Wednesday, January 27, 2016

Risks Escalating

- "It's tough to make predictions, especially about the future."

- Yogi Berra

In my Forecast 2016 I mentioned many factors that could cause a severe reaction in the market and overall economy. In just a few weeks many of those risks have increased rapidly and this in itself has caused the market to stagger. As I claim in my unpublished work that every action has a reaction and things seldom operate in a vacuum. Let us take a look.
Weather: is being mentioned in this election year and climate change will be such an issue that new regulations will develop. The problem is both what is offered and the behind the scenes pushback on businesses that these rules could effect. Good ideas are out there, but many factors suppress their formation like creditability of influence, the willingness of politicians to weigh success over ego and how it is presented to the public, especially after the response of the opposition.
Cyber-Hacking: The Chinese Premier shook hands with President Obama, saying that he will look into ending cyber-hacking. The next day the hacking continued. Candidates like Donald Trump are looking to impose tariffs on Chinese products to help American workers and companies. It is a small step to punish Chinese hacking by adding financial fines to cutting them off completely until the theft stops. I like this protection for our economy, however one must be careful not to offend a nation and start another cold war.
New Bretton Woods: With the currency battles going full blast like China devaluing amongst others and the consequences of low oil prices to exporting nations like Canada which some analyst see falling to .52 cents against the US dollar, something needs to be done. Going back in time when Tricky Dicky took the US off the gold standard(1971) and ended convertibility to gold, the world has lacked a stable financial currency to transact trade. The US dollar won by default since we had the largest economy and strongest military. However, even President Nixon knew his bombshell would have repercussions. He offered in a speech to have another Bretton Woods which was an allied agreement to undertake world commerce after WWII. All these years later, the world still waits for an agreement. It needs one, least a bureaucratic agency like the IMF takes control, especially if another crisis develops and it introduces its SDR currency to the world. It is always best to have things and feelings expressed without the pressure of a crisis rather than take what is pushed out in times of turmoil. Does TARP ring a bell? You remember that, don't you: Money for the banks at taxpayer's expense. Keep in mind we haven't heard about Greece in awhile and Brazil may get the Olympics in 2016, but its economy ain't worth bronze or its currency.
At certain times certain industries merge. We are at that time in the oil industry and all the service branches that extend from its core. There has been talk of Western Refining taking over NTI. I'm sure the phones are ringing off the hook as oil hit $26 this past week before rebounding to $32 as if that is a rebound? Many small or under-capitalized firms will be force into bankruptcy. The smart ones will utilize a merger to survive. Don't listen to the talking heads who say this is normal which it is, but okay which it isn't. There could be serious problems like derivatives firing off. Every action has a reaction and things seldom operate in a vacuum. Sound familiar? One problem. The potential merger talks will uncover "poison pills" and class action suits will fly all over the place like on late night TV ads.
One related aspect to mergers is funding and its cost. A serious liquidity problem is developing in the market. The Fed is now controlling the "repo" market by injecting one trillion on a daily level. They have crowded out all the old players. In addition, treasury bonds are separating to extreme levels from the cost of junk bonds. This is a sign of liquidity problems in the market. It reveals the market is stressed.
P.S. :This just in - Apple reported a sales decline. Can Samsung be far behind? After all how many people are left who don't have a cell phone and so many have more than one. Can you say, saturation point?
desperate governments will seek revenues. Good companies like Silver Wheaton and others will be in their crosshairs. I predicted a rise in the US gas tax, but it won't happen until after the election. However, desperate governments could respond sooner than later and it has been months since Greece has been in the headlines not to mention the on going problem with refugees in Europe and budgets that are in duress.
Adding the above and you have a pot brewed by a witch. Keep your eyes and ears open.