World Economic Outlook Has Turned Downward

Discussion in 'West Mall' started by Musburger1, Jan 15, 2016.

  1. Musburger1

    Musburger1 2,500+ Posts

    Or so it appears to me. China, the price of oil, and the stock markets are strongly correlated and and all three have been plunging.

    Let's take a look at oil.

    Several oil exporting countries - Norway, Russia, Canada, Saudi Arabia, Venezuela, Brazil, Nigeria - are dependent on oil revenues to fuel government spending and provide income and services to much of the general population. Those budgets are being strained to the max right now and are projected to rapidly worsen during 2016. In addition to the above mentioned countries, Australia supplies China with raw materials. As virtually all commodities have crashed, Australian and Canadian currencies have deteriorated greatly against the US dollar.

    What about the US? Today, Reuters pointed out that Wells Fargo has an exposure of $17 billion to impaired energy related loans. Small and midsize oil companies are busting their butts to produce as much oil as possible in order to sell it for as much as they can just to make debt payments. When these companies default, some of the banks and investors will take a big hit; probably not on the scale of the housing collapse, but significant none the less.

    The general consensus is that once the the weak players collapse and are forced out, production will begin to fall, supply and demand will balance out, prices will rise commensurately, and then stabilize. But maybe not. The current expansion of oil was made possible by the explosion of Chinese debt over the past decade which created unprecedented demand. The Chinese poured more concrete in a few years than the US poured in a century. China built entire cities and millions of high rises that are totally unoccupied. It was the biggest misuse of capital in human history. Now its all crashing down. The housing bubble in China makes the US housing bubble in 2008 look like child's play. Despite a great plunge, Chinese stocks are still highly over valued and have room to fall much more. As Chinese wealth evaporates, so will the demand for energy. This will put further downward pressure on oil prices even with a dip in production as demand could fall at a greater rate than supply does.

    Without Chinese growth, multinational corporations will see profits fall. Cuts will be made. As I write, Walmart just announced the closing of 154 US stores affecting some 10,000 employees. As corporate profits fall, stock markets will likely continue to drop. Hundreds of billions of dollars worth of paper wealth will vanish into thin air if this plays out.

    The bursting of the enormous Chinese bubble is the catalyst, and its bursting now. The combination of globalism (the outsourcing of industry overseas as a result of free capital flows), and fed policy (artificially low interest rates) were the driving forces which created the Chinese bubble.

    Meanwhile, the world has plenty of oil, but not plenty of cheap oil. Canadian tar sands, US fracking, and deep water projects aren't profitable south of $50/barrel and in some cases maybe $90/barrel. Hundreds of billions of dollars were loaned into existence over the past 7 or 8 years to produce this oil and guess what? It can't be paid back. And whichever clown is elected to be our next President can't do a damn thing to change that fact.
     
  2. Vol Horn 4 Life

    Vol Horn 4 Life Good Bye To All The Rest!

    To be fair, Wal Mart closing stores has more to do with extremely poor business decisions than the Chinese, oil prices, markets, etc. Their business model over the past decade has been terrible causing flat to negative sales growth in like stores yet they have been opening stores like crazy. Another example of "if things aren't working, opening more stores will fix it" mentality......Whole Foods.....

    If things aren't working, the root cause must be fixed before one ever thinks about opening another store otherwise you just open another problem. Eventually they extend credit too far and run out of capital so the only way to free up cash is to liquidate.
     
  3. theiioftx

    theiioftx Sponsor Deputy

    I too expect we are about to experience a severe world economic downturn. China is the catalyst, but I also think the US economic policy will be the real problem. Both governments are lying about key economic indicators, but that Ponzi scheme is about to be exposed.

    As for WalMart, credit goes to the living wage crowd. Moving low wage workers to $15 per hour was a substantial financial hit on low performing stores.
     
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  4. nashhorn

    nashhorn 5,000+ Posts

    So what are you planning to do, gold, silver, cash, Colorado weed? Hated my conservative approach for years due to its slow growth but sure happy now because of minimal losses.
     
  5. Musburger1

    Musburger1 2,500+ Posts

    The one thing I have some control of is my health; what I eat and how I exercise. Down the road, if the health system implodes, entitlements are scaled back, and services are curtailed, I hope to be in good enough physical condition that I can adapt to whatever lifestyle is necessary to move forward. It's hard to say if the US will have a long, slow period of stagnation and lower living standards or a relatively quick drop into a collapse. Hopefully neither, but I think these are possibilities.

    As far as assets, cash or gold may be the best bet for the near to mid term.
     
  6. theiioftx

    theiioftx Sponsor Deputy

    I am pretty well diversified and have plenty of time to recover. I will likely sell some stocks this week and move more into gold as a hedge. Also, I will replenish my ammunition and add a little more than usual for security. I live on property with plenty of wildlife in case things get really bad for a really long time.

    As it falls, I will continue to buy the bargains the market offers.
     
  7. UTChE96

    UTChE96 2,500+ Posts

    I have actually been sitting on cash for some time and finally starting to find some stocks that I think are fairly valued. Of course, I am not retiring for another 20 years but I still think this correction is a good thing. Hopefully, we will soon replace the Marxist in the white house with someone who has more economic sense.
     
  8. nashhorn

    nashhorn 5,000+ Posts

    Unlike Theo I no longer have the time to recover but like Mus I have also taken more interest in personal health, prompted primarily by the continued production in grandchildren. :bow:
    As stated earlier, my ultra conservative, mainly bonds, treasurys, etc, has limited losses but I do think converting more to cash and gold may be a good idea. Depending on ones definition of fast or slow, I think this could be pretty fast development if our leaders fail to take constructive action, and I do NOT expect that.
     
  9. BevoBeef

    BevoBeef 250+ Posts

    According to the experts being quoted on NBR last Friday, I think that their comments do not jive with your dire predictions. There will be many places in the world that will be hurt drastically but the predictions for the USA are still quite strong because of the health currently. Banks are much stronger than in 2008. The stock market is just now considered to have gone into the correction territory, and some experts predict that it will be profitable by end of mid year. Most of the expert investing advisors being asked were saying that they are telling their clients to still buy value with cash that is on hand. There is a lot of liquidity in the stock market right now. This is not yet a bear market. Predictions are that the stock market will still rise in the coming year, although the volatility will be considerable. Even though the percent losses in stock prices are there, the actual volume of shares being sold are relatively low for panic selling.

    Walmart is still healthy. NBR is reporting this: Wal-Mart said Friday it will close 269 stores across the globe, including 154 in the U.S. The world’s largest retailer also will open as many as 405 stores globally in the coming fiscal year, as it shifts its focus toward Supercenters and Neighborhood Markets in profitable locations.
    Bottomline - In the coming year, Walmart will be opening more stores than they are closing. They are just wisely retooling their fleet of stores and getting rid of the loss leaders.

    My son-in-law is a financial officer in a mid-sized oil company. With oil price in the low thirties, I asked him about the health of the company and future layoffs earlier this week. He said that they are in decent shape because they have hedged against falling oil prices and will not be losing substantially. They are gearing up to start exporting oil out of this country. So they must think they they can sell their excess for a profit sometime this year. Yes, the weaker oil companies will be culled out, but the smarter ones who have been investing their capital wisely will still be around. NBR says The oil market has yet to reach a “shock price point” that will persuade drillers to lay down production.
    U.S. drillers have proved more resilient at lower prices than previously thought.

    Personally, I will let the market drop a few points more, and then I will start taking advantage of the cheapest stock prices within a year. Experts are still saying that the Fed Reserve will still increase rates a couple of times this year. That would not be happening if expectations were now that the economy is tanking.
     
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    Last edited: Jan 16, 2016
  10. Musburger1

    Musburger1 2,500+ Posts

    BevoBeef, maybe you'll be proven correct but:
    1. When have investment advisors ever uniformly say it's not a time to buy? Just like a car salesman.
    2. You are ignoring China. They are imploding and the US economy does not exist in a vacuum.
    3. If for example $1 trillon dollars is loaned into existance to produce oil, but only $700 billion of revenue is generated, eventually $300 billion plus interest is destroyed. If leveraged derivatives are thrown into the mix, perhaps more. If a prudent oil company hedges, it might save the company, but the entity on the other side of the hedge takes the loss. Either way, the losses have not been realized yet but they are inevitable and will cause great damage.
     
    Last edited: Jan 16, 2016
  11. Musburger1

    Musburger1 2,500+ Posts

    Timely to the discussion, ZeroHedge just came out with an article addressing the financial situation with respect to energy has grown to the point where the Federal Reserve has gotten involved.

    http://www.zerohedge.com/news/2016-...nergy-mark-market-tells-banks-not-force-shale

    It's not a long read, but here's a synopsis:
    The fed appears ready to intervene in much the same way as they did with the subprime housing implosion. Banks would not be forced to value their energy holdings at mark-to-market so as not to reveal impairments. Down the road, the question is whether the fed would pick "winners and losers" among the financial companies holding bad loans by purchasing the loans from them. In other words, the fed would expand its balance sheet in order to bailout banks holding impaired debt. If oil prices hold where they are now, this should all play out within the next 12-18 months. If prices fall further, I suppose it would take even less time.
     
  12. nashhorn

    nashhorn 5,000+ Posts

    If, during further economic downturn the Feds rescue the Banks again, I think we may get an uprising.
     
  13. Joe Fan

    Joe Fan 10,000+ Posts

    NFP and Unemployment came out today (first Friday new month)
    UE was below 5% for first time in a long time
    So Obama came out today for a victory lap

    But of course we also have --
    $19T+ in federal debt (almost half of that his)
    46M people on food stamps
    93M out of the workforce
    $4.4T Federal Reserve Balance sheet
    a US Manufacturing recession, and
    2015 US GDP below 3%
     
  14. UTChE96

    UTChE96 2,500+ Posts

    Also, median household income is still lower than when he took office and all of this with ZERO interest rates during most of his administration. That is an impressive record of incompetence.
     
    • Like Like x 1
  15. nashhorn

    nashhorn 5,000+ Posts

    but he managed to say much of this is due to after effects remaining from 07 and 08.
     
  16. Musburger1

    Musburger1 2,500+ Posts

    While Obama's Healthcare project has been an ongoing disaster, the biggest driver for the upcoming worldwide economic plunge can be laid at the feet of central bankers and governments worldwide. Economic growth is made possible by low cost energy and the expansion of debt which makes it possible to fund research and expansionary projects of all sorts.

    Deep offshore oil projects, Canadian tar sands, and fracking are high cost energy sources. The development of these projects came about because of high demand and artificially low interest rates which made it possible for energy companies to borrow huge sums. The demand for energy increased as developing countries (i.e. China) expanded debt at a fantastic rate in order to build highways, infrastructure, and even entire skyscraper filled cities which remain largely uninhabited.

    Now we have reached a point where the debt overhang is so large, defaults are inevitable and there isn't room to continue increasing debt. As a result, growth becomes stagnant and likely will turn negative, thus decreasing energy demand further.

    As energy demand continue to fall, the price of oil will remain low and the billions of dollars which were borrowed in order to fund these high cost projects -both energy projects worldwide and construction projects in China - will be defaulted on. As the process unfolds, employment losses will escalate, countries will devalue their currencies, and the prospect of war will only increase.

    Enjoy the weekend. Good luck Denver.
     
  17. Musburger1

    Musburger1 2,500+ Posts

    Quick update:
    1. China:
    Chinese Markets are closed this week due to the Chinese New Year. Large protests recently in Honk Kong. Hundreds of thousands of workers in China have been either laid off or unpaid. Any positive news out of the government with respect to GNP projected growth cannot be taken seriously.

    2. Oil: After reaching a temporary bottom of around $26/barrel when this thread began on January 15th, oil surged as high as $34/barrel. Today it briefly dropped down under $28/barrel before closing slightly above $28. Many oil companies have begun slashing dividends and others are preparing for bankruptcy.

    3. Banks: It's not just US banks that could be on the hook for defaulted loans made to the energy sector. In fact, the largest banks in Europe appear to be in the most distress. But all of these banks are interconnected, so if one of the big ones blows up, the whole system is compromised. Many of the largest European banks have seen their stock prices decline more than 25% since January. The broader markets could follow.

    Prediction: Over the next several months, markets will continue on a downward spiral and the US will begin to joint the rest of the developed world in recession. At some point, there will likely be a political decision to "stimulate the economy." I don't believe the public will stand for a bailout of the banks. Instead, I'm expecting something along the lines of the Bush stimulus checks that took place after 9-11 via the IRS. This time, I don't think it will be $300 or $600 but probably something like $3,000-$5,000 for everyone. This will blow up the deficit, but people will be OK with that since they'll be getting a check.

    Result: If something like what I described happens, I take it as a signal that the entire structure is on its last legs. The Japanese and European Central Banks have already initiated something called NIRP (Negative Interest Rate Policy) in the failed attempt to generate more loans and more spending. It doesn't work because indebted people and entities reach a saturation point where they can not service the debt they already have and take on more. The next option is to print money (debase the currency) which would be disguised with a tax give away like described above. But even that would probably not stimulate more spending or generate business as most people would wind up using the money to pay down debt.
     
  18. Driver 8

    Driver 8 Amor Fati

    Is it advisable to get out of stocks now? If so, what then, sit on the cash?
     
  19. Mr. Deez

    Mr. Deez Beer Prophet

    I wouldn't sit on cash of the currency is being devalued.
     
  20. Musburger1

    Musburger1 2,500+ Posts

    Well over 90% of what we call money is nothing more than a digital representation of asset values, also known as debt. This could be your stock portfolio, home value, etc. The central banks are fighting deflation with the goal of inducing inflation at a low rate. They are losing. As the financial system contracts, holding on to dollars is the smart move because scarcity will make them more valuable. But eventually, the governments get desperate and increase money printing. That's when the process reverses and inflation starts.
     
  21. Clean

    Clean 5,000+ Posts

    Yes, a world economic downturn does seem to be inevitable and overdue at this point.

    Belying that inevitability, BO just submitted a $4Trillion dollar budget. Hillary and Bernie are telling the voters they should get free health care, free college, a living wage, and on an on. What do you want? They'll just give it to you. They'll take it away from those rich folks and give it to the poor folks. They're veritable Robin Hoods. Vote for them.

    The way Bernie is picking up momentum, I'd say lots of Americans aren't worried in the least. They think that Uncles Sam and Bernie will take care of them.
     
  22. Musburger1

    Musburger1 2,500+ Posts

    No matter which party wins the Presidency, we will see the deficit blow up; just couched differently to play towards the constituency. If Sanders were to win, he will push for the agenda Clean enumerated and attempt to pay for it with enormous tax increases. Most likely the compromise would be passing some of the agenda without a tax increase. This would expand the deficit and put pressure on bond rates thus forcing the Fed to once again purchase treasuries (monetize the debt).

    If the Republicans win, look for expanded "defense" spending in addition to some kind of fiscal spending increase disguised as a universal tax cut.

    At some point, everything we know - welfare, health care, social security, pensions - all blows up.
     
  23. UTChE96

    UTChE96 2,500+ Posts

    Musburger,
    You depress me because I know you are right.
     
  24. Mr. Deez

    Mr. Deez Beer Prophet

    Why not buy gold?
     
  25. Musburger1

    Musburger1 2,500+ Posts

    That's probably a good investment. Gold usually performs best in periods of uncertainty whether or not we experience deflation or inflation.
     
  26. nashhorn

    nashhorn 5,000+ Posts

    Gee, whomever is elected can blame the former administration for the collapse that is coming........for eight years because the ramifications will certainly last beyond that.
     
  27. Joe Fan

    Joe Fan 10,000+ Posts

  28. Joe Fan

    Joe Fan 10,000+ Posts

  29. Joe Fan

    Joe Fan 10,000+ Posts

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  30. Joe Fan

    Joe Fan 10,000+ Posts

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