My Financial Road Map for 2018

Happy New Year to all of you!

In last year’s roadmap, I forecast that 2017 would end with gold prices up and the dollar index down, both of which happened.  I underestimated the number of Fed hikes by one hike, but globally, average short term rates have remained around zero. That will be a core pattern throughout 2018.

Central banks may tweak a few rates here and there, announce some tapering due to “economic growth”, or deflect attention to fiscal policy, but the entire financial and capital markets system rests on the strategies, co-dependencies and cheap money policies of central banks.  The bond markets will feel the heat of any tightening shift or fears of one, while the stock market will continue to rush ahead on the reality of cheap money supply until debt problems tug at the equity markets and take them down.

Central bankers are well aware of this. They have no exit plan for their decade of collusion. But a weak hope that it’ll all work out. They have no dedicated agenda to remove themselves from their money supplier role, nor any desire to do so. Truth be told, they couldn’t map out an exit route from cheap money even if they wanted to.

The total books of global central banks (that hold the spoils of QE) have ballooned by $2 Trillion in assets (read: debt) over 2017. That brings the amount of global central banks holdings to more than $21.7 trillion in assets. And growing. Teasers about tapering have been released into the atmosphere, but numbers don’t lie. 

That’s a hefty cushion for international speculation. Every bond a central bank buys or holds, gets a price-lift. Trillions of dollars of such buys have artificially lifted all bond prices, and stocks because of the secondary-lift effect and rapacious search for self-perpetuating returns. Financial bubbles pervade the world.

Central bank leaders may wax hawkish –manifested in strong words but tepid actions. Yet, overall, policies will remain consistent with those of the past decade to combat this looming crisis. US nationalistic trade policies will push other nations to embrace agreements with each other that exclude the US and shun the US dollar.

And finally! My new book Collusion: How Central Bankers Rigged the World comes out on May 1. 2018. You can see my book tour schedule evolve over the next few months on my website. I look forward to seeing you at the upcoming events.

Meanwhile, here are some themes to watch for 2018:

1) Central Bank “Tightening” and “Tapering”: More Talk than Action

The Fed predicted three hikes for 2017, and for the first time in three years of announcing rate increases, met its own forecast. Thus, Federal Funds Rates rose by 75 basis points.

In Europe, the European Central Bank (ECB) kept rates in the zero percent range. Gearing up to Brexit, the Bank of England raised rates by a mere 25 basis points. In Japan, the Bank of Japan (BOJ) kept rates negative.  The People’s Bank of China (PBoC) didn’t alter its benchmark rate this year, though it did increase its medium-term lending facility and its open market reverse repo agreements by a whopping 15 basis points in 2017. Those aren’t exactly definitive tightening bias moves.

The ECB announced a “tapering” bias, but in practice, merely cut its monthly purchasing pledge while extending the total period of purchasing. This was a typical central bank ‘bait-and-switch’ maneuver, the net effect of which will be more QE, not less.

Japanese Prime Minister Shinzo Abe’s snap election victory last fall secured BOJ head, Haruhiko Kuroda in his spot, or at least, provided a green light for more easy money provisions to the Japanese capital markets.

In the US, Jerome Powell will assume the helm at of the Fed on February 4. How different will his policies be from those of Janet Yellen or Ben Bernanke?  Not much. He voted in favor of the Fed’s monetary easing programs (even with hesitation) every time. Powell will embrace the same unlimited easy money policy on any sign of market weakness, as the global web of central banks remains as omnipresent as ever.

2) Rising Stock Markets for Now; But on Shakier Ground

Global stock markets, being the easiest place to park cheap money will rise at first in 2018. This will take place on the back of another spurt of record corporate buybacks. The move will carry on due to a self-fulfilling prophesy of return-seekers (from hedge to pension funds) until met by a span of corporate or bank scandals or geo-political risk. 

In the US, the Dow Jones finished the year up 28.11% adjusted for dividends (compared to 16.47% adjusted for dividends in 2016.) President Trump took credit for the equity euphoria, as Obama and other presidents have done in the past.

The reality is that stock markets were bolstered by historically cheap money and more than $14 trillion of QE. If the Fed (or any major central bank) was to unwind the $4.5 trillion of assets it’s holding, markets would plummet. That’s why the Fed isn’t moving much, nor are other central banks, to truly reduce the size of their artificial market intervention.  But when markets fall back to earth – the drop will be quick and painful.

On the flipside, there’s economic reality. Job growth is at its slowest pace since 2011, wage growth is relatively stagnant and job market participation sits at four-decade lows. While the stock market continues to shatter records, the real economy remains left behind.

3) Expanding Debt and Corporate Defaults

Debt is at epic levels any way you slice it, public debt, corporate debt, credit card debt, student loan debt. There will be a tipping point – when money coming in to furnish that debt, or available to borrow, simply won’t cover the interest payments. Then debt bubbles will pop, beginning with higher yielding bonds.  Leverage is a patient enemy.

Fueled by low rates and a strong investor appetite, debt of nonfinancial companies in the US has accelerated rapidly, to $8.7 trillion, a figure equivalent to more than 45 percent of GDP. Nonfinancial corporate debt outstanding grew by $1 trillion over the past two years. US tax cuts will propel more issuance at first, due to the perception of more money available later with which to repay it. That is not the same as actual profits.  

This is the year where borrowing fueled by central banks slams into a wall of growing defaults.  Expect corporate defaults to rise on the back of even slight rate hikes. Defaults will deepen in non-Asian emerging markets first. That’s because those currencies haven’t done as well against the US dollar as in other countries, and central banks and governments aren’t as able to sustain that debt through various intervention maneuvers.

Meanwhile, major central banks will find ways to fuel corporate bond markets to stave that crisis off as long as they can. The ECB’s corporate buying program kicked into high gear in 2017, for instance, driving corporate spreads and rates downward. The ECB’s corporate sector purchasing program (CSPP) will expand the ECB’s corporate bond holdings to over 20 percent of its whole book, double today’s percentage. 

Other central banks will try to do the same, but face headwinds. China has a $3.4 trillion corporate bond market showing signs of struggle. With more than $1 trillion of local bonds maturing in 2018-19, it will become increasingly expensive for Chinese companies to roll over financing, which is why the PBoC will maintain its QE programs in 2018.

4) Weakening Dollar, Rising Gold and Silver Prices

The dollar index that tracks the dollar against other major currencies (including the Euro and the Pound sterling) hit 14-year lows in 2017. As the index dropped accelerated, it  exhibited a counter-historical diversion from the behavior of the US stock market. That pattern looks set to continue in 2018, despite any minor US rate increases that did not serve to bolster the dollar against other major country currencies last year.

It’s also counter-intuitive for the currency coupled with rising rates to underperform the one with easier policy. Yet, that’s what happened between the US dollar and the Euro in 2017. The Euro’s surge will carry on given that its strength better reflects surrounding economic reality, than the dollar does for the US, where the stock market has far outpaced economic factors like wages and job force participation levels.

Similarly, gold and silver will rise against the US dollar, as bitcoin enthusiasts and gold bugs converge. Nations like China, India and Russia continued to stockpile gold in their quest to diversify against the dollar last year. China’s Gold Bar Demand rose by more than 40%. The more gold these nations buy, the more the dollar could decline relative to their currencies, especially if they sell US treasuries, or reduce purchases, to buy gold.  Even my old firm, Goldman Sachs noted the bitcoin boom hasn’t dampened gold demand.

5) Ongoing Economic Power Shift from the West to the East

The economic power shift from West to East, and from the US dollar to the Chinese yuan, will continue for economic and geo-political reasons as China forges more solid global trade relationships and the US retains its nationalist stance.  

Given the Trump administration’s isolationist and pro-bilateral trade agreement doctrine, China will augment its economic, military and diplomatic presence globally. The Chinese government has invested billions in the BRICS Development Bank and Asian regional organizations like ASEAN. That type of long-term groundwork will expand in 2018.

As it did in 2017, Japan embarked upon greater cooperation with India and Russia to hedge its US relationships. The Japanese economy also hit a growth streak in 2017. Its economy has been expanding since the start of 2016, the longest streak since 1999.

Japan will keep developing its Eastern influence and seek new relationships as Prime Minister Abe consolidates his power. For the Bank of Japan, that means, despite some talk to the contrary, maintaining its aggressive QE program. The ongoing supply of cheap money will provide a bid to the Japanese stock market and massive liquidity to its banks.

6) Easy ECB policy / Sterling Rising into Brexit

In 2015, Mario Draghi, the head of the ECB, decided to extend Euro-QE into March 2017. Then, he extended Euro-QE to December 2017, with a promise to do more if necessary.  There was taper talk in the ECB’s QE program this year. In October, the ECB announced,  that starting in January 2018, its asset purchases will follow a monthly pace of €30 billion until the end of September 2018, “or beyond, if necessary.” Ultimately, on an absolute value basis, the move was camouflage that will lead to more QE for Europe, not less. 

Over in the United Kingdom, having fallen 14% in 2016 due to Brexit anxiety, the Pound executed an impressive rise helped along the way by the BOE’s 25 basis rate hike. The Pound recorded its best annual performance against the dollar since 2009, with an almost 10 percent rise. Meanwhile, the Euro gained an impressive 14.1 percent vs. the dollar.

Brexit is still looming. Yet, the Sterling has had a good run, and given the receding uncertainty over what Brexit could look like, this trend should extend in 2018. Once everyone realizes that UK banks aren’t moving to Frankfurt no matter what Brexit looks like, the Sterling will outperform the Euro.  This will be positive for UK banks that have better capital cushions and are considered more stable.

7) Infrastructure Focus

Currently, the US federal government spends about a modest $100 billion annually on infrastructure. States and cities have tapped out at  $320 billion in allocated funding.  How they could afford increases at more than double that rate is a mystery.

Yet, the US remains at a huge infrastructure disadvantage relative to Asia and Europe. Any official talk of a bill combined with associated news coverage alone would lift bidding interest for government contracts, and share prices of companies in the sector.  

And we will hear more talk about a bi-partisan infrastructure bill and associated public-private partnerships in the wake of the Trump - GOP tax bill victory and into his second year in office.  The problem is that his proposed spending of at least $200 billion over the next decade is contingent on $800 billion coming from state and local sources. Many states don’t have the budget to meet such infrastructure demands. This means other funding or increased federal spending will be hotly debated in 2018. Engineering and infrastructure companies will reap the benefits of related expectations and attention.

8)  Cryptomania Grips More Tightly

As for Bitcoin, despite its predisposition to being a Ponzi scheme, it should rise (and sustain its high degree of volatility) through 2018 for a few reasons. First, many funds have been green lighted to get involved in the second half of 2018 and ETF’s are on the horizon, albeit with a plethora of surrounding problems and regulatory hesitations. Second, futures exchange activity will broaden the market. Third, establishment banks like Goldman Sachs have announced plans to set up crypto-trading desks and promoted the possibility of bitcoin becoming a legitimate global currency.

There will be growth of the number and diversity of exchanges beyond Coinbase in the manner of PayPal which is already a player in that space, as well as for Coinbase itself. Expect the start of many payment exchanges that can process both regular currencies and cryptocurrency transactions ala the dot com bubble, rendering the idea of crypto-independence more and more fuzzy.

Conversations amongst the financial elite at G7 gatherings and other similar forums will encapsulate more crypto focus. Central banks will ultimately create or utilize some elements of crypto currencies for themselves, and adopt ways to regulate the market, as will regulatory agencies that will focus more on crypto than regular banking activities (both need that monitoring to protect people.)  Meanwhile, there will be more buying of cheaper crypto currencies (or assets as I consider them) like Litecoin and Ripple. The fight between those that believe in crypto’s decentralized nature will hit a wall of resistance from banks and central banks, but that fight might take years.

9) Going Digital and Green

Whether you use it, invest in it, or are wary of it – one thing is certain, mining crypto currencies require substantial amounts of power.  While Bitcoin’s value was up seven-fold in 2017, its power requirements shot up by 43% just since October. Much of this power comes from generators fed by fossil fuel sources. That’s not clean power.

Green technology for uses in blockchain related products will be a hot area in 2018, as will be clean and renewable sources of energy in general. Solar energy costs have fallen 62% since 2009 and could be cheaper than coal in less than a decade. As traditional fossil fuel economies from Saudi Arabia to Mexico begin to shift, green competition could drive down these costs further in 2018 and render clean energy more profitable.

Beyond the crypto space, green jobs will boom, in some countries more than in others. China continues its efforts at a record pace has pledged to spend up to $1 trillion on infrastructure projects in 64 countries with which it seeks to strengthen alliances. Much of that will go into sustainable energy investments. China leads the world in investment in renewable energy projects with an estimated $32 billion spent overseas.

Sustainable energy means jobs elsewhere, too. In 2018, Tesla plans to open the biggest battery factory in the world in Nevada. The UK government has announced massive £246 million investment in the automotive electrification research and development sector.

10) Dangers of Trump’s Deregulation Entourage

The Securities and Exchange Commission (SEC), the regulatory agency tasked with protecting investors, shareholders and citizens from fraudulent financial system activities, is currently run by a man that served as Goldman Sachs’ outside counsel during its subprime crisis related spate of settlements. Goldman Sachs requested of him, that it be released from annual reporting of its lobbying policies or payments. 

He’s not alone in those sorts of allegiances. The Office of the Comptroller of the Currency (OCC) is run by a former colleague of Treasury Secretary Steven Mnuchin, Joseph Otting, who was the CEO of OneWest (the formerly failed California-based bank, IndyMac). That’s the bank that Mnuchin and his billionaire friends took over before exacting alleged tens of thousands of foreclosures and turning it around for a hefty profit. Then there’s the Fed, where Jerome Powell has expressed his disinterest in bank regulations over the years. The Consumer Financial Protection Bureau is now run by Mick Mulvaney - a man that has derided the very existence of the agency. 

Ultimately, the mother of all deregulators is presiding over the US Treasury Department. Steven Mnuchin has deflected the notion of reinstatement of a modern Glass-Stegall at every possible moment. He waived away regulation for AIG, the reckless insurance company at the epicenter of the financial crisis, by giving the firm a green light to stop reporting risk details to the Financial Stability Oversight Council over which he presides.

Trump speaks of deregulation with pride. Nearly every regulatory body in his purview tasked with monitoring the financial system is run by someone who has benefited from its unfair practices or somehow believes too much regulation over bailed out big banks is a bad thing. Historically, severe crises follow periods of lax oversight and loose bank regulations. The question isn’t “if” there’s one budding, but “when” it will happen.

The last time deregulation and protectionist businessmen filled the US presidential cabinet was in the 1920s. That led to the Crash of 1929, the Great Depression, and ultimately, brought us to World War II as I explained in All the Presidents’ Bankers. 

During the past decade, the helium that inflated asset bubbles and fortified the global banking system was central bank Collusion. At some point the financial dam is destined to break – it has to, and it will. On that sober note, I leave you with this quote from The Rich Boy written in 1926 before the Great Depression by F. Scott Fitzgerald: 

“The world, as a rule, does not live on beaches and in country clubs.”

Whoever we are and wherever we live, may we face the challenges of this year, and our times, with awareness, courage and action.

The Next Financial Crisis will be Worse than the Last

This piece first appeared in Truthdig.

We’ve made it through 2017. The first-season installment of presidential Tweetville is ending where it began, on the Palm Beach, Fla., golf course of Mar-a-Lago. Though we are no longer privy to all the footage behind the big white truck, we do know that, given the doubling of its membership fees, others on the course will have higher stakes in the 2018 influence game.

The billionaire who ran on an anti-establishment platform went on a swamp-filling, deregulatory and inequality-producing tear, in the process creating the wealthiest Cabinet in modern United States history and expanding his own empire along the way. His offspring, Russia-related investigations aside, didn’t do too shabbily either. White House policy adviser Ivanka Trump’s brand opened a splashy new store in the lobby of Trump Tower in Manhattan, just in time for Christmas.

If you look at the stock and asset markets, as Donald Trump tends to do (and as Barack Obama did, too), you’d think all is fine with the world. The Dow Jones Industrial Average rose about 24 percent this year. The Dow Jones U.S. Real Estate Index rose 6.20 percent. The price of one Bitcoin rose about 1,646 percent.

On the flip side of that euphoria however, is the fact that the median wagerose just 2.4 percent and has remained effectively stagnant relative to inflation. And although the unemployment rate fell to a 17-year low of 4.1 percent, the labor force participation rate dropped to 62.7 percent, its lowest level in nearly four decades—particularly difficult for new entrants to the workforce, such as students graduating under a $1.3 trillion pile of unrepayable or very challenging student loan debt. (Not to worry though: Goldman Sachs is on that, promoting a way to profit from this debt by stuffing it into other assets and selling those off to investors, a la shades of the subprime mortgage crisis.)

Those of us living in the actual world without billionaire family pedigrees possess a healthy dose of skepticism over the “Make America Great Again” sect that believes Trump has transformed America “hugely,” for record-setting markets don’t imply economic stability, nor do 40 percent corporate tax cuts translate into 40 percent wage growth. We can march forward into 2018 carrying that knowledge with us.

But first, a recap. For the U.S. financial system, 2017 was marked by five main themes: The GOP’s “You All Just Got a Lot Richer” Corporate Tax Reduction Plan; Big Banks Still Bad; The Fed’s Minor Policy Shift; Debt; and Deregulators Appointed to Positions of Regulatory Authority.

Banks Are Still Big and Bad

The Big Six banks have paid billions of dollars in settlements for a variety of frauds committed before and since the 2007-2008 financial crisis, but that didn’t keep them from tallying up new fines in 2017. The nation’s largest bank, JPMorgan Chase, agreed to pay $53 million in fines for scamming African-American and Latino mortgage borrowers with disproportionately higher rates than for white borrowers. The Consumer Financial Protection Bureau fined Citigroup $28.8 million for not disclosing foreclosure-avoiding actions. Bank of America got fined $45 million for its foul treatment of a California couple trying to save their home.

But the Big Six bank that received the most attention in 2017, as it did in 2016, was Wells Fargo. The number of people affected by its fake-account creation scandal grew from 2 million reported in 2016 to about 3.5 million. That increase resulted in Wells Fargo expanding its associated class-action settlement to $142 million.

Wells Fargo was mired in smaller scandals, too. For instance, it charged 800,000 customers for auto insurance they didn’t need, raised mortgage rates for certain customers without properly disclosing it was going to, and made a bunch of unauthorized adjustments to people’s mortgages.

No Glass-Steagall Reinstatement, More Deregulation

The idea of reinstating the Glass-Steagall Act of 1933 featured in both the Democratic and the Republican National Committees’ platforms during the campaign season. But Trump’s treasury secretary, Steven Mnuchin, made it clear multiple times there would be no such push from the administration, arguing against doing so before senators including Elizabeth Warren and Bernie Sanders.

To emphasize his disdain for regulation and oversight, Mnuchin also pushed the Financial Stability Oversight Council, over which he presides, to vote 6 to 3 to rescind American International Group’s designation as posing a potential threat to the U.S. financial system. Thus, AIG will no longer be paying penance for its role at the epicenter of the last financial crisis by filing regular risk reports anymore. Federal Reserve Chair Janet Yellen also supported the move.

Consumer Financial Protection Bureau Bashing

In a major blow to citizen security, Richard Cordray, the Obama-appointed regulator, resigned as director of the Consumer Financial Protection Bureau in November.

During his six years at the helm of the CFPB, which the Dodd-Frank Act formed in 2011, the 1,600-person regulatory entity accomplished a lot. It has provided $11.9 billion in relief to consumers for enforcement actions affecting more than 29.1 million people, handled 1.2 million consumer complaints and garnered timely responses on concerns for 97 percent of consumers.

Still, Trump appointed White House budget director Mick Mulvaney to the post that Cordray vacated. Remember: Mulvaney as a congressman wasn’t a fan of protecting consumers. “I don’t like the fact that [the] CFPB exists,” he said. “I will be perfectly honest with you.”

Over at the Office of the Comptroller of the Currency (OCC), Joseph Otting, Mnuchin’s former partner in the takeover of IndyMac and subsequent flurry of foreclosures, was confirmed to the top position. In that spot, Otting will be able to help the Trump administration dial back more post-crisis bank regulations.

The Fed and Debt Bubbles

The Federal Reserve raised rates three times this year. With trepidation that more or larger hikes would cause a market meltdown (because cheap money has lifted banks and markets over the past decade), each time the Fed acted, it did so by the smallest sliver it could—25 basis points. All told, this brings the total rate hikes of 2017 to 75 basis points. The short-term interest rate now sits in a 1.25 percent to 1.5 percent range.

As part of its rate-hike-into-strength message, the Fed forecast that the job market and economy will further improve in 2018. Trump’s appointed Fed leader, Janet Yellen’s No. 2 man, Jerome Powell, will take stewardship of the Fed in February 2018. Policywise, he will do exactly what Yellen and Ben Bernanke did before him, given that’s how all his votes went—albeit while advocating less oversight of the big banks. That’s because cheap money turbo-boosts the stock market, and quick rate hikes can harm the bond markets.

The reality is that the Fed and the administration are scared that selling too many bonds back into the capital markets will result in broader sell-offs, which could lead to another credit squeeze and possible recession, not to mention losses for the big banks exposed to those corporations.

Zombie Companies

Fueled by cheap Fed money and low rates, the amount of outstanding corporate debt has nearly doubled from pre-crisis levels of $3.4 trillion to record levels of $6.4 trillion.

By Oct. 1, U.S. investment-grade corporate debt issuance had already surpassed $1 trillion—beating 2016’s pace by three weeks. The amount of speculative-grade (or junkier) corporate debt issued during the first three quarters of 2017 was 17 percent higher than over the same period in 2016. Altogether, that means that U.S. corporate issuance is set for another record year, as well as the sixth consecutive year of increased corporate debt issuance.

As history has shown us, all bubbles pop. Until then, certain companies are the equivalent of the living dead. The Bank of International Settlements (BIS), or central bank of global central banks, defines zombie firms as “firms that could not survive without a flow of cheap financing.” The latest BIS Quarterly Report labeled one of every 10 corporations in emerging (EME) and advanced countries as a “zombie.”

Corporate debt of nonfinancial U.S. companies as a percentage of GDP has surged before each of the last three recessions. This year, it reached 2007 pre-crisis levels. That didn’t end well last time. Plus, now, that debt has been powered by central banks the world over.

And whereas, in the past, companies used some of their debt to invest in real growth, this time corporate investment has remained relatively low. Instead, companies have been on a spree of buying their own stock, establishing a return to 2007-level stock buybacks.

Corporations and Taxes

Companies have taken advantage of cheap money to increase their debt and buy their own stock, even though Trump and the GOP peddled the notion that decreasing their tax rate by a whopping 40 percent would move them toward diverting their money from the stock and bond markets into jobs and wages.

The GOP tax bill cuts the corporate tax rate from 35 percent to 21 percent. Collectively, large U.S. companies only pay an average effective tax rate of 18 percent anyway. They only contribute 9 percent to the overall tax receiptsthe U.S. government receives each year.

Companies like General Electric haven’t paid any taxes in a decade. But more to the point, that tax cut is another form of cheap money giveaway. Even Jamie Dimon, chairman and CEO of JPMorgan Chase, concurred. He called the tax cut a “QE4” (another round of quantitative easing, added to the three rounds the Fed executed over the past decade to reach $4.41 trillion in credit).

Looking Ahead to 2018

As we enter the new year, consider this: All the Fed talk about “tapering” or reducing the size of its book, and even the 75 basis points of rate hikes, are a setup for the next act of the same play.

Since the Fed’s announcement that it was going to stop reinvesting the interest payments on the bonds it’s holding, the size of its book has been about the same. There’s always a mismatch between what the Fed says and what it does.

So despite its tapering talk, the Fed’s balance sheet is down a mere $10 billion (an equivalent of a rounding error) this year. Its book of assets remains at $4.41 trillion, a figure equivalent to 23 percent of U.S. GDP. Incoming Fed Chair Powell is more likely to keep supplying cheap money than withdrawing it from the markets in the instance of any wobbles.

What does that mean? Financially speaking, 2018 will be a precarious year of more bubbles inflated by cheap money, followed by a leakage that will begin with the bond or debt markets. The GOP tax cuts won’t technically kick in monetarily for corporations until after the year is over in 2019, but the anticipation of extra funds will fuel more buybacks. This will help to provide cover for any rate hikes the Fed implements, because it provides corporations the ability to boost their own share prices further.

Meanwhile, the Treasury Department, Federal Reserve and other smaller regulatory authorities in Washington will push for greater deregulation of the financial systems and banking industry on any level possible. If there is another financial crisis in 2018 or later, it will be worse than the last one because the system remains fundamentally unreformed, banks remain too big to fail and the Fed and other central banks continue to control the flow of funds to these banks (and through to the markets) by maintaining a cheap cost of funds.

Politically, no one in any position of the most power will do anything to fix any of this. It's up to us to push it.

My Political-Financial Road Map for 2017

Happy New Year! May yours be peaceful, safe and impactful!

As tumultuous as last year was from a global political perspective on the back of a rocky start market-wise, 2017 will be much more so. The central bank subsidization of the financial system (especially in the US and Europe) that began with the Fed invoking zero interest rate policy in 2008, gave way to international distrust of the enabling status quo that unfolded in different ways across the planet. My prognosis is for more destabilization, financially and politically.  In other words, the world's a mess.

Over 2016, I circled the earth to gain insight and share my thoughts on this path from financial crisis to central bank market manipulation to geo-political fall out, while researching my new book, Artisans of Money. (I’m pressing to hand in my manuscript by February 28^th – the book should emerge in the Fall.)

I traveled through countries including Mexico, Brazil, China, Japan, England and Germany, nations epitomizing various elements of the artisanal money effect. I spoke with farmers, teachers and truck-drivers as well as politicians, private and central bankers. I explored that chasm between news and reality to investigate the ways in which elite power endlessly permeates the existence of regular people.

In last year’s roadmap, I wrote we were 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.”    

That happened. Going forward, as always, there’s an endless amount of information to process. The state of economies, citizens and governments remains more precarious than ever. Major areas on the upcoming docket include – central bank desperation, corporate defaults and related job losses, economic impact of political isolationism, conservatism and deregulation, South America’s woes, Europe’s EU voter rejections, and the ongoing power shift from the West to the East.

For now, I’d like to share with you some specific items - which are by no means exhaustive, that I’ll be analyzing in 2017.

1) Watching the Artisans of Money (Central Banks)

On December 16^th, 2015, after equivocating for seven years, the Fed raised rates by 25 basis points. To hedge itself against its own decision, the Fed claimed that despite this move (that the financial press considered indicative of an actual policy shift) its "stance of monetary policy remains accommodative after this increase.” Sure enough, the Dow opened January, 2016 with a 10% drop. The US stock market exuded its worst 10-day start to a year since 1897. Other global markets fared worse.

Four hikes were initially predicted for 2016. We got just one. Another 25 basis points followed – nearly to the day, on December 14, 2016. The Fed has now forecast another three hikes, for 2017. If you do the math, consider the reasons behind the Fed’s wishy-washy language, and ignore economic rhetoric, that translates to one hike this year.

Last year, I noted that the Fed’s December 2015 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.” This happened. Given the tempestuous state of the world and over-optimism surrounding Trump’s ability or desire to follow through on certain campaign vows, I see no reason for a different rate pattern in 2017.  

2) Volatility for Stock Markets

Following a volatile start to 2016, markets rebounded. Not because fundamental economic conditions of the world’s major countries improved instantly or geo-political tension declined. But as other major central banks took over the cheap money mantle.

The cavalry appeared. The Bank of Japan hit negative rate territory in January, 2016. The European Central Bank adopted negative rates in March, 2016.  As a result of these major central banks equalizing the cost of global money back to zero, the stock market bubble marched on.  And if that wasn’t enough to show that liquidity and crisis concerns still exist, both central banks introduced additional manifestations of quantitative easing during the year with the ECB extension in time and BOJ extension up their yield curve.

In November, Donald Trump’s victory further elevated stock markets, especially sectors most likely to be deregulated by the incoming billionaire club administration, like banks.   

Yet, the idea that any President can control the economy with a tweet and a set of disparaging or aggrandizing comments is foolish.  Once the hype of a reality TV show president subsides into prevailing political and economic uncertainty, stock and bond markets will end the year crumbling in the dust of broken promises.

3) Rising Corporate Defaults and Oil Prices

Extending a disturbing trend, the number of large global corporations that defaulted in 2016 outpaced those in 2015 by 40 percent. The figure for 2016 hit 150, making 2016 the worst year for corporate defaults since the financial crisis.

If Trump wants to make America great again, he should start by examining the leverage in corporate America, where 2/3s of global corporate defaults occurred. Of those, 50 out of 63 globally, were in the oil and gas sector.  (Emerging markets accounted for 28 defaults and Europe for 12).  S&P expects the default rate to rise in 2017. And if Trump’s nominee for Secretary of State, Rex Tillerson, has anything to do with it, oil prices won’t move up much for 2017. This will mean more defaults in that sector. Based on his recent statements, his policies are cushioned in the ideology of pumping more oil, not less. 

4) Turmoil in South America

Last year, given how scandal-plagued Brazil was, I thought no matter what happened regarding now-former Dilma Rousseff’s government, its markets would slip along with its economy. Yet, against all logic, interim President Michel Temer, even more plagued by scandal than his ejected predecessor, got a Hail Mary from the international investor community. Much of that had to do with Wall Street’s old friend Henrique Mereilles nabbing the minister of finance spot (having run Brazil’s Central Bank under President Luiz Inácio Lula da Silva (a.k.a. “Lula”) from 2003 to 2010.)

I also said that Argentina wouldn’t be having a “walk in the park.” The new centrist government removed currency capital controls in order to attract foreign money, which had the side effect of crushing the Argentinean peso.  Unemployment and general angst increased. A group of protestors recently stoned the car of President Macri amidst growing resentment of his austerity measures.

Venezuela, a nation dependent on oil for 96% of its exports has erupted into total chaos. As perhaps the desperation move “currency controls” or restrictions were introduced in early December President Maduro announced  plans to withdraw the 100 bolivar note which makes up 77 percent of all currency in circulation and closed the borders to stop people holding Venezuelan currency outside of the country.  That caused mass panic and Depression like bank lines, looting and violence. The government chose to keep the 100-note in circulation until January 20. That’s a temporary measure.  So is a large year-end bond issue from the government forced on the state banks. Things will get uglier. Restricting currency circulation is a harbinger of the war on cash everywhere.  Contagion in South America is more likely to be acute this year.  

5) First Half: Rising Dollar/ Sideways Gold, Second Half: Reverse and Cash

Last year, I said that despite other countries (and the IMF) seeking to battle the almighty Greenback, global malaise would “keep the dollar higher than it deserves to be.”

Then, I expected gold “to rise during the summer as a safe haven choice” which it did and to “end the year lower in US dollar terms” which it also did.   This year, it’s likely that the dollar will remain strong in the beginning given the recent Fed hike, expectations of more, and initial enthusiasm for Trump’s promises. This will keep a lid on gold.  

Yet once it becomes clear that US economic conditions remain lackluster and inequality rampant, the dollar will weaken and gold will appreciate.  In the backdrop, though the US remains the world’s biggest gold holder, nations like China, India and Russia will continue to stockpile gold in a bid to diversify against the dollar.

In addition to watching the yellow metal, as I’ve urged over the past few years, routinely extracting cash from bank accounts remains a smart defensive play for 2017.  People have asked me where to keep it. The answers depend on individual financial situations, but paying down debt, buying necessary hard assets and staying liquid with the rest in physical reach (there’s a reason for the term, keeping it ‘under the mattress’ is practical.

6) Power Shift from West to East through China and Japan

As it has done since cheap money became US economic and financial policy in the wake of the financial crisis, China continues to forge a US-independent path. It did so through inclusion of the Renminbi in the IMF’s SDR basket in October 2016. It also established a stronger relationship and side agreements with Russia, the BRICS community and increasingly with Europe and the United Kingdom post the Brexit vote. That was no accident, but part of a strategy to be distanced from the risk the US and its central and private banking system poses.  The New Development Bank (formerly referred to as the BRICS bank) headquartered in Shanghai, China, offers alternatives to old institutions like the IMF, and allows for a rise of eastern and emerging nations to succeed in a collective format.

The trajectory of this power shift from the US dollar and US policies will escalate. If Trump and his team go the isolationist, or bilateral trade agreement routes, it will only push China to increases its economic, military and diplomatic presence globally. While Trump (and the outgoing Obama administration) accuse China of currency devaluation, the People’s Bank of China (PBOC) has actually been selling US treasuries to bolster its currency - hit by capital outflows, not manipulation.  China sold $22 billion of US treasuries in July. Its US government debt holdings are at their lowest level in more than three years, and these sales, especially in the face of Trump’s scorn, will continue.

These accusations and geo-bullying will also push former adversaries, China and Japan closer together. The two nations are already negotiating some historic agreements.  We could be approaching a new era in which Sino-Japanese relations allow for diplomatic normalization and more economic partnerships, which would be mutually beneficial.

Over 2016, Japan entered greater cooperation with India and Russia.  The agreements it arranged will bolster Japan’s potential for 2017. The Yen should appreciate as a result. Even in the case of further economic turmoil in the US and around the world, the Yen will benefit, as it did during the financial crisis, from being a safe haven currency.

7) More Anti-EU sentiment and economic hardship in Europe

In 2015, Mario Draghi, European Central Bank (ECB) head decided to extend Euro-QE into March 2017. At the start of last year, I said that, “The euro will continue to drop in value against the dollar” and “negative interest rates will prevail.” That happened. And despite no evidence of any economic benefit (and purely to help ailing banks) Draghi extended Euro-QE to December 2017, with a promise to do more if necessary.

Meanwhile, mega banks in Europe continue to buckle, economies continue to stagger and the uprising of populations increasingly apprehensive of the entire EU apparatus will be felt in votes this year. Already, much of Eastern Europe (with notable exceptions of Austria and Romania) has elected anti-EU politicians. With major elections approaching - in the Netherlands in March,  France in May and Germany likely in October, the only way for the sitting elite to retain power is to make the markets seem frothy. That means more QE manifestations from Draghi, a weaker euro, more bubbles in major European stock markets and greater presence from conservative, protectionist politicians.

In Europe, weaker countries are struggling more than ever. In Greece, more than one out of every three people now lives in poverty and 25% of Greeks are unemployed and receive no benefits. Even stronger countries like Norway and Switzerland will be at economic risk as they begin to negotiate trade agreements with the central EU.

8) Upside for Russia

Any way you look at it, Russia will be a key economic beneficiary for 2017. The ruble appreciated about 21% vs. the dollar in 2016, outperforming all other emerging market currencies for the year. This trend will continue. Russia’s MICEX stock market index rallied 24% for 2016. Russian bonds will maintain that path amid high interest rates (around 10%) and a positive geo-political outlook relative to the US.

Russia will enjoy warmer relationships with the US under the Trump administration and find and ally in Rex Tillerson as Secretary of State. It has strategically engaged in trade agreements with China to diversity against US ones.  Simultaneously it has furthered relations with many Eastern European countries that have been disillusioned with the EU.  As more pro-Russia officials are being voted into power, the positive impact on Russia’s economy will carry on.

These alignments could provide Russia more impetus militarily. Having stepped in to assuage the situation in Syria while the US remained relatively silent, it can also capitalize on its Middle East relationships.  Russia supplies nearly one-third of the EU’s natural gas, but it has also begun clean energy initiatives through the BRICS development bank and other platforms, a strategic diversification. That’s why the ruble will outperform the euro and the pound sterling.

9) Angst in the United Kingdom

Before being picked as Trump’s Commerce Secretary, billionaire, Wilbur Ross called Brexit a “God-given opportunity" for UK rivals.  As commerce secretary, he can act upon that characterization - through negotiations of new US-UK trade agreements that favor the US. That would increase UK reliance on more optimal EU negotiations, by no means a given. The UK can also hope that China and the BRICS will offer better opportunities, which increases the West to East power shift.

The sterling fell 14% in 2016, due to Brexit and anxiety over what form it will eventually take.  Despite a year-end dead-cat bounce, uncertainty can only mount once negotiations truly begin.  As the Financial Times noted, the number of times the words “uncertain” and “uncertainty” appeared in the Bank of England’s Monetary Policy Committee meeting minutes in 2016 rose 78 per cent vs. 2015.  That doesn’t bode well for the sterling. But in the event of a Bank of England rate cut (to compensate for the Fed hike), there would be another temporary boost to the UK stock and bond market.

10) The Trump Effect Will Accentuate Unrest

Trump is assembling the richest cabinet in the world to conduct the business of the United States, from a political position.  The problem with that is several fold.

First, there is a woeful lack of public office experience amongst his administration. His supporters may think that means the Washington swamp has been drained to make room for less bureaucratic decisions.  But, the swamp has only been clogged. Instead of political elite, it continues business elite, equally ill-suited to put the needs of the everyday American before the needs of their private colleagues and portfolios. 

Second, running the US is not like running a business. Other countries are free to do their business apart from the US.  If Trump’s doctrine slaps tariffs on imports for instance, it burdens US companies that would need to pay more for required products or materials, putting a strain on the US economy. Playing hard ball with other nations spurs them to engage more closely with each other. That would make the dollar less attractive. This will likely happen during the second half of the year, once it becomes clear the Fed isn’t on a rate hike rampage and Trump isn’t as adept at the economy as he is prevalent on Twitter.

Third, an overly aggressive Trump administration, combined with its ample conflicts of interest could render Trump’s and his cohorts’ businesses the target of more terrorism, and could unleash more violence and chaos globally.

Fourth, his doctrine is deregulatory, particularly for the banking sector. Consider that the biggest US banks remain bigger than before the financial crisis. Deregulating them by striking elements of the already tepid Dodd-Frank Act could fall hard on everyone.

When the system crashes, it doesn’t care about Republican or Democrat politics. The last time deregulation and protectionist businessmen filled the US presidential cabinet was in the 1920s. That led to the Crash of 1929 and Great Depression. 

Today, the only thing keeping a lid on financial calamity is epic amounts of artisanal money. Deregulating an inherently corrupt and coddled banking industry, already floating on said capital assistance, would inevitably cause another crisis during Trump’s first term.

In closing, I share with you my yoga instructor’s New Year’s motto:

Don’t half-ass anything.

That means whatever you do - imbue it with passion, courage, attention and conviction.