Economy

Published on January 5th, 2016 | by James Howard Kunstler

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Kunstler’s predictions for 2016: Banking and Markets

By James Howard Kunstler

(See Kunstler’s introduction to his round of predictions here.)

The big event of the year past was the Federal Reserve’s Waiting for Godot act concerning Money_black_hole_by-sodaheadthe fed funds rate.

When Godot finally showed up two weeks before year’s end, it was in the expected-but-pitiful form of a 25-50 basis point hike — which gives the impression of a possible 50 point rise, but with the way-more-likely probability of actually sticking to the lowest end of the gradient (and actual overnight lending rates were already a few basis points above zero, so the net was really less than 25 basis points.)

The background of this charade was pretty clear to anyone not brain damaged from the rigors of playing Candy Crush on their phone:

  • the Fed was hiking rates into a wobbling global economy
  • they were forced to act at year’s end or surrender the last shreds of their credibility (i.e. being taken to mean what they say)
  • and they left the door open to retreat in 2016 if necessary.

But the damage to the Fed had already been done. They were unmasked as a propaganda machine powerless against the real tides of the economy, creating only mischief and misunderstanding, and ultimately undermining all soundness in the relationship between money and real human activity.

Anything they do in the election year ahead will be viewed with suspicion, specifically of pimping for Hillary Clinton’s coronation. And her relationship with the biggest banks is well-understood.

So they had to make their grand gesture in December.

The stock markets skidded a little below sideways this year, except for the Nasdaq which glided up more than 5 percent (techno-grandiosity rules!) — with one upchuck at the end of the summer that was remedied by China bailing out its own janky stock markets and playing games with its currency.

Gold and silver continued their four-year swoon thanks to repeated massive wee hour dumps of futures contracts before the traders in New York even got out of bed. The charts conclusively show this shady activity, raising the question: why would any seller want to hugely undercut the price of what he seeks to sell by selling into a market where no buyers are present… or even awake? The answer seems to be: to make the dollar appear more firm than it really is.

The many years of zero interest rate policy (ZIRP), combined with the previous accumulation of debt unlikely to be paid back has made it ever more difficult to issue new debt with any likelihood of being paid back. But ZIRP has also nullified the relationship between interest rates and risk. In a system unencumbered by central bank interventions, interest rates would have to go a whole lot higher on instruments with such poor prospects. Of course, higher interest rates would only make new bonds that much less likely to be serviced by their issuers, especially governments laboring under Himalayan-scale debt loads. The tension in this equation has been provisionally papered over by the use of interest rate swaps, reverse repos, and other abstruse machinations and derivatives aimed at suppressing true price discovery.

The corporate stock buyback fiesta of 2015 was the perfect example of an anything goes and nothing matters ethos. It happened in full view of everyone, and it happened solely to assure corporate executives that they would enjoy their bonuses and fringe benefits and nobody complained about it. Even so, it barely accomplished anything index-wise. The markets went sideways even with all that insider action because the fundamentals suck and the global economy was obviously sinking into a deflationary contraction.

My auditors derive no end of mirth from my attempts to predict the stock markets each year. So, to add to their enjoyment, I’ll be even more precise this time around. I predict that the S & P will top on January 15, 2016, at 2142, and then crumple below 1000 by June. Carnage at the margins of the bond market — high yield paper — will spread to the center and we’ll finally see the re-pricing of risk back in the European sovereign market. French, Spanish, UK, and Italian 10-year paper below 2.0 percent? What a colossal joke that’s been! Fasten your seat belts and check your pension funds.

Oil and Deflation are up next: Further collapsing oil prices will lead to more bankruptcies in the oil patch (and more economic chaos spreading outward. or skip to part 3, Geopolitical Clusterfuck part 4, Election 2016, or part 5, Climate Change.

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About the Author

James Howard Kunstler has been writing about peak oil and the destruction of American civil society since the 1990s. He is the author of The Long Emergency, Too Much Magic, The Geography of Nowhere, the World Made By Hand novels, and more than a dozen other books. He lives in Washington County, New York.



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