Coming in 2016

Know it is not New Year’s Day when predictions typically come. Truthfully have been looking for trends and indicators before making up my mind during a volatile December and January. Here are keys for 2016 and possible gray swans that could be missed.

1. Global Economy will continue to slow down gradually. Predictions of end of the world will surround us, but main drivers are a slower growing China economy and governments will need to reign in spending. Do not expect China to have a hard landing, and expect several governments will cut spending slowly over the year as tax receipts are reduced by their economies. Middle East and Asian countries most affected.

2. US Economy will have a mild recession. The long slow growth is due for a pullback, but do not foresee a collapse. The US economy will stabilize the world economy. Stock markets may fall further than the economy over weaker earnings and short term jolts to expansion plans. We may already have over 50% of the stock price pullback. Typical recessions stock losses are 15% to 30%.

3. Commodity prices will stay weak until the global recession passes. Expect industrial metals like copper & iron stay weak for a couple years. However most of the price drop has already occurred. Will hurt Australia, Canada, Russia, and South American countries dependent on mining.

4. Silver is forming a bottom around $14. Moderate chance could step down a bit more, but likely price will increase by end of year as mining slows down and supplies get tighter. Gold is trying to form a bottom, but is more of an emotional investment driven by fear. Could take one more step down or start another bull market. Consider accumulating both gold and silver in 2016.

5. Oil should stay weak for now, but expect prices to turn up a bit in summer to end of year. Expect prices to rebound to $40 to $55 per barrel by mid-2017 at the latest. Think the cartel will pull together sometime in the next year. (gray swan)

6. Unemployment will likely stabilize as job growth slows. Truth is the easy productivity games are ending. Robotization is a time-consuming investment more likely during growth cycles where payback is guaranteed. Having participated in both successful and unsuccessful automation projects, it takes time to develop robots and computer programs.  However it is a good investment for your business during a mild recession to prepare for the next growth spurt.

7. Gray Swans:

            ISIS/Daesh - will weaken in Syria / Iraq under direct pressure. Will grow stronger in Libya and Africa where non-functioning governments cannot handle the crime.

            Europe - Economy is recovering, but slowed by less demand in Asia. Will struggle with more immigrants coming and increased nationalistic parties gaining power. Will see Eastern Europe struggle most, but watch Italy, Belgium, France and Spain for risk.  

European Union - Not likely, but countries leaving the union would be considered a serious warning for the end of the Euro.

Terrorism - Expect more attacks on soft targets like malls, restaurants and hotels.

Computer Hacking will increase in 2016 and become more of international issue.

2016 is setting up as mild year with increasing risks. Also see there will be pleasant surprises with new technologies, medical treatments, disruptive companies and areas of growth to offset some of the worries. Stay positive and looking for opportunities.

The Government Default

Today the news is the 2 parties are negotiating a 6-week extension raising the government borrowing. Only 7 days ahead of time. What a show of incompetence!

The Republicans thought they were winning. To paraphrase Governor Piyush "Bobby" Jindal, they have become the party of “Stupid”. This member is disgusted.

The Democrats think they are winning. Wrong! You are the irresponsible teenagers borrowing on your credit card. The day is coming soon where your card will be cut in half, and a very long stretch of your pay being docked is beginning. Debt has to be paid.

The US currently spends $23 billion of every $250 billion of taxes for borrowing. Because of good credit borrowing was 1%. Looking at Greece, Ireland, Spain and Italy the interest rate for over indebted is about 6% or higher.  At that rate the US would have to pay $138 billion out of every $250 billion of taxes for borrowing. How much spending is left for the Democrats? Look at Detroit.

Looking for a 3^rd party of adults to cut spending and raise taxes. Both are needed for the crisis we are creating. We need a sustainable economy, manufacturing and spending. Anyone coming forward?

Top Finance Concerns

These Top Finance Concerns from Cindy Kraft, the CFO Coach. These opinions reflect the view on business conditions we see from talking with business owners and investors, so I wanted to share them.

The CFO Rising conference yesterday morning was right up my alley with sessions on Creating Alignment in the C-Suite, A New Dynamic in the Boardroom, and ... particularly ... Finance Skills for a New Decade. My next few blog posts will talk about what I heard, but I’ll start with some interesting stats that opened the morning.

The CFOs in attendance were polled around critical issues they are facing, and here are some of the results ...
--89% felt the worst was over but do not anticipate a turn around anytime soon
--Only 4% felt growth was likely to happen in the next several months
--70% were concerned and VERY concerned (35%) around the cost effectiveness of proposed government regulations
--When asked about the proposed health care legislation, 69% were very concerned about the tax impacts and 62% were very concerned about the quality of care

Conversely, the attendees felt there was some good that came out of the economic downturn ... it has forced finance to go back to basics.
--32% said they now had a core business focus
--25% were focused on increasing productivity
--3 out of 4 indicated they would be preserving cash as a hedge against economic uncertainty
--77% indicated their focus would be on organic growth ... which means ...
--Only 10% indicated M&A was a core business focus

http://www.cfo-coach.com/ to subscribe to Cindy Kraft's postings.

Business Predictions for 2010

It is time for the annual predictions of what the year will bring. So let’s look at my past predictions first.

• In 2009 I predicted the recession would continue, but not be a worldwide disaster.
[Partially Correct, not a worldwide disaster, but now is expanding worldwide]
• Jobs would be very hard to find, and would start recovering near the end of 2009.
[Correct, but the jobs recovery is barely starting]
• The stock market would bottom and start back up within 6 months.
[Correct bottoming in March]
• Housing predicted no bottom and prices would fall another 5% – 15%.
[Correct]
• Oil prices, thought we may have a correction where prices hit the $30’s per barrel, the stabilize around the $40’s to $60’s range.
[Partially Correct, did drop into the thirties, and spend most of the year in range. Then the dollar devaluation and worldwide usage pushed oil into the $70’s - $80’s range.]

Yes, I had good years predicting in 2008 and 2009, but there are no crystal ball that work all the time. This is based on experience, observation, and reading other peoples predictions. With all predictions, your results are affected by location, driving habits, weather and your mileage will vary…

Recession: We are seeing worldwide signs of recovery. Is it enough? There are other signs that are weaker. The US is not going to lead the recovery. The world has to pull the recovery. My major expectation is for slow growth of about 1% - 2%. There is also a significant chance for a double recession like the Great Depression. I put this at about 20% - 25%. If this happens it will be a tough year.

Interest Rates: Expect bond and borrowing rates to be raised. Creditors are going to demand more money to lend the Federal Government for spending. This is going to slow the economy toward the end of the year.

Stock Market: I suspect we are getting closer to a market top in the first quarter or mid year. We gain significantly since March 2009, and are possibly bubbly. The Fed may try to engineer a break in the rising market to keep interest rates low. Have my stop losses set and am monitoring.

Dollar: The slow down trend of the dollar has ended. There are so many concerns about the Euro and other currencies, believe the dollar will do well early in the year. Later in the year we may see Gold and Silver rising again despite the improvement of the dollar.

China: I expect the China boom to end late this year. They have a real estate bubble forming, and their leadership wants to slow down lending. They are trying to stimulate internal markets and keep their people employed.

Jobs: If you have a job, hang on to it until you find another. Unemployment is not improving, and may have bottomed. But the recovery for the job market will be slow.

Housing: Suspect the bottom to the real estate market to be closer, in 2011 or 2012. The over supply of home still has to be worked off the market. I expect prices to fall another 5% - 10% in 2010. Commercial real estate is falling and I don’t see the bottom yet.

Oil prices: There are a lot of possible scenarios for trouble this year, including a good possibly of needing to stop Iran from building nuclear bombs. If that happens or Iran grabs Iraqi oil fields, expect a short term spike. My major expectation is prices to stay in the $70’s - $80’s early in the year, and then increase into the $80 - $100 range by the end of the year.

Remember, we have lived through recessions before, and will survive. My prediction may be no more accurate than yours. But if these predictions happen, how will it affect your business?
Steve

The Recession Is Over--No Thanks To Stimulus

Interesting article on the Economy and Stimulus by two economists. See why the stimulus was more political than economically successful.

http://www.forbes.com/2009/12/14/larry-summers-recession-recovery-opinions-columnists-wesbury-stein.html?partner=popstories
Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors

Political Uncertainty Puts Freeze on Small Businesses

Very Good Wall Street Journal Article about why small businesses are not hiring or may be laying off. Think this is a common reason businesses are not taking advantage of the economy to expand market share. The uncertainty of the new health care costs, increasing taxes in 2010 when the Bush tax cuts expire, and political new taxes like Cap and Trade are causing businesses to hold on to cash. The recovery may be slow in the current situation until some direction is clearly coming from Washington.
http://online.wsj.com/article/SB125659324579108943.html
The leaders who can see a way to expand their businesses will be rewarded when the recession ends. How can you affordability grow your business market share now? Your customers will thank you.
Steve Amos

Energy prices have resumed rising

The price of oil is going up and there are several questions why.Oil storage are full and full tankers are sitting outside our harbors. Due to supply, prices should be falling.

In the back of everyone mind should be the situation in Iraq. The nuts running Iraq want to dominate the middle east, and really believe they can bring their mullah back from the 13th century by destroying infidels (Israel) and spreading their religion throughout the world. Russia is not supporting sanctions against Iraq, and may force Israel to attack. If that happens Iraq will mine the waterways and trap 25% of oil tankers from reaching the West. Needless to say prices should spike if this happens.

Add to that US government spending tripling our debt without any job creation. The value of the dollar is falling by design which also drives up prices of commodities. They believe it will make us able to export more, but they have not eased regulations on small businesses. Add to that small businesses are afraid what will happen with the health care bill. No wonder the economy is slow. This does not even include banks and businesses deleveraging, nor consumers reducing spending over job fears and increasing savings.

No wonder oil went from $65 to $80 in the last eight weeks. Gold has crossed $1,000 per ounce and is still rising. The dollar is still easing. Do not see anything stopping these trends in the next six months, or until the Iraq situation and health care is resolved. I bought ETF's in Gold at $950 and Oil at $65 because I expected the dollar to fall.
Steve

PS - see current MarketWatch article below about oil prices.
http://www.marketwatch.com/story/oil-falls-as-api-reports-rise-in-crude-supplies-2009-10-21

The Bernanke Market

More commentary By ANDY KESSLER in the Wall Street Journal. Favorite line in the article: "But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist."

http://online.wsj.com/article/SB124762005061042587.html

Happy reading,
Steve

The Economy Is Even Worse Than You Think

An interesting analysis of the economy and commentary by MORTIMER ZUCKERMAN. My favorite line of the article: " So what kind of second-act stimulus should we look for? Something that might have a real multiplier effect, not a congressional wish list of pet programs. "

http://online.wsj.com/article/SB124753066246235811.html

Happy reading,
Steve

Advice from an Economist Who Saw 1929

Interesting article in Time commenting on the actions (stimulus) the government is taking. Good read.
Steve

http://www.time.com/time/business/article/0,8599,1909115,00.html?xid=rss-biztech-yahoo

Plastic Molders Predict Increasing Oil Prices and Report Market Conditions

Interesting report by Injection Molding magazine that covers a prediction the price of oil will be in the 90's or 100's again by the end of the year. Notable is the recommendation manufacturers convert to all electric molding machines to save energy costs.

It also reports every market using plastic injection is down except medical products. It is an interesting read on the economy by Lisa M. Pellegrino
Steve

http://www.plasticstoday.com/imm/articles/MEI0709

Maxwell: Oil Price Forecast

Energy expert Charles Maxwell notes that because of the recession, oil supply and demand are in balance, but down the road there will not be enough supply.

http://www.moneyshow.com/video/video.asp?wid=4022&t=3&scode=009597

My conclusion, there will be more demand for domestic and international drilling starting in 2012. This may hurt President Obama's reelection campaign since the energy policy has been discouraging more drilling.
Steve

Are Oil Prices Going to Continue to Rise?

Friday the market price closed at $72.25 per barrel. The price of a barrel of oil has increase 17% in the last month. Four months ago the price per barrel was around $36. Here in California, gas prices have zoomed from $2.25 per gallon to $2.85 per gallon. Just in time for the driving summer season. What is happening?

First of all, oil went too high when it zoomed past $100 to $147 per barrel. There was no economic justification for oil going up so high. Speculators drove the market too high has everyone had to buy oil to make some money. When everyone is buying the same thing, you are nearing the peak price.

Oil usage dropped rapidly as gas cost over $4 per gallon. Mileage driven went down as people drove less, bought better mileage cars or took the public transit. This is a permanent change in behavior, and lowered usage more. Of course oil supplies rose. Then the price per barrel over-corrected into the 30’s. This happened despite cuts in production by OPEC. Demand fell faster due to a global recession.

But there are multiple situations affecting price. Developing countries like China and India are buying more cars. Oil stocks have fallen to normal levels. Bio-fuels have risen to be roughly 6% of consumption. Politically the Obama administration is not supporting drilling more oil domestically. Lower prices let that slide by without much political pressure, but I expect that to be a mistake as usage will increase worldwide. The energy alternatives for the green energy do not replace oil however. They generate electricity.

OPEC desires stability. They realize now too high of prices can stall the global economy reducing demand which ruins their economies. They recently increased production about 0.5% to stabilize demand.

So what is driving the price increases? The amount of money the government is borrowing and the policies of the treasury to fight the recession. The dollar is under pressure due to the debt levels and the value of the dollar will fall as the economy recovers. The Chinese and OPEC are looking to protect themselves by diversifying away from the dollar.

So what is my prediction? Oil will stay in the $50 - $80 range this year. Expect this bubble to deflate a bit by August. $3 per gallon gas is too big of a drag on the US economy to help the global economy recover. Second this should be a slow economic recovery. Oil usage is starting at a lower consumption rate for 2009 and 2010.

Long term the falling value of the dollar will be inflationary. US energy policies with global warming taxes will hurt energy independence for the next ten years. It will be cheaper to import oil than produce it domestically. Unless an energy break through occurs, expect oil prices to rise in the years 2011 - 2013.
Steve Amos

Energy Independence

President Bush’s energy proposals to Congress include the right solutions to free the US from energy dependence. We need more domestic oil production, natural gas, pipelines, nuclear power, solar, grass based ethanol and to better technology to clean coal for our independence. There will be few jobs in the future without energy infrastructure, and the political risk from oil producing countries cutting our supply is substantial.

Our dollar is falling in value for because of oil imports. Oil imports were 4.9 billion barrels in 2007. Estimate $75 per barrel is $367.5 billion, or 50% of the $711.6 billion US trade deficit. We need to expand drilling off all coasts and domestic refining.

Corn based ethanol is not efficient and is causing food shortages. We need to develop cellulous (grass) base ethanol.

France generates 90% of their electricity with nuclear power. Our nuclear plants are decades old and need to be replaced for safety. Solar power will contribute in the next decade, but we need electricity at night for non polluting electric cars.

We need to balance fiscal, political and environmental responsibility in our energy policies. The US can not surrender our children’s future to imports. We need to meet our own needs domestically.

Invest in Productivity and Innovation

The economy is in a mild recession. The housing bubble has burst and is reverting to mean (normal) values. The super leverage of the 2000’s is being unwound as the investors who took the risk are paying the price of risk. There is a lot of speculation about how bad the economy will be.

We will not have a great depression. This is just a normal business cycle, unless political protectionism makes the situation worse. This cycle is predictable and expected by mature investors. There are challenges coming, but nothing to panic over.

Consumers will not be able to use their homes to use like an ATM to keep spending. Increased energy and food costs further will reduce consumer spending power. Consumers will change their spending towards different priorities for the next few years until incomes increase again. Job outsourcing globally will keep salaries low.

Consumer spending is the driver of two thirds of spending. Fortunately the world is now more successful everywhere, and increased demand is now coming from Eastern Europe, Asia, India and the Middle East. So consumer spending will recover internationally first.

So how will the economy recover? Productivity and innovation has always driven economic growth.

Invest in businesses, products or services that increase productivity. Can you lower shipping costs, use energy more efficiently, use less material in products, service clients quicker at less cost, or reduce overheads? These are the drivers of productivity. And the companies that do this are the ones to own.

Innovation and market changers are the companies that will thrive in the future. Look at Apple’s success in changing the music market. There are kids who have never bought a CDs nor albums. They buy music through iTunes. Television and movies are the next to be changed. Low cost hardware and better software has made an explosion of producing content available. With so many choices for customers, how can major studios or networks hold on to viewers? Look for distribution over the web to grow.

Computer grow exponentially more powerful, and programs now do the leg work of thousands of technicians or clerks. CAD changed how we design products, test ideas, and do research. Better quality and lower prices have come with these innovations. In fact, as the price gets lower more people have access to the power of software. Look at the success of new medical products that are improving medical care. CAD has speed up development tremendously. Furthermore the web will be replaced by cloud computing which will increase the amount of data available faster.

Invest in energy businesses that increase productivity of creating energy or conserving energy. One caveat, they must be profitable at a much lower oil prices. Energy will be the next bubble to break. $100 to 120 per barrel is not sustainable.

Oil was stuck in the $15 to $20 per barrel range for two decades. A price of $30 dollars per barrel would be reasonable today with normal inflation. The value of the dollar fell about 30% over the last two years, so $20 to $30 per barrel is now $30 to $45 per barrel. Demand will fall at the current high prices, and alternative production methods are cost effective above $30 per barrel. Both will reduce future demand for oil and lower prices. Invest only in energy processes that are cost effective at $30 - $45 per barrel. I expect oil to fall to $60 – $70 per barrel in 2009.

In summary, the future economic growth will be from productivity and innovation. Productivity and Innovation will overcome a few years of low growth or recession. This is where we need to invest for future profits.

Business Predictions for 2008

Everyone makes a fool of themselves by predicting the future at this time of the year. So I will badly make a fool of myself by expressing my opinions on the difficult business market for 2008. Please be aware opinions do not affect the future, and your mileage will vary. So here we go…

Housing will drop big due to credit crunch. If you can’t get financing very easily, how do you buy from someone? Since it is harder to get loans, fewer buyers are available with good credit and money down to buy houses and condo. Investors buy at the value of the net income they can rent a property for, and look for bargains. Neither the lack of buyers and investors caution is good for supporting prices in housing.

Disclosure here: I have done residential and commercial real estate appraisal in California and assisted in Nevada, so actually have real estate analysis expertise. The rise in residential values ran 9 years in southern California from 1997 to 2006, and went years too far. Values could really drop back hard. Las Vegas and Arizona have already dropped prices around 30% and could go lower with so many new homes. The Inland Empire and San Diego values have dropped over 20% in 2007, so Los Angeles and Orange County are behind the curve and may fall 20% in 2008. I have predicted prices to fall off the peak 20% to 30%, and up to 50% if the economy really fell. So I tend to be regarded as pessimistic since I think the boom went far too long. Recovery should start around mid 2009 to 2010, but it is very hard to pick the bottom. If your housing prices have been falling since 2005 you are closer to the bottom than we are here in southern California.

Your area housing values will vary based on local conditions, but I expect a national average to fall by 10% without crazy loans, easy money and speculators to inflate home values. Best analysis I have read is from JP Morgan predicting land values will return to 2002 – 2003 levels, and near the east and west coasts the land may be up to 80% of home values. Location, location and location still rule when it comes to evaluating properties. Look for investment opportunities this year and in 2009.

Commercial property values will go down since it is harder to get credit here as well. It is early in this correction, locations, and property use varies so much will not predict how much values will fall. Commercial prices did not go up as crazily as they did in housing, but value depends on income and cost to borrow. A ten to twenty percent retreat would not surprise me this year in some areas.

Economy will recession early, and start the recovery before end of 2008. The credit crunch will hurt borrowing for businesses, but the hallmark of the American economy is how quickly capitalists adapt to change. China’s currency is increasing in value to the dollar, which will increase inflation as well. Consumers will cut back slightly, but most spending will continue to be stable. Styles will move away from excess to value, so imports may be hurt with higher prices of the now lower dollar. However booming economies internationally especially in India and China will improve American exports. In all, the diverse and adaptable economy will be recovering this year.

Employment will only drop mildly in the US. Finance, automobile and housing industries will be significantly hurt in 2008, but the rest of the economy should grow needing good employees. Your local conditions will vary. I will be looking for a new position in 2008, so understand personal concerns depend on your situation and industry. I expect to be with a business unit growing quickly or turning around by mid year.

Oil will fall from $90 – $100 per barrel to $60 – $70 per barrel in 2009. Politics in unstable countries can have a tremendous affect on supply making timetables hard to guess. So this is the riskiest prediction I am making. Have no special information here, but let’s look at history. Recently it took many years to go from $20 to $30 per barrel. Prices were stuck in the $15 to $20 range for over a decade. The sudden jump in oil prices from $30 to $90 per barrel happened way too quickly from a historical perspective. The cause was speculators and fears driving gains with increase international demand. The value of the dollar fell about 30% over the last few years, so $20 to $30 per barrel is now $30 to $45 per barrel. Demand will fall with current prices, and alternative sources are cost effective above $30 per barrel further reducing demand. Politics will have an effect with a president elect promising a program to reduce oil imports could speed the price reduction. Overall I expect a gradual reductions happening with jumps and falls starting in 2008.

Stock market will fall early and start recovery about mid 2008. The recovery will be mild and I like John Mauldin’s description of the “muddle through” economy. The stock market often acts as a predictor of the market and it has had a lot of growth. The question is how far we are going to correct recess or depress the market? More importantly which business sections are going to fall the most. My record here is poor historically, so do your own research. Falling should be finance companies, housing, and consumer related businesses. Everything else depends on design, innovation and value to grow businesses.

The election in November is too close to call right now. The Democrats are likely to have either Hilary or Obama, and they would be wise to have a joint ticket. Republicans have five good candidates, and possibly no one will come with a majority to the convention. Voters usually look at experience, positions, leadership and pandering. Could be another close election based on the experience of the Republican candidate versus the changes proposed by the Democrats. There is a lot of potential changes based on the economy, world events, Terrorists, Iraq and Afghanistan. In the final election the most moderate candidates between the Democrats and Republicans usually win, so that is my prediction.

Okay, this is enough predictions for me to reasonably make in 2008. Lets see how wrong I am since my record has never been perfect. Black swans events make predictions more of an art than a science. Use your own judgment about the validity of these guesses and how they may affect you.

Recommend Forbes, marketwatch.com, John Mauldin, Doug Fabian and Mark Skousen for research and information.