the last debate or late night show fly-by from any Presidential hopeful, but this is the year of the US election. I look forward to continuing to post my monthly wrap on TomDispatch as the Democratic and Republican nominees emerge. I will be taking stock of the most expensive election in not just US history, but in the history of the World. Look for more on the numbers behind the politics later this month.

From a financial standpoint, this election has low impact on flows of capital. Given the platforms of everyone in reasonable contention (with the exception of Bernie Sanders’ platform), no one will actually touch excessive speculation, concentration risk in the banking or other critical sectors like healthcare, or meaningfully examine the global role of artisanal central bank policy, particularly as emanating from the Fed. 

Elsewhere, economic stress throughout the globe and a general sense of exasperation and distrust with politicians is putting new leaders in place that are pushing for more austerity or open capital flow programs rather than foundational growth and restrictions on the kind of flows that cause undue harm to local economies. That is a recipe for further economic disaster that will fall most heavily on populations worldwide.