Disaster and Other Estimations for 2015

The New Year is nearly here.  So are the new hopes and new dreams.  We’re certain 2015 will be the year you get everything you deserve in life.  But what else will happen?

Today we hold a licked index finger up to see what way the winds will be blowing in 2015.  Obviously, this isn’t an exact science.  Making predictions about the future is more art than science anyway.

But this technique is as good as any we’ve ever come across.  It is certainly better than taking a chart and extending a trend line out into the future.  For, where investing is concerned, past performance is no guarantee of future results.

Hence, chasing last year’s star performers or hot asset classes can be a good way to lose money.  Chances are you will be buying at all-time highs.  This is what most people do…they buy high and sell low.

Alternatively, investing in beaten down companies that have suffered from dreadful industry conditions can be more profitable.  Eventually these stocks will revert back up to, and perhaps overshoot, their mean.  In other words, higher returns are made by buying stocks when they’re cheap and out of favor.

Before we begin with our estimations for 2015, we must pause to offer a full disclaimer…

“Those who have knowledge, don’t predict.  Those who predict, don’t have knowledge,” noted ancient Chinese Philosopher Lao Tzu.  Certainly, Lao Tzu is much, much smarter than we are.  But we won’t let that stop us.

We sharpen our pencil and face our limitations, nonetheless.  We are provoking thought and after entertainment.  What follows, for fun and for free, are several simple guesses for the year ahead…

Bread and Circuses, Shock and Awe

Make no mistake, large boils are festering just below the geopolitical surface.  Certain century old disputes can’t be kept from swelling forever.  It is likely 2015 will be the year several of these boils pop and splatter conflict across the globe.

The escalation of Putin’s actions in Ukraine and Crimea are obvious.  New sanctions will further Putin’s defiance.  Similarly, you can count on increased conflict with ISIS and the global war on terror.

But the real boiling point for global conflict will come out of the East China Sea…particularly, the festering dispute between Japan and China over the Senkaku-Diaoyu Islands.  Last year China set up a large Air Defense Interception Zone in the East China Sea to strengthen territorial claims in the vicinity of the Islands.  Japan claims the territory as theirs and says there is “no dispute” over who the Islands belong to.

What makes this a real concern, is the United States has a treaty obligation to defend Japan in the event of an “armed attack” on the Senkaku-Diaoyu Islands.  As things come to a head in 2015, the United States could get pulled into a conflict with China over their dispute with Japan.  This, no doubt, would result in a major global conflict.

According to the IMF, China now has the world’s largest economy.  China’s next feat will be to have the world’s most powerful military.  This age old dispute with Japan provides China justification to strengthen their military.  We expect you’ll hear more of this as the year progresses.

As for the economy and financial markets…

Disaster and Other Estimations for 2015

These days one should always hope for the best and prepare for the worst.  In 2015, it’s possible the economy could chug along just fine.  Growth could run at a nice 3 percent clip and inflation could hit the Fed’s 2 percent target.  The bull market in stocks could also extend for another year.

Yes, these things are all possible.  In fact, they may come to pass.  But disaster is also possible…it is something you should expect in 2015…

For instance, the stock market is at all-time highs.  Moreover, it has been at all-time highs for quite a while.  Of course, markets breathe in and they also breathe out.  So, too, stocks go up and they also go down.

In this regard, it is highly likely something will trigger a 20 to 40 percent decline in the stock market before the close of 2015.  That something could be the collapse in junk bonds.  This is what happened prior to the stock market crash in 2008.  At the moment, the recent collapse in oil prices is prompting a collapse in junk bonds.  Stocks will be next.

With respect to the economy, as 2014 concludes things are looking up.  Third quarter GDP, as recently reported by the Bureau of Economic Analysis, grew at an annual rate of 5.0 percent.  Consumer confidence is at its highest level since before the Great Recession.

Unfortunately, these sanguine economic readings won’t last.  The majority of the high paying jobs that were created in the U.S. over the last several years have been to support the fracking boom.  Now that oil prices have crashed, these jobs will disappear.  The advantage consumers get from lower gas prices won’t make up for the loss of high paying jobs.  Like Europe and Japan, the U.S. economy will be dragged down toward recession as the year progresses.

The strong dollar will also be a challenge to the Fed’s 2 percent inflation target.  This will force a change to the Fed’s current position that they will begin raising the federal funds rate by mid-year.  When the stock market tanks, in concert with price deflation, the Fed will panic.  Not only will they continue with their zero interest rate policy…they will also let loose with a new round of quantitative easing – QE4 – or some other evolution in their insane monetary policies.  For instance, they may print money and buy stocks outright.

Gold will likely be flat…or it may even decline to about $1,000 per ounce.  Shrewd wealth savers will take this opportunity to calmly and quietly exchange some of their dollars for gold.  Several years from now, when deflation reverses to inflation, gold – and dryland farming property – will be the wealth preserver of last resort.

Lastly, dependence on debt and on zero interest rates has set the US economy – and most economies – up for disaster.  Currently, deflation is pushing down treasury yields…further puffing up a debt bubble that’s been decades in the making.  Will 2015 be the year it finally pops?

No one really knows.  But unlike oil exploration junk bonds, the Fed will not allow the Treasury to default on its debt obligations.  They will do everything they can to push deflation to inflation, to lighten the government’s debt burden.  They may not succeed in 2015.  However, they eventually will.  In short, don’t touch bonds…including treasuries.

Happy New Year!

Sincerely,

MN Gordon
for Economic Prism

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