2015 Review

The war in Syria continues, sending out a flood of refugees to Europe and beyond.  Russia has joined the Syrian fray, and Europeans are becoming frayed around the edges as more refugees move in.

Meanwhile, rich Arab countries do not help with the Syrian diaspora because they are having enough trouble feeding their own people.  Saudi Arabia has stopped growing food in its desert and will be growing it elsewhere and importing it.  Middle Eastern oil-rich countries continue to subsidize their food prices/supplies with the oil they sell.  Unfortunately, the price of oil has dropped during 2015 due to new competition from the United States and the expansion of fracking.  Not only has this caused Saudi Arabia (for example) to run a deficit in 2015, but it has also forced them to continue pumping more and more oil in an attempt to pay their bills and to maintain their market share in the oil industry, driving prices lower still.

Meanwhile, back in the United States, the oil producing companies that have borrowed money are finding it more difficult (with lower oil prices) to service their debts.  And with no end to the decline in oil prices in sight, the U.S. Congress (and president Obama) may actually allow U.S. oil companies to export oil soon, rather than having them default on their debts and go bankrupt. (Unusually sensible for politicians, don’t you agree?)  Nevertheless, a looming debt default crisis is growing.

The student loan problem in the United States isn’t going away.  The labor market for recent graduates isn’t very rosy, making it difficult to repay student loans.  A growing debt default crisis is looming.

The Fed kept interest rates low during most of 2015, which buoyed the U.S. stock market and real estate market.  The stock market’s performance, in turn, led the Fed to threaten to raise interest rates, and since December 16, when the Fed announced that it would raise interest rates, the stock market has been somewhat jittery.  The junk bond market is also looking less than stable.

The U.S. dollar has strengthened relative to other currencies during the year.  While this didn’t help exports, it encouraged the Fed to raise interest rates.  The Fed still wants to obtain a 2% inflation rate, but is facing an uphill battle with all the debt problems and deleveraging the world is facing.

In Europe, Mario Draghi promised to do “whatever it takes” in 2012 to save the Euro and so far, he has succeeded.  But at what cost?  During the past 2 years, the Euro dropped from roughly $1.38 to $1.08/Euro.  And now, with the added cost of supporting the refugees, it’s hard to see how the European economy can avoid a recession.

Japan is continuing its Abenomics policy of quantitative easing; i.e., printing more money, in an attempt to cheapen the yen and make its economy relatively more competitive.  Meanwhile, its public debt, as a percent of GDP, is still around 210%.  Not good.  Is it any wonder that their economy is shrinking?

China has a little more leeway in how it handles things because it isn’t limited by what voters want.  On the other hand, it’s harder to believe what the Chinese government says about the economy, given its lack of transparency.  Still, there’s no doubt that its economy has grown in recent years…leading to the IMF’s decision to include the yuan in its list of reserve currencies, which could spawn a rise in demand for the yuan in the long run.  In the short run, however, the Chinese government devalued its currency earlier in 2015 and saw its stock market lose half its value.  Consequently, it’s trying to shore up its stock market (in part by selling U.S. Treasury Bonds) and buoy its currency.  No wonder many Chinese are sending their money outside China.  They want a safer investment in a country with a more stable currency, as well as cleaner air and water.  Sound familiar? I guess the grass is often greener on the other side of the globe…

Bottom Line:   Inflationomics continues to hold sway around the world and the central banks continue to pump more money into the system in an attempt to get inflation up to 2%.  On the other hand, because interest rates have been kept so low for so long, the weight of all the accumulated debt is keeping people from saving and investing their money in productive assets (or spending it on consumptive items).

Meanwhile, the U.S. Fed thinks it has things under control and that the U.S. can afford to raise its interest rates.  In the short run, raising interest rates may actually encourage investment in the United States, as it appears to be a relatively safe haven for now.  In the long run, however, the United States government is still the largest debtor in the world, without any hope of paying off its debts without price inflation to diminish the U.S. dollar’s value…it’s just of matter of time.

It’s hard to know which will happen first, expanding social unrest/war in the Middle East and a possible spike in oil prices, or a deflationary spiral driving commodity prices lower due to growing debts around the world. 2016 may tell.

Robert F. Sennholz

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