by Nomi Prins, Nomi Prins:
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 28th – the book should emerge in the Fall.)
I traveled through countries 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 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 16th, 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.”
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