I guess you could say that 2015 was anemic—and that is an understatement. In early 2015, I predicted we would have little to no growth. I pointed out that cash may be king, and up until Tuesday I was right. Certainly, some individual stocks outperformed cash, but overall, if you were in cash for the entire year, you fared OK.
What about 2016? Looking at all the economic data for global growth makes it almost impossible to believe that global expansion opportunities will improve in 2016. I do believe that here in the U.S., 2016 could be slightly better – very slight—assuming there will be a positive seat change on Pennsylvania Avenue in November.
One of the big issues in 2016 will be the Eurozone’s utter dependency on monetary policy to stop their problems. Other challenges include strengthening their currency, strengthening the banking sector, and strengthening the industrial sector. Consider consumer spending, productivity levels, wage levels, and increase of inflation—all amid an escalating refugee crisis. Then there are the labor market and regulatory crisis. Topping the list would have to be debt problems throughout most of the nations in the Eurozone—debt problems they apparently are not very worried about. All this is likely to hold any true global economic growth at bay for 2016 (with India likely to be the good growth story for 2016 and beyond).
The oil industry will see more crises in 2016—primarily because we lifted the 40-year ban on exporting crude oil (I am the only one in this camp for this reason). This will change the whole dynamic of global oil. As I said on the day the legislation was passed, this action will create turmoil in the oil markets. Brent Crude Oil will have to find parity, even dip below West Texas Intermediate, creating a new crisis and possibly even a new Arab Spring in the Middle East. I have been astonished at how many analysts have missed what is likely to go on in the Middle East—things already beginning to take place as we enter 2016. Saudi Arabia is cutting their expenses dramatically since they are already well into their cash reserves. At the same time, they are raising fuel prices. Because of their stubborn unwillingness to cut production, they have now painted themselves into a corner and will face potential political upheaval in their nation because of it. And now it may be too late to cut production because, even with a cut production, they may not see West Texas Intermediate increase their prices. If this is the case, then they will lose a competitive edge to the imports of American oil, thereby losing the very thing they were trying to protect by not cutting production—market share. The Organization of the Petroleum Exporting Countries (OPEC), and Saudi Arabia in particular, will have to reconsider and think hard about what they could do about a possible coming crisis in 2016 and this could change the oil dynamic and keep prices range bound for all of 2016.
Many are watching Asia (China and Japan in particular), but we now have to include Russia. They continue to slow down—once again on cheaper oil as we see a commodity crisis brewing. China’s government has committed to certain reforms, but remember –this is a Communist government that changes like the wind. Japan has sunk back into recession and will find it difficult to come up with a true revitalization without getting into further debt, printing more money, and dramatically devaluing their currency.
Canada is on the doorstep of serious downturns in their economy, thanks to the collapse in oil prices. The global economy is absolutely dependent on America somehow returning to economic global leadership. However, Washington lost that role some seven years ago and is obviously reluctant to take the lead in anything—let alone global leadership in the economy. Doing so would be extremely challenging for America and I don’t see much possibility for us to pull that off in 2016 since we must have “leaders” in order to take “leadership.”
In 2015, I recommended carrying significantly large cash positions. The most disappointing part of the outlook for 2016 is that I will most likely once again recommend significantly large cash positions through at least the first half of the year. I don’t know that cash is going to be king as it was in 2015, but certainly we cannot be prepared to get fully involved in the markets. We do need to keep our eyes on some select picks and some income-producing kinds of positions—particularly if we are retired. But the bond market will offer us more risk than return and I have not even talked about debt or derivatives. Unfortunately, our oil stocks will continue to struggle but, of course, these are buying opportunities.
I do believe 2016 could be a bit more stable than 2015, but so much depends on the global economy, global leadership, wages, inflation, and . . . yes, unfortunately, monetary policy and fiscal policy coming out of Washington D.C. How much longer can we take a 2.5 percent GDP growth rate? Likely at least another year. We need to pray that 2016 ushers in some leadership. Though I feel 2016 may be a bit more stable then this year, we need to pray there will be no major geopolitical event, terrorist attack, or more threat to peace and freedom throughout the world. Otherwise 2016 will likely become another volatile and unpredictable year.